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)).