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When Does a Company Have to Pay Redundancy?

Reading time: 10 mins

Redundancy arises when an employee’s role is no longer required due to factors like workforce restructuring or business closure.

For any company, learning when you have to pay redundancy is important. Redundancy is payable if a genuine redundancy has taken place and the company is not a small business.

In this article, our employment lawyer discusses when employers need to pay redundancy (and when they don’t), how much should be paid and the steps required to meet the criteria for a ‘genuine redundancy’. We also link cases that may be helpful in your redundancy determinations.

Key takeaways

  • The Fair Work Act outlines a schedule for minimum redundancy pay based on years of service
  • Eligibility for redundancy pay includes full-time or part-time employees with at least one year of service in businesses with 15 or more employees
  • Small businesses (with fewer than 15 employees) may not be obligated to pay redundancy
  • Employers should assess the necessity of a role for their business and ensure the redundancy is genuine to prevent unfair dismissal claims
  • Communication with affected employees is crucial, exploring alternatives like redeployment, job sharing, or reduced overtime
  • Redundancy pay is based on an employee’s continuous service and is calculated at their base pay rate for ordinary hours worked
When is there redundancy

What is Redundancy?

Redundancy occurs when a part-time or full-time employee’s role is no longer required by the employer due to circumstances such as workforce restructuring and closure of business because of bankruptcy or insolvency.

Employees may be entitled to redundancy pay if they:

  • work full-time or part-time
  • are employed by a business that has at least 15 employees
  • are employed for at least 1 year with that employer

Redundancy can be voluntary or involuntary. Involuntary redundancy occurs when the redundancy is mandatory or compulsory and there is no option given to the employee.

Whereas voluntary redundancy occurs when employees agree to make their job redundant. The employer usually provides alternative options and financial incentives to the employees.

What businesses need to pay redundancy?

Not all businesses have to pay redundancy. When an employee works for a small business employer, generally, the employer is not required to pay redundancy.

According to the Fair Work Ombudsman’s website, the following factors need to be considered in determining whether the employer has fewer than 15 employees. These factors are:

  • all employees employed by the employer at that time are to be counted
  • a casual employee is not to be counted unless, at that time, they have been employed on a regular and systematic basis
  • associated entities are taken to be one entity
  • the employee being terminated, and any other employees being terminated at that time are counted.

Steps to follow for redundancy

It should be remembered that what is made redundant is the employee’s role or position and not the employee per se.

Redundancy does not occur because of employees’ conduct or performance but is based on the condition of their job, role, or position, and the business.

In order to make an employee’s role redundant, the following steps could serve as your guide:

1. Decide whether you no longer need the job for your business

In order to make someone’s role redundant, as an employer, you should determine whether the position is no longer necessary for the business. This might be due to workforce restructuring, reorganisation, or technological advancement.

If the role isn’t redundant, and you are seeking to terminate the employee, check out our article on other types of employment termination scenarios and procedures to learn more.

2. Make sure that the redundancy is a genuine redundancy

A genuine redundancy is when the employee’s role or position is no longer necessary for the employer’s business, and the job does not need to be done by anyone.

This is an important step in order to protect your business from an unfair dismissal case. If the redundancy is genuine, the employee won’t be able to apply for unfair dismissal.

Further, for a redundancy to be genuine, the employer needs to follow the correct process for the dismissal. This includes complying with the consultation requirements in the Modern Award, enterprise agreement, or other registered agreement.

To be sure, it’s better to seek advice from an experienced redundancy lawyer to determine whether the redundancy is genuine or not.

3. Inform the employees who will be affected by the changes

As an employer, communication with the employees is crucial. Employees being made redundant must be informed of the changes within the business which could affect their working arrangements.

Employees should be provided with the opportunity to raise questions and suggestions regarding the changes that affect them.

Most importantly, the employer must consider all alternatives and options regarding redundancy. For example, redeployment, job sharing, and reduced overtime.

4. Determine the notice periods and redundancy requirements before paying redundancy

You must find out the minimum notice of termination and redundancy pay entitlements for each affected employee according to the National Employment Standards (NES).

