Making an employee redundant, a step-by-step guide for Australian employers

The business case is made. The downturn has run longer than expected, the new software does the work of two people, or a restructure has removed a layer of management. The role is surplus and you have decided it has to go. In the Fair Work system, though, the redundancy process has not actually started at that point: the decision that carries legal weight is the one you reach after consulting, not the one you walked in with.

Done properly, the process ends with an employee lawfully dismissed on the ground of redundancy. Written notice is given or paid out, entitlements are calculated and paid, every step is documented, and the dismissal holds up if it is challenged at the Fair Work Commission. It helps to know what the process does not involve. Redundancy is not a payment that buys the right to remove any employee, and it is not a shortcut around performance management or misconduct procedures. A dismissal only counts as a genuine redundancy if the job itself is gone, any consultation obligations were met, and redeployment was not reasonable.

Before you start: the prerequisites

Work through these before anyone is told anything:

• A documented business reason: the role, not the person, must be surplus because of changes in the operational requirements of the business, such as a restructure, automation, a downturn or a closure.
• The right industrial instrument: identify the modern award or enterprise agreement that covers the employee and read its consultation term, because complying with it is part of what makes a redundancy genuine.
• A reliable headcount: a business employing fewer than 15 people is a small business employer for redundancy pay purposes, counting casuals engaged on a regular and systematic basis and treating associated entities as one.
• The employment contract and policies: check for notice or redundancy terms that are more generous than the National Employment Standards, because the more generous term applies.
• A redeployment shortlist: roles within your business and any associated entity that the employee could reasonably do, with or without training.
• Selection criteria, if several roles are affected: objective criteria settled before anyone is told, so the choice of who goes can be explained and evidenced.

The two prerequisites that most often trip employers up are the award question and the headcount. An award you assumed did not apply can carry a consultation term, and the 15-employee line moves once regular casuals and associated entities are counted.

The redundancy process, step by step

Confirm the role is genuinely surplus

Under s 389 of the Fair Work Act 2009 (Cth) (the Act), a dismissal is a genuine redundancy only if the employer no longer requires the person's job to be performed by anyone because of changes in the operational requirements of the enterprise. Typical drivers are restructuring to remove duplication, automating a function, outsourcing work, closing a site or relocating operations, and a sustained downturn in demand or funding.

Redundancy is about the work, not the worker. If the real reason is poor performance, misconduct or a breakdown in the working relationship, the dismissal is not a redundancy at all, and treating it as one will not stop an unfair dismissal claim succeeding. Write the business rationale down now, with dates, and keep it. It is the foundation document for everything that follows.

Check the award or enterprise agreement for consultation obligations

Most modern awards and enterprise agreements contain a consultation term, and s 389(1)(b) makes compliance with it a condition of a genuine redundancy. If the applicable award required consultation and you did not consult, the redundancy is not genuine however sound the business case.

The Fair Work Ombudsman describes the pattern these terms follow. Once a decision to make major changes has been made, the employer must, as soon as possible, notify affected employees about the proposed changes, provide clear information about the changes and their expected effects, discuss strategies to reduce the negative effects on employees, and consider employee ideas and suggestions. Note the timing: you may have a preliminary view, but you cannot finalise the dismissal until employees have had a genuine opportunity to respond.

Consult before the decision is finalised

Put the proposal in writing. Tell the affected employee what is proposed, why, when, and which roles are at risk. Invite their response in writing, set a reasonable deadline, and actually consider what comes back, including alternatives to redundancy such as reduced hours, redeployment or voluntary redundancy. Keep notes of the meeting, the written communications, and what you did with each suggestion.

Even where no award or enterprise agreement applies, consult anyway. Genuine consultation is the strongest available evidence that the redundancy was both genuine and fair, and it is what a Commission member will look for if the dismissal is challenged. The small business exemption from redundancy pay does not exempt a small business from consulting.

Look for redeployment before you finalise

Section 389(2) provides that a dismissal is not a genuine redundancy if it would have been reasonable in all the circumstances for the person to be redeployed within the employer's enterprise or the enterprise of an associated entity. Work through:

• Roles in your business the employee could perform, considering their skills, experience, qualifications and location.
• Roles in any associated entity, which includes related companies.
• Whether reasonable retraining would bridge any gap between the employee and an available role.
• The offers made and the employee's response, recorded in writing.

If an appropriate role existed and you did not offer it, the redundancy will not be genuine. If you did offer a reasonable role and the employee refused, record the offer and the refusal, because both affect the outcome.

Select affected employees on objective criteria

Where several employees do similar work and only some of the roles go, the choice must be made on criteria you can explain and evidence: skills, qualifications, experience, documented performance and, where relevant, disciplinary record. Apply the criteria consistently across everyone in the pool and keep the assessment. Criteria that single out an employee for a reason connected to a protected attribute, such as their age, disability or family responsibilities, take the dismissal outside redundancy altogether and into general protections territory, where the employer carries the burden of proof.

