What is the Difference Between Redundancy and Severance Pay?

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What is the Difference Between Redundancy and Severance Pay?

January 30, 2022         Lauren Hanna

Termination is a difficult process for both employers and employees. Employees may be entitled to a payment from their employer upon termination. The two usual payments are redundancy and severance pay. While redundancy and severance pay are similar, there are key differences. 

Severance Pay

Severance pay is compensation an employee receives when their employment is terminated early. Redundancy pay and other entitlements may be included in the severance pay. The amount is typically contingent on the length of time an employee has been employed. 

Severance pay is usually offered when an employee retires, is laid off, or when a position is eliminated. 

Redundancy Pay 

Redundancy pay is owed when an employee has been made redundant because their job is not required by business anymore due to changes or bankruptcy. Redundancy pay is a form of severance pay. 

Some examples of why redundancy occurs is when new technology is introduced, the business closes or relocates, there is restructuring or the profits have decreased. 

How to calculate redundancy pay? 

How much redundancy pay an employer is required to pay is calculated based on the employee’s continuous service. Continuous service refers to how long an employee has been working in the business. 

The Fair Work Ombudsman has a Notice and Redundancy Calculator to help determine the amount of pay required. However, it is best to first contact a lawyer to find out if a redundancy pay is owed and for more information. 

What exemptions apply?

Not all employees are entitled to a severance pay. This includes casual employees, trainees, apprentices and small business employees.

A small business is only exempt if they have less than 15 employees. There are additional rules for determining whether a business falls under this definition and you should contact a lawyer to find out whether your business or the business you are at employed at fulfils this definition. 

Conclusion

Severance pay and redundancy pay are similar, however, there are important differences. It is crucial that you are aware of these differences in order to know whether you are required to pay or entitled to receive payment. For more information contact 1300 337 997 or fill out the form on this page.

About Lauren Hanna

Lauren is studying a Bachelor of Law and a Bachelor of Business at UTS. She is interested in commercial law, finance and banking law, and property law.