The table below outlines the applicable minimum notice period as established by NES:

Period of Continuous Service Minimum Notice Period
1 year or less 1 week
More than 1 year -3 years 2 weeks
More than 3 years – 5 years 2 weeks
More than 5 years 4 weeks

If a contract, award, or enterprise agreement state a more generous provision for redundancy entitlements than that of the NES, the more generous provisions should apply.

In cases where 15 or more employees’ positions become redundant, then written notification of the proposed dismissals should be submitted to Services Australia.

5. Provide a letter of termination to the affected employee

The letter of termination serves as a written notice to the affected employee.

The letter should indicate the reason for the employee’s termination, the notice period, employee’s last day of work, redundancy pay entitlements, and other applicable entitlements.

Learn more about terminating employment contracts in our article.

Redundancy Payments

When an employee’s job is made redundant, they may be entitled to redundancy pay.

This extra pay is in addition to the termination notice period under the NES (discussed below), and will be determined by how long they have been with the employer and the amount is paid at the employee’s base pay rate for ordinary hours worked.

Employee’s base pay rate must not include the following:

  • incentive-based payment and bonuses
  • loadings
  • monetary allowances
  • overtime or penalty rates
  • any other separately identifiable amounts

Refer to the table below for the minimum redundancy pay that an employee is entitled to receive, as set out by the Fair Work Act:

Period of continuous service Redundancy pay
At least 1 year but less than 2 years 4 weeks
At least 2 years but less than 3 years 6 weeks
At least 3 years but less than 4 years 7 weeks
At least 4 years but less than 5 years 8 weeks
At least 5 years but less than 6 years 10 weeks
At least 6 years but less than 7 years 11 weeks
At least 7 years but less than 8 years 13 weeks
At least 8 years but less than 9 years 14 weeks
At least 9 years but less than 10 years 16 weeks
At least 10 years 12 weeks

Different redundancy provisions may apply instead of those listed above in an award or agreement and these may provide more redundancy pay. It is recommended to check the employment contract, award, or agreement if these include redundancy clauses.

How can a company avoid having to pay redundancy?

We previously discussed that not all businesses are required to pay redundancy. However, paying redundancy can be prevented, reduced, or waived completely. This can be possible by applying for a redundancy pay waiver under the Fair Work Act.

Under the Fair Work Act, employers who are required to pay redundancy and wanted to reduce the amount to be paid should either:

  1. have found alternative employment for the employee; or
  2. are not capable of paying the redundancy pay.

Employers can be exempt from making redundancy payments if they were able to redeploy or find their employees a suitable alternative employment.

Suitability depends on the employee’s competence, skills, and experience and how that meets the nature and qualifications required to perform the new role. The location of the job in relation to the employee’s residence should also be considered, as well as the remuneration and entitlements to be offered.

Learn more about suitable alternative roles and reducing redundancy payments in our article.

Another way to avoid redundancy payments is to offer voluntary redundancy to your employees, which is discussed above.

case laws on redundancy

Case Law Examples

Genuine Redundancy

Voluntary Redundancy

Entitlement to Redundancy Pay

Redundancy Payment

Alternative Employment/ Redeployment

Frequently Asked Questions

Redundancy occurs when an employee’s role is no longer needed due to factors like restructuring or business closure.

Redundancy is available to full-time or part-time employees who have worked for at least one year in a business with 15 or more employees.

No, small businesses with fewer than 15 employees may not be obligated to pay redundancy.

A business that makes its employees redundant following proper dismissal processes, typically has ‘genuine redundancies’. 

Seeking legal advice is recommended to confirm genuineness and to ensure proper procedures are followed.

  • Assess the necessity of the role for the business.
  • Ensure the redundancy is genuine.
  • Communicate changes to employees and explore alternatives.
  • Determine notice periods and redundancy requirements.
  • Provide a written notice of termination.
  • Redundancy pay is based on an employee’s continuous service and is calculated at their base pay rate for ordinary hours worked.
  • The Fair Work Commission provides a schedule for minimum redundancy pay based on years of service.
  • Employers can apply for a redundancy pay waiver by finding alternative employment for the employee or demonstrating an inability to pay.
  • Offering voluntary redundancy to employees can also reduce or eliminate payments.

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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