Making employees redundant and your legal obligations as an employer

Making employees redundant is one of the most legally sensitive decisions an Australian business can make. When you dismiss an employee because their job is no longer needed, you are not free to simply close the file. The Fair Work Act 2009 (Cth) (the FWA) protects employees from redundancy unless the redundancy is genuine, and it sets out minimum payments you must make when it is.

This article sets out your obligations as an employer: who the redundancy rules apply to, when the law treats a redundancy as genuine, the consultation you must undertake, the notice and redundancy pay you must provide, and what happens if you get any of it wrong.

Who has to comply, and when

The redundancy rules in the FWA apply to national system employers, which covers most private sector businesses in Australia, including companies and sole traders employing staff under the national workplace relations system.

A redundancy occurs when you no longer need an employee's job to be done by anyone. That can happen because the business introduces new technology, sales or production slow down, the business closes or relocates, or a restructure follows a merger or takeover. The role itself disappears, and the employee is not replaced. If you still need the work done, even under a different job title, you are dealing with a dismissal, not a redundancy.

Several thresholds determine what you must pay:

• 12 months of service: an employee must have at least 12 months of continuous service before they are entitled to redundancy pay under the National Employment Standards (the NES). Unpaid leave does not count towards continuous service, though it does not break it.
• Small business employers: a business with fewer than 15 employees does not have to pay redundancy pay under the NES, although the notice obligations still apply. This threshold catches many family businesses by surprise.
• Excluded employees: casual employees, employees engaged for a specified period, task or season, and apprentices or trainees are generally outside the notice and redundancy pay entitlements under the NES.
• Awards and agreements: the NES figures are minimums. A modern award or enterprise agreement can set higher redundancy entitlements, and some awards contain industry-specific redundancy provisions that operate instead of the NES.

Confirm the redundancy is genuine

Under s 389 of the FWA, a dismissal is a genuine redundancy only if two things are true at the same time:

1. Your business no longer required the employee's job to be performed by anyone, because of changes in the operational requirements of the enterprise; and
2. You complied with any obligation in a modern award or enterprise agreement that applied to the employment to consult about the redundancy.

The test looks at the job, not the person. A redundancy is not genuine if it is really a performance-based dismissal wearing a redundancy label, or if the work continues to be done by someone else after the employee leaves.

There is a third, separate check. Even where both limbs are met, the dismissal is not a genuine redundancy if it would have been reasonable in all the circumstances to redeploy the employee within your business, or within the business of an associated entity. That means you must actively look for alternative roles, including at a lower level or in a related company, before you finalise the redundancy. The Fair Work Ombudsman (FWO) cannot decide whether a redundancy is genuine, so the responsibility for building that case sits with you.

Consult with affected employees

Every modern award and enterprise agreement contains a consultation process for major workplace changes, including redundancies. 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 with employees measures to avoid or reduce the negative effects of the changes; and
• consider any ideas or suggestions employees raise.

Consultation is not a courtesy. It is part of the genuine redundancy test itself. Under s 389(1)(b), if your award or agreement imposes a consultation obligation and you do not comply with it, the redundancy is not genuine, and the unfair dismissal defence is unavailable to you.

Give notice or payment in lieu

Even if you owe no redundancy pay, you must still give the employee written notice of termination or payment in lieu of notice. Under s 117 of the FWA, the minimum notice period depends on continuous service:

An employee over 45 who has completed at least 2 years of continuous service gets an extra week, for a maximum of 5 weeks. The notice must be in writing and specify the day of termination. Alternatively, you can pay in lieu of notice at the full rate for the notice period, which is common in redundancies because the employer usually wants the employee to leave immediately.

Pay redundancy pay

An employee with at least 12 months of continuous service at a business that is not a small business employer is entitled to redundancy pay under the NES, calculated at the employee's base rate of pay for ordinary hours. Bonuses, loadings, monetary allowances, overtime and penalty rates are not included. The NES scale is:

Note the quirk in the last row: redundancy pay peaks at 16 weeks for nine to ten years of service and then steps down to 12 weeks once an employee passes ten years. If you rely on a table you have not checked recently, this is the row that produces the wrong figure.

