Redundancy pay is the payment an employee receives after they have been made redundant from their employment.
Redundancy pay is sometimes referred to as severance pay, however there are technical differences that separate the two terms.
When an employee is made redundant, it is usually because their employer no longer requires a job to be performed anymore. Note that it is the job itself, not the employee that becomes redundant. Examples of when redundancy can happen include:
- The business starts using new technology that replaces the need for a person
- There is a decrease in sales or production
- The business relocates or closes down
- There is a restructuring of the business
- The business or employer becomes bankrupt or insolvent
Severance on the other hand, refers to circumstances where the employee’s contract is terminated early for any number of reasons such as an employee breaching their employment contract. The two terms are used interchangeably due to their similarities, but the distinction becomes important when understanding your rights and obligations as an employer or employee, and whether redundancy pay is applicable in your circumstances.
How do you calculate redundancy pay?
An employee’s redundancy pay is calculated based on their continuous period of service with their employer. Continuous service refers to the length of time they have been employed by the business. The amount paid is determined by the employee’s base rate for ordinary hours worked:
Base rate x redundancy pay period = redundancy pay
The following table is used to calculate the redundancy pay based on the period of continuous service:
|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*|
Note that there is a reduction in redundancy pay for employees with at least 10 years of continuous service.
Who is excluded from receiving redundancy pay?
There are certain classes of employees that do not receive redundancy pay if they are made redundant. Examples include:
- Employees that have worked for less than 12 months with the business
- Employees on a fixed term contract
- Casual employees (unless there is evidence that they have been employed on a regular and systematic basis)
- Small business employees
Employees working for a small business are not entitled to redundancy pay. A small business employer is defined as someone who has fewer than 15 employees at the time of the redundancy. In determining whether an employer has less than 15 employees, the following needs to be considered:
- All employees are to be counted at the time of redundancy
- Casual employees are not counted (however the same rules apply as above)
- Any employees being dismissed at the time are counted
- Associated entities are counted as one entity
Has the employer offered the employee a similar job?
If an employer offers a similar job to the dismissed employee and they do not accept it, the amount of redundancy pay can be reduced or eliminated altogether. In these cases, the employer will need to make an application with the Fair Work Commission to reduce the amount of redundancy pay an employee receives, or to release them from the need to pay for redundancy altogether.
What if the employer cannot afford to pay redundancy?
In the circumstance where an employer is financially unable to pay redundancy to their employees, they can file an order with the Fair Work Commission to have the redundancy amount reduced, or even eliminated depending on the circumstances.
Is the redundancy genuine?
A genuine redundancy refers to when an employer has legitimate reasons to make an employee redundant. The employer must also oblige to any awards or enterprise agreements held between them and their employee – these set out the minimum employment entitlements for all employees.
If an employee’s dismissal is a genuine redundancy, the employee has no grounds to make a claim of unfair dismissal against the employer.
What makes a redundancy non-genuine?
A redundancy is defined as non-genuine when:
- the employer has the ability to re-deploy the employee within the business but fails to do so
- the employer hires another person to do the same job as the employee that was dismissed
- the employer fails to uphold the requirements under an award or registered agreement
If an employee believes that they have been made redundant in a non-genuine way, they may file an unfair dismissal complaint against their employer with the Fair Work Commission.
How can an employer limit their liability when making an employee redundant?
If an employer has decided to dismiss an employee based on redundancy, it is important they follow the correct procedures to avoid any claims that could be made against them. The following are important to consider before making someone redundant.
Notice must be provided to all employees that are going to be made redundant. The amount of notice an employer is required to give depends on how long the employee has worked for the business. The following can be used as a guideline for minimum notice requirements:
|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||3 weeks|
|More than 5 years||4 weeks|
Employers must give the notice in writing to the employee by delivering it personally to them or by sending it to the employee’s last known address.
Complying with obligations set out in modern awards and enterprise agreements
It is crucial that employers recognise any awards or enterprise agreements held between them and the dismissed employee. These vary depending on the employee’s occupation and any other agreements that were made regarding their employment.
Awarding the right amount of redundancy pay
Employers have an obligation to ensure that the employee receives the correct amount of redundancy pay. The above formula details the standard practice used to determine how much an employee should receive in redundancy pay.
An employee is entitled to redundancy pay when they are made redundant and dismissed from their employment.
The formula to calculate redundancy pay is as follows:
Base rate x redundancy pay period = redundancy pay.
How much redundancy pay the employee receives is dependent on how long they have worked for the business.
Employers should ensure that any redundancies made are genuine in order to protect themselves against claims of unfair dismissal. This involves:
- giving enough notice to employees regarding the redundancy
- complying with any valid awards and agreements
- calculating the correct amount of redundancy pay the employee is entitled to