Do I always need to pay terminated employees redundancy pay?

redundancy pay

When making employees redundant, is redundancy pay always required? The short answer is, it depends.

There are some cases where redundancy pay is not applicable at all, including:

  • Casual employees.
  • Employees employed for less than 12 months.
  • Employees hired for a specific task, timeframe, or season.
  • Trainees under an apprenticeship or other such agreement.
  • If the employer is a small business.

There are several other specific cases that apply to particular industries, where daily, weekly, or seasonal hire, is the accepted norm.

What counts as a small business?

It depends on who you ask. The Bureau of Statistics has one definition, and the Australian Tax Office has another, but all that matters here is the description under the Fair Work Act which is: a business employing less than 15 regular employees, generally not counting casuals, at the relevant time qualifies as a small business. (FWA Section 23)

The relevant time means at the start of the process, not the end. That is, if you employ 20 people, but intend on terminating six, leaving you with 14, you are not defined as a small business, since you started with 20.

What about when employees aren’t made redundant but have had their hours reduced?

It would be entirely natural to assume that redundancy pay, paid in the case of termination, would only apply when an employee has left your employment.

The courts have decided that this is not necessarily the case.

For example, an employee who has usually worked 37 hours per week, but who’s hours have now been reduced to 21, can be found to have been terminated. That is, their original agreement of employment has been repudiated by this significant change and, therefore, their original contract has been terminated, even though they are still employed at the same firm, and redundancy pay may be appropriate.

This circumstance of reduced hours and reduced pay is quite relevant during the COVID-19 business environment where possibly large reductions in business activity are necessary. This is worthy of professional advice.

Can the amount owing in redundancy pay be reduced?

There are circumstances in which redundancy pay can be reduced, but the employer cannot make that decision alone, they must apply to the Fair Work Commission.

Essentially, this only applies where:

  • The employer finds other acceptable employment for the employee. Alternative employment not only has to be acceptable, it must be offered. That is, mere talk of future possibilities, no matter how appealing, is not enough to satisfy the clause.
  • The employer cannot pay the normal amount. This will require full explanation and supporting documentation. Nor will COVID-19 necessarily be a justifiable reason, as recent cases will attest.

It’s important to get legal advice on what you may owe in redundancy pay should you terminate employees or reduce their hours, ahead of making that decision, to ensure you’re compliant.