Two further points on redundancy pay:

• Reduction applications: you can apply to the Fair Work Commission to reduce the amount of redundancy pay if you have found other acceptable employment for the employee, or if you genuinely cannot afford to pay the full amount. This avenue applies to NES entitlements only, not to redundancy pay that comes from an award or enterprise agreement.
• Tax treatment: a genuine redundancy payment is tax-free up to a limit that depends on the employee's years of service, with the limit indexed each 1 July. Amounts above the limit are concessionally taxed as employment termination payments. The ATO treats a payment as a genuine redundancy only where the job is genuinely abolished and the employee is under age pension age; a dismissal for disciplinary or inefficiency reasons is not a genuine redundancy for tax purposes.

Pay out leave and other entitlements

On termination, s 90 of the FWA requires you to pay the employee for any untaken annual leave, at the amount that would have been payable had they taken the leave. Outstanding wages and other accrued entitlements must also be included in the final payment. Long service leave is a separate entitlement governed by state and territory legislation, so check the rules that apply in your state as well as any award or agreement terms.

Notify Services Australia for large-scale redundancies

If you are considering making 15 or more employees redundant, you 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 of the dismissals. Failure to comply with these requirements can attract penalties.

What happens if you get it wrong

If the redundancy is not genuine, the employee can apply for unfair dismissal, and your genuine redundancy defence under s 385 of the FWA is unavailable. Where the Fair Work Commission finds the dismissal was harsh, unjust or unreasonable, compensation is capped at the lesser of 26 weeks of the employee's remuneration and half the high income threshold, which is currently $190,100 and is adjusted each 1 July.

Two further exposure points to keep in mind:

• General protections: if the real reason for the dismissal is a prohibited one, such as the employee exercising a workplace right or a discriminatory attribute, the dismissal can also attract a general protections (adverse action) claim, separate from any unfair dismissal application.
• Underpayments: failing to pay notice, redundancy pay or leave entitlements is a contravention that the Fair Work Ombudsman can investigate and enforce, with penalties for non-compliance.

An employee generally needs at least six months of service, or 12 months with a small business employer, to bring an unfair dismissal claim, so the minimum employment period is worth checking early when a dispute looks likely.

Compliance checklist

Before finalising any redundancy, work through this list:

• [ ] Confirm the role is truly redundant: the work is no longer required by anyone, and there is a documented operational reason for the change.
• [ ] Identify the applicable modern award or enterprise agreement and follow its consultation clause before the decision becomes final.
• [ ] Consider redeployment within your business and any associated entities, and record what you considered and why it was not reasonable.
• [ ] Give written notice of termination, or pay in lieu, at the correct rate for the employee's service and age.
• [ ] Calculate redundancy pay on the NES scale, check whether a higher award or agreement rate applies, and check the exemptions for service, small business and employee category.
• [ ] Pay out unused annual leave, long service leave and any outstanding wages in the final payment.
• [ ] If 15 or more employees are affected, notify Services Australia before the dismissals take effect.
• [ ] Keep a written record of the operational reasons, the consultation, the redeployment search and the payments made. If the redundancy is ever challenged, that file is your defence.

Where a lawyer can help

Redundancy decisions are rarely urgent enough to skip advice. A lawyer can:

• review whether the redundancy is genuinely defensible before you act, including whether redeployment is reasonably available;
• help you design and run the consultation process so it complies with the award or agreement;
• draft the redundancy letters, selection criteria and settlement terms;
• manage the Services Australia notification and any award or agreement interaction; and
• respond to unfair dismissal, general protections or underpayment claims if an employee challenges the redundancy.

Consultation and redeployment: where redundancies fail

If there is one part of this process to get right, it is the sequence of consultation and redeployment. Most failed redundancies are not failed because the business did not have a genuine operational reason. They fail because the employer announced the decision without following the award's consultation clause, or because it did not genuinely consider whether the employee could be redeployed, including into an associated entity. Both failures strip away the genuine redundancy defence and expose the business to an unfair dismissal claim with a compensation cap of up to 26 weeks' pay.

The first action to take this week is simple: before you make any redundancy decision definite, pull out the applicable award or enterprise agreement, read the consultation clause, and check the 15-employee threshold. If you are not sure how the clause applies, or whether the redundancy will hold up, get advice before you tell the employee anything. Once the announcement is made, the defence window starts closing.