Employers must carefully manage the redundancy process to avoid disputes with employees. While genuine redundancies are a legitimate way for businesses to restructure, reduce costs or respond to operational changes, failing to follow the correct process can expose employers to claims including unfair dismissal.
Redundancy can also create uncertainty for both employers and employees, particularly around consultation requirements, redundancy pay obligations and whether an employee has been offered suitable alternative employment.
This article explains what redundancy means, what makes a redundancy genuine under the Fair Work Act 2009 (Cth), when redundancy payments may apply and the steps employers should take to minimise legal risks.
What Is a Redundancy?
A redundancy occurs when an employer no longer requires a particular job to be performed by anyone because of changes in the operational requirements of the business.
Importantly, redundancy is not related to an employee’s performance, conduct or ability to perform their role. A genuine redundancy occurs because the position itself is no longer required, rather than because the employer wants to replace the individual occupying the role.
Redundancies commonly occur due to:
- business restructuring;
- changes in business operations;
- financial difficulties;
- the sale of a business;
- insolvency or closure of a business; or
- changes designed to improve efficiency or profitability.
A common issue arises when a business is sold and the new owner offers employment to existing employees. If an employee rejects the offer of employment, questions may arise about whether redundancy pay is payable and whether the termination was a genuine redundancy.
Difference Between Notice and Redundancy Pay
Notice and redundancy pay are separate employment entitlements and should not be confused.
Notice of Termination
A notice period gives an employee time to find alternative employment after their employment ends. Employers may provide working notice or payment instead of notice, depending on the circumstances.
Redundancy Pay
Redundancy pay (sometimes referred to as severance pay) is intended to compensate eligible employees for the loss of ongoing employment and future benefits associated with long-term service.
An employee may be entitled to both notice and redundancy pay where the legal requirements are satisfied.
What Is a Genuine Redundancy?
Under the Fair Work Act 2009 (Cth), a genuine redundancy can provide an employer with a defence against an unfair dismissal claim.
For a redundancy to be considered genuine, the employer must generally show that:
- the employer no longer required the employee’s job to be performed by anyone because of changes to the operational requirements of the business;
- the employer complied with any consultation obligations contained in a modern award or enterprise agreement; and
- it was not reasonable to redeploy the employee within the employer’s business or an associated entity.
Employers should carefully assess whether the role itself has genuinely disappeared. Simply changing an employee’s title, replacing them shortly afterwards or advertising a substantially similar position may create questions about whether the redundancy was genuine.
Further information about genuine redundancies is available from the Fair Work Ombudsman.
Redundancy Consultation Requirements
Employers cannot simply inform an employee that their role has been made redundant without following the required process.
Where a modern award or enterprise agreement applies, employers must comply with consultation obligations. This generally requires the employer to:
- notify employees about proposed changes;
- explain the reasons for the redundancy;
- discuss the effects of the changes; and
- consider ways to reduce any negative impacts.
Employers should also investigate whether suitable alternative employment is available within the business or an associated entity before finalising a redundancy.
When Is Redundancy Pay Required?
Employees who are made genuinely redundant may be entitled to redundancy pay under the Fair Work Act 2009 (Cth). However, not every employee is eligible.
An employee may not be entitled to redundancy pay where they:
- resign from their employment;
- are dismissed for reasons unrelated to redundancy, such as misconduct or poor performance;
- have been employed for less than 12 months;
- work for a small business with fewer than 15 employees;
- are a casual employee; or
- are employed under certain fixed-term arrangements.
Where redundancy pay applies, the amount is generally calculated based on the employee’s length of continuous service.
For example, under the National Employment Standards, employees with between one and two years of service may generally be entitled to four weeks’ redundancy pay, while employees with longer periods of service may receive a higher entitlement.
Employers should review the employee’s contract, applicable award or enterprise agreement and the National Employment Standards before calculating redundancy entitlements.
How Employers Can Avoid Redundancy Disputes
Redundancy disputes often arise when an employer does not properly document the business reasons for the redundancy or fails to follow the required consultation process.
Employers should consider:
- documenting the operational reasons for the redundancy;
- reviewing employment contracts, awards and enterprise agreements;
- consulting with affected employees in accordance with legal requirements;
- considering alternative roles or redeployment opportunities;
- calculating notice and redundancy payments correctly; and
- obtaining advice before announcing redundancies.
Employers should also be cautious where a redundancy involves senior employees or executives, as additional contractual or common law issues may arise.
Frequently Asked Questions About Redundancy
Can an employer make a position redundant and hire someone else?
A genuine redundancy requires that the employer no longer requires the role to be performed by anyone. Replacing an employee in substantially the same role may create a risk that the redundancy was not genuine.
Can an employee challenge a redundancy?
Yes. An employee may be able to bring an unfair dismissal claim if the redundancy was not genuine or if the employer failed to comply with consultation requirements.
Does an employer have to pay redundancy?
Not always. Redundancy pay depends on factors including the employee’s length of service, employment type, employer size and applicable industrial instruments.
Legal Advice About Workplace Redundancies
Redundancy law can be complex, and mistakes in the process can result in costly disputes. Employers should ensure they understand their obligations before making decisions that affect employees.
Our employment lawyers can assist employers and employees with redundancy advice, unfair dismissal risks and workplace disputes.
If you require advice about a redundancy matter, contact our team to discuss your circumstances.
This article provides general information only and does not constitute legal advice. You should obtain advice specific to your circumstances.