Avoiding redundancy traps

Employers can easily fall into dispute with their employees by failing to properly handle redundancies. There is often uncertainty surrounding redundancy, in terms of handling it within the law, as well as cost.

Redundancy commonly occurs when a business is sold and a new owner offers jobs to the vendor’s existing workforce. Some employees decline the offer of employment by the new owner. In this context, an issue can arise as to whether or not redundancy payments need to be made to an employee who rejects an offer of employment by the new owner.

Notice and Severance distinguished

Notice and severance payments should not to be confused. The period of notice provides the employee with a chance to seek other employment while a severance payment is intended as compensation for the loss of future entitlements to long service leave and accrued sick leave.

Redundancy

Let’s examine what redundancy means. The best way to define redundancy is that the employer no longer wishes the duties the employee has been performing to be undertaken by anyone. Termination of the employee on this ground has therefore nothing to do with poor performance or misconduct. Essentially the work or role is no longer required to be performed by any employee. Redundancy can also happen when an employer becomes insolvent or bankrupt, or following a re-structure, in order to increase the competitiveness or profitability of a business.

The employer must meet any requirements under a relevant award or enterprise agreement regarding redundancy. This includes discussions with the employee about the prospect of redundancy in view of operational changes or restructuring.

Employers need to be aware that a redundancy which does not meet the above criteria may expose them to an unfair dismissal claim. It should also be appreciated that a redundancy does not remove the need for notice or payment in lieu of notice.

Some employers fall into the trap of going through a ‘redundancy’ and then immediately afterwards advertising the same position. From an employer’s perspective it is prudent to assume the former employee will check your advertised positions.

It is not uncommon for an employer to seek to portray what may in fact be, a wrongful termination of an executive, as a “redundancy”.

The employer needs to ensure that, on examination of the facts, whilst the employee may have no legal claim to a severance payment, there is no basis of a common law claim.

What is a ‘genuine redundancy’?

If an employee has been made redundant and that redundancy is a “genuine redundancy” as defined by the Act then the employer will be able to defend a claim for unfair dismissal.

Under the Act, it is a “genuine redundancy” if:

  • the person’s employer no longer required the person’s job to be performed by anyone because of changes in the operational requirements of the employer’s enterprise; and
  • the employer has complied with any obligation in a modern award or enterprise agreement that applied to the employment to consult about the redundancy; and
  • it is not reasonable for the employer to redeploy the person in the employer’s enterprise or an associated entity of the employer’s enterprise.

It is important that the employer who is making an employee redundant, not only complies with the consultation provisions of any applicable award or enterprise agreement, but also makes enquiries to make sure that there is not a suitable alternative position available within the employer’s business or any other “associated entity” of the employer.

When should a redundancy payment be made?

When an employee is made redundant then usually a redundancy payment will be required by the employer and this is often called severance pay.

However, the employee is not entitled to redundancy pay under the Fair Work Act if the employee:

  • resigns
  • is terminated other than due to redundancy, e.g. misconduct or performance issues
  • has been employed for less than 12 months
  • is employed in a small business with less than 15 employees
  • was employed for a fixed term and that term has ended
  • is a casual employee

The amount of any redundancy payment is calculated by reference to the employee’s years of service. By way of illustration if the employee has worked for a period greater than one year but less than two the redundancy period payable would be 4 weeks. If the term was between 9 to 10 years the period would be 16 weeks.

However, an employer may not be required to pay the redundancy for the full length of service if the employee did not have any redundancy entitlements with the employer in question, prior to 1 January 2010. In those circumstances the period from which redundancy payments are calculated is 1 January 2010 rather than the full length of service.

In conclusion – take care

It is easy to fall into one of these employment law traps and employers should be satisfied as to the circumstances that constitute a redundancy, carefully review payments to be made and comply with the Act’s requirements in relation to a “genuine redundancy”.

Regardless if you are an employer or employee, if you feel you need assistance call us on (02) 6621 2481 or email info.lismore@sll.com.au.