The Lowdown on Redundancy Payments in Australia

If you’re looking to make someone redundant in your workplace, knowing the obligations around redundancy payments is a big part of the puzzle. This guide will break down everything you need to know, including how much employees are entitled to, how it’s calculated, and what exceptions apply.

 This can happen for many reasons, such as restructuring, downsizing, or technology making certain roles redundant. The payment is meant to help employees transition to new employment.

When is Redundancy?

Redundancy happens when:

• An employer no longer needs a particular job to be done by anyone.
• The business becomes insolvent or bankrupt.
• Redundancy is genuine only if the employer does not hire another individual to perform the same job.

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• Permanent full-time and part-time employees who have worked for more than 12 months.
• Employees of businesses with 15 or more employees.

These entitlements are governed by the National Employment Standards (NES) under the national workplace relations system.

However, some employees are not entitled to redundancy pay:

• Casual workers.
• Employees who have worked for less than 12 months.
• Employees of small businesses (fewer than 15 employees).
• Apprentices and trainees are employed only for the duration of their training agreement.

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The more years of service, the higher the redundancy pay. Below are the minimum redundancy entitlements under the NES:

What is Included in Redundancy Pay?

The redundancy payment is based on an employee’s base rate of pay for their ordinary hours worked. It does not include:

• Bonuses or incentive-based payments.
• Overtime or penalty rates.
• Loadings or allowances.

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For the financial year starting July 1, the tax-free amount consists of a base amount plus an additional amount for each year of service. For example, in the financial year ending June 2024, the tax-free threshold was:

• Base amount: $11,985
• Additional amount per year of service: $5,994

Redundancy payments are reported on the employee's income statement or PAYG payment summary, highlighting the tax-free components based on the length of employment.

Any above amount will be taxed as part of an Employment Termination Payment (ETP) at concessional rates.

Genuine vs Non-Genuine Redundancy

A genuine redundancy occurs when:

• The job no longer exists.
• The employee is under the age pension age at the time of termination.

A non-genuine redundancy occurs when:

• The employee resigns.
• They are dismissed for misconduct or inefficiency.
• Termination occurs due to serious misconduct and does not qualify for redundancy pay.

Non-genuine redundancies do not qualify for tax concessions and are taxed as an ETP.

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In addition to redundancy pay, employees are entitled to notice periods before termination or payment instead of notice. When a company pays this out instead of the employee serving the notice period, it’s called ‘time in lieu of notice’. 

The minimum notice period depends on how long you have worked for your employer:

Employees aged 45 or over who have worked for at least two years are entitled to an additional week’s notice.

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• Small businesses with fewer than 15 employees.
• Fixed-term contract employees whose contract ends as agreed.
• Casual employees.

Certain industry-specific redundancy schemes outlined in awards or enterprise agreements may provide entitlements different from those provided by general provisions.

Make sure you’re up to date with the latest Modern Award that reflects your business.

Additionally, the employee may not be eligible for redundancy if the employer offers them another suitable position within the company or its related entities.

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• Business Closure: When a business shuts down entirely, all employees may be made redundant. This is often due to financial difficulties or the owner’s decision to cease operations.
• Downsizing: Companies sometimes reduce their workforce to cut costs or improve efficiency. Some employees may be made redundant in such cases as their roles are no longer required.
• Restructuring: Businesses may undergo significant changes in their structure or operations, making certain roles redundant. This can happen during mergers, acquisitions, or internal reorganisation.
• Insolvency: If a business becomes insolvent or bankrupt, it may be unable to continue employing its staff, resulting in redundancies.
• Mergers and Acquisitions: When two companies merge, or one acquires another, there may be overlapping roles. To streamline operations, some positions may be made redundant.

In each scenario, employers must follow the correct procedures for redundancy, including consulting with employees and providing adequate notice. This ensures that the process is fair and transparent, giving employees the time to prepare for their next steps.

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Generally, small businesses are not required to pay redundancy pay to employees who have been employed for less than 12 months. 

However, the employer must provide redundancy pay if an employee has been with the company for 12 months or more.

Despite the exemption for shorter-term employees, small businesses must still follow the correct procedures for redundancy.

This includes consulting with employees about the redundancy, providing a redundancy notice period, and ensuring that the process is fair and transparent.

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However, the financial state of the employer might mean they lack the funds to fulfil these obligations. Employees can turn to the Fair Entitlements Guarantee (FEG) scheme in these cases.

The FEG is a government-funded program designed to assist employees who have been made redundant due to their employer’s insolvency.

Through the FEG, eligible employees can claim unpaid entitlements, including redundancy pay, ensuring they receive the support they are entitled to even when their employer cannot provide it.

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• Redundancy occurs when the job no longer exists.
• Employees may be eligible for redundancy pay if they’ve worked for over a year and the employer has over 15 employees.
• Redundancy pay is based on the length of service and calculated using the base pay rate.
• Tax-free limits apply to genuine redundancies, which vary depending on the length of service.
• Some employees—casuals and those working for small businesses—are not entitled to redundancy payments.

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What if my employer can’t afford my redundancy payment?

If your employer becomes insolvent or bankrupt and cannot afford to pay your entitlements, you may be able to claim through the Fair Entitlements Guarantee (FEG) scheme. This government scheme ensures eligible employees receive unpaid entitlements, including redundancy payments.

Can I negotiate my redundancy payment?

In some cases, yes. If your employment contract or enterprise agreement provides better terms than the NES minimums, you may be able to negotiate a higher payout. However, employers are only legally required to meet NES standards unless otherwise agreed upon.

Is my unused annual leave included in my redundancy payment?

No. Unused annual and long service leave are separate entitlements paid out upon termination but are not part of your official redundancy payment.

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