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12 July 2012 Redundancy

By Richard Ottley, Partner and Laura Sowden, Solicitor

Introduction

Many employers struggle with issues around redundancy. For example, when and if they can make a person redundant and if so, how much is it going to cost them?

A context in which the issue of redundancy frequently crops up is, when a business is sold and a new owner offers jobs to the vendor's existing workforce. Some employees decline the offer of employment by the new owner. In this context, an issue can arise as to whether or not redundancy payments need to be made to an employee who rejects an offer of employment by the new owner.

These and other issues are covered below.

What is it?

Redundancy is when an employee's position is no longer required by an employer due to restructuring or operational changes in the employer's enterprise which renders their position unnecessary. Essentially the work or role is no longer required to be performed by any employee. Redundancy can also occur when an employer becomes insolvent or bankrupt.

The employer must meet any requirements under a relevant award or enterprise agreement regarding redundancy. This includes discussions with the employee about the prospect of redundancy in view of operational changes or restructuring.

Employers need to be aware that a redundancy which does not meet the above criteria may expose them to an unfair dismissal claim.

It should also be appreciated that a redundancy does not remove the need for notice or payment in lieu of notice.

When is it payable?

When an employee is made redundant then usually a redundancy payment will be required.

Redundancy pay or what is sometimes describes as severance pay, may be payable either under a contract with the employee, pursuant to an award or industrial instrument or under the safety net provisions of the Fair Work Act 2009 (Cth) (the Act). This article looks at the entitlement under the Act.

Under the Act, and on application to Fair Work Australia, a redundancy payment may not be required if the employer finds other acceptable employment for the employee. If the employer is not able to pay the redundancy payment then the employer can apply to Fair Work Australia for a reduction.

An employee is also not entitled to redundancy pay under the Act if:

  • Employee resigns
  • Employee is terminated other than due to redundancy, for example for misconduct or on account of performance issues
  • Employee has been employed for less than 12 months
  • The employer is a small business with less than 15 employees
  • Period of employment was for a fixed term and that term has ended
  • Employee is a casual employee
  • Where the employment is transferred to a new employer in certain circumstances (see below)
What is Payable?

The amount of the redundancy payment is calculated by reference to the employee's years of service.

Here is a table of how to calculate redundancy pay amounts under the Act.

Redundancy pay period
    Employee's period of continuous service with the employer on termination Redundancy pay period
1 At least 1 year but less than 2 years 4 weeks
2 At least 2 years but less than 3 years 6 weeks
3 At least 3 years but less than 4 years 7 weeks
4 At least 4 years but less than 5 years  8 weeks
5 At least 5 years but less than 6 years 10 weeks
6 At least 6 years but less than 7 years 11 weeks
7 At least 7 years but less than 8 years 13 weeks
8 At least 8 years but less than 9 years 14 weeks
9 At least 9 years but less than 10 years 16 weeks
10 At least 10 years 12 weeks


Upon a redundancy, an employee will also be entitled to notice or payment in lieu, in addition to any redundancy payments. Employees may also be entitled to long service leave, annual leave, and other payments.

Under the Act, an employer may not be required to pay the redundancy for the full length of service if the employee did not have any redundancy entitlements with the employer in question, prior to 1 January 2010. In those circumstances the period from which redundancy payments are calculated is 1 January 2010 (not the full length of service).

Can redundancy be used as a defence to an unfair dismissal claim?

If an employee has been made redundant and that redundancy is a "genuine redundancy" as defined by the Act then the employer will be able to defend a claim for unfair dismissal.

A "genuine redundancy" under the Act is if:

  • the person's employer no longer required the person's job to be performed by anyone because of changes in the operational requirements of the employer's enterprise; and
  • the employer has complied with any obligation in a modern award or enterprise agreement that applied to the employment to consult about the redundancy; and
  • it is not reasonable for the employer to redeploy the person in the employer's enterprise or an associated entity of the employer's enterprise.

It is important therefore, that an employer who is making an employee redundant, not only complies with the consultation provisions of any applicable award or enterprise agreement, but also makes enquiries to make sure that there is not a suitable alternative position available within the employer or any other "associated entity" of the employer (very broadly defined)1 which could be offered to the employee.

Can employee seek redundancy payments upon a transfer of business?  

In the context of a transfer of business where for example, the first employer sells a business to a new employer, if the new employer provides an offer of employment:

  • on terms and conditions substantially similar to, and, considered on an overall basis, no less favourable than, the employee's terms and conditions of employment with the first employer immediately before the termination; and
  • recognises the employee's prior service with the first employer; and
  • had the employee accepted the offer there would have been a "transfer of employment" within the meaning of the Act

then, generally speaking, an employee who rejects such an offer does not have a claim for redundancy under the Act.

If however, the employee makes such a claim and satisfies Fair Work Australia that the offer was unfair to the employee in the way in which it operated, then the first employer may be ordered to pay redundancy to the employee.

It needs to be appreciated that the Act does not appear to disturb whatever contractual arrangements there may have been in place which operate in the above circumstance. Therefore careful attention needs to be directed to the employee's contract of employment.

Under the Act, if an employee of the first employer accepts the job offer and then works for the new employer, their period of service may or may not be broken for the purpose of redundancy, depending on the circumstances.

In a transfer of business of "non-associated entities" the new employer can decide whether or not to recognise the employee's service with the first employer for the purpose of redundancy pay. If the decision is made not to recognise service for the purpose of redundancy, then the first employer is liable for the redundancy pay in respect of the period the employee worked for them. The employee's period of service with the new employer for redundancy purposes will therefore commence on the date the new employment commences.

If the first employer and the new employer are associated entities (or if they are not but the new employer agrees to accept the employee's service record with the first employer) then the employee's service record with the old employer for the purpose of redundancy, will automatically transfer across. No redundancy pay is payable where the employment record is carried across, but in future, if the new employer subsequently makes the employee redundant they will need to take into account the employee's service record with the first employer in calculating redundancy payments. These issues often inform financial arrangements in sale of business documentation.

A final point to remember, in a transfer of business context, is that the first employer should ensure that they meet any notice requirements under the Act, the employment contract or otherwise, as notice (or payment in lieu) may still have to be provided, notwithstanding that an employee has a seamless transition to the new employer.

Key issues

To conclude, employers should be satisfied as to the circumstances that constitute a redundancy, should carefully review payments to be made in this context (including the giving of notice or payment in lieu) and comply with the Act's requirements in relation to a "genuine redundancy". They should also direct attention to the issue of redundancy and the employee's service record in the context of a transfer of business.

1Associated entities are two businesses, one an associate and one a principle, which for example are related bodies corporate or where the principal controls the associate (ss 50AA, 50AAA Corporations Act 2001 (Cth)).

Richard Ottley, Partner  |  Phone: +61 2 9233 5544  |  Email: rbo@swaab.com.au

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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