Notify Services Australia if 15 or more employees are affected

If the business is considering making 15 or more employees redundant, the employer must give Services Australia written notification of the proposed dismissals as soon as possible, and before the employees are made redundant. The notice must set out the reason for the dismissals, the number and categories of employees likely to be affected, and the timing. Failing to notify can attract penalties, so treat it as a fixed step in the sequence, not an afterthought.

Give written notice, or pay in lieu

Under s 117, the employer must give the employee written notice of the day of termination, and the gap between notice and termination must be at least the minimum period, unless the employer pays in lieu. The minimum periods are:

• not more than 1 year of continuous service: 1 week
• more than 1 year but not more than 3 years: 2 weeks
• more than 3 years but not more than 5 years: 3 weeks
• more than 5 years: 4 weeks

Add one week if the employee is over 45 and has completed at least 2 years of continuous service. Periods of casual employment do not count towards the notice calculation, and the award, agreement or contract may require more. Payment in lieu must be at the full rate of pay for the hours the employee would have worked during the notice period.

Calculate and pay redundancy pay

An employee is entitled to redundancy pay under s 119 where employment is terminated at the employer's initiative because the job is no longer required, except where the termination is due to the ordinary and customary turnover of labour. The amount, paid at the employee's base rate for ordinary hours, scales with years of continuous service:

• at least 1 year but less than 2: 4 weeks
• at least 2 but less than 3: 6 weeks
• at least 3 but less than 4: 7 weeks
• at least 4 but less than 5: 8 weeks
• at least 5 but less than 6: 10 weeks
• at least 6 but less than 7: 11 weeks
• at least 7 but less than 8: 13 weeks
• at least 8 but less than 9: 14 weeks
• at least 9 but less than 10: 16 weeks
• 10 years or more: 12 weeks

No redundancy pay is owed under s 121 if the employee's continuous service is less than 12 months, or if the employer is a small business employer. There is a narrow exception: where a small business became small because of the very terminations and then went bankrupt or into liquidation within six months, redundancy pay can still be owed, so the exemption is not automatic in insolvency situations.

Pay final entitlements and close out

When employment ends, work through each of these items:

• Annual leave: accrued and untaken annual leave must be paid out when employment ends, under s 90(2). Employees accrue 4 weeks a year, or 5 for shiftworkers under an award or agreement.
• Long service leave: entitlements depend on the state or territory legislation that applies and the employee's length of service, so check the rules for the jurisdiction where the employee works.
• Personal leave: accrued personal and carer's leave is not paid out on termination.
• Superannuation and tax: whether super is payable on a termination amount, and how it is taxed, varies with the type of payment. Confirm the treatment with your accountant or adviser before finalising the numbers.
• Final pay and records: pay everything owed promptly, issue the final payslip, and keep the consultation notes, selection assessments, redeployment records and payment calculations. They are your defence if the dismissal is challenged.
• Centrelink: Services Australia may ask for employment separation details if the employee claims income support. Provide the information promptly if it is requested.

Where people typically get held up:

• Deciding before consulting: if the final decision is made before employees have had their say, the consultation limb of s 389 fails and the redundancy is not genuine, no matter how strong the business case.
• Getting the headcount wrong: regular and systematic casuals count towards the 15, associated entities count as one employer, and the employee being dismissed counts too. Small business status can disappear once the count is done properly.
• Skipping the associated entity redeployment search: a reasonable role at a related company is enough to defeat genuineness, and it is the limb employers most often overlook.
• Miscalculating notice and redundancy pay: the extra week for employees over 45, the exclusion of casual service, and the drop back to 12 weeks at 10 years of service are the points where calculations most often go wrong.

Where a lawyer fits into the process

A lawyer's role is to check the steps before you take them, not to rescue the process afterwards. A legal practitioner would confirm which award or enterprise agreement covers the employee and read the consultation term for you; review the selection criteria and the redeployment assessment for reasonableness; draft the consultation letters, the outcome letter and any deed of release; calculate the notice, redundancy pay and leave entitlements; advise on the Services Australia notification and on insolvency situations; and, if it comes to that, respond to an unfair dismissal or general protections application at the Fair Work Commission.

Most redundancy disputes are won or lost on paperwork. Having a lawyer review the process at the consultation stage, while changes can still be made, is far cheaper than defending a claim where the consultation record is thin.

Consultation before the decision is finalised

The step that determines whether the redundancy holds up is the consultation that happens before the decision is finalised. It is the step employers most often compress or skip, and it is the one the Act makes a legal condition of genuineness. A sound business reason gets you through the first limb of s 389, but the dismissal only survives an unfair dismissal claim if the consultation limb is satisfied and redeployment was not reasonable. Get the consultation right and everything else, the notice, the payments, the records, falls into place.

The essentials, in short: confirm the role is genuinely surplus and document why; identify the award or agreement and follow its consultation term; consult genuinely before deciding; look for redeployment across the business and any associated entity; select on objective criteria; notify Services Australia where 15 or more employees are affected; give written notice or pay in lieu; pay redundancy pay, annual leave and any long service leave owed; and keep the records that prove each step happened. If any part of the picture is unclear, particularly award coverage, the headcount, or the correct entitlements, take advice before the first letter goes out.