Need reminding to lodge your monthly or quarterly BAS on time?

Then join the AFYF mailing list and receive ongoing information, news and updates on the latest tax, business, marketing and accounting developments. We’ll even remind you to lodge your BAS on time!

Out Sourcery

  • Bookkeeping
  • MYOB Setup and Training
  • Business Systems and Management

MYOB | Professional Partner learn more »


This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.


Handling redundancies

First of all we need to understand what we mean by redundancies. Redundancy occurs when the position that an employee is occupying is no longer required to be filled by anyone, ie the position is redundant. This can then result in the termination of an employee which is referred to as a retrenchment. This is an important distinction as it is the position that is made redundant, not the employee; the employee is actually retrenched as a result of the redundancy. Redundancies are not related to poor employee performance or conduct.

Not all redundancies result in retrenchment of an employee. The employee may actually be redeployed into another position within the organisation and a redundancy does not have to mean that all the duties in a position disappear; it can be enough that duties transfer to another position. For example, both an Accounts payable position and an Accounts Receivable position could be merged into one Accounts position thereby causing the former positions to be made redundant and a new position created. Another example is where receptionist duties may be rolled into an administration position.

Causes of redundancy are varied and can include:

• Introduction of new technology
• Organisational restructure
• Downsizing
• Liquidation; and
• Sale of business

The obligations on businesses in relation to redundancies can arise from a variety of sources. It may be from legislation such as the impending Fair Work Act, from industrial instruments (awards or workplace agreements) or from contracts and/or policies.
Redundancy obligations include things such as:

• Notice of termination
• Leave
• Severance Pay
• Consultation; and
• Redeployment.

The current legal obligations for redundancy are largely contained in the Workplace Relations Act but this all changes on 1st July 2009, when the Fair Work Act comes into play which will have a dramatic impact on employer obligations and the manner in which businesses go about undertaking redundancies.

What’s in store under the Fair Work Act

Under WorkChoices there has been no statutory entitlement to redundancy pay, the entitlement instead came out of industrial awards. However, under the Fair Work Act, all employees will have a statutory entitlement to redundancy rights for the first time.

Under WorkChoices there was no requirement to consult, however the Fair Work Act contains a statutory obligation to consult. If you don’t consult employees, then the redundancy will not be seen as genuine and employees will then have access to unfair dismissal provisions. The new laws also mean that for redundancy to be genuine, an employer must have considered redeployment within the business or within any related bodies corporate.

Businesses under WorkChoices were free to select those to be made redundant as part of managerial prerogative. This will now change with the selection process becoming all important. The selection should take place according to criteria such as skills, qualifications and responsibilities. It must be transparent and fairly applied otherwise it could give rise to discrimination claims on the bases of things such as family responsibilities, illness, disability, gender, race, union membership, workers compensation claims, etc.

This is not to say the selection process cannot be based on performance and knowledge of the business but you do have to document the selection process and show that is fair. It is also not permissible to simply dismiss staff on the basis of ‘ Last On First Off’. Business owners who simply apply a thought process without documenting it will be vulnerable with regards to unlawful termination claims.

You don’t have to show the process to the employee but have it documented just in case the redundancy is challenged and Fair Work Australia demands information on the selection process. Calling for voluntary redundancies can be a way of avoiding this problem, however the danger with this can be that your efficient employees apply for voluntary redundancy as they are confident of their re-employment opportunities, leaving the business with less efficient employees, further adding to the downturn spiral.

Where an employee is retrenched due to their position being made redundant they are usually entitled to severance pay. Severance pay entitlements will be covered in the Fair Work Act with tables outlining minimum entitlements. This is in addition to any amount required to paid out under notice period clauses.

There are exemptions from the obligation to pay severance pay. These include where the employee has less than 12 months, continuous service with the employer immediately prior to the time of termination, or at the time the person was given notice of the termination, or where the employer is a small business employer which is defined as an employer which employs fewer than 15 employees at the particular time. There is a risk that casual employees could be included in this head count if at the time of a person’s retrenchment, any casuals in the business have been engaged on a “regular and systematic basis”.

Look out for contracts and policies

Contractual obligations and policies are often the neglected area when it comes to redundancies. It is common for employers to miss processes that are promised in their own internal policies. For example, your business may have a policy that has been written five years ago promising employees that you will go about a certain consultation process or you may have a contract that promises a particular amount of severance pay or days notice.

Where these are in excess of legislation, a business may also be bound by these promises and if they do not fulfill them it may give rise to a breach of contract claim. For this reason it is crucial that all businesses maintain current policies on redundancies, particularly when legislation may see them exempt from severance pay. The last thing an employer wants is for a policy or contract to give this entitlement back to an employee, particularly in tough economic times.

Transmission of business

Redundancies and transmission of business often go hand in hand when businesses are sold and employees do not gain employment with the new employer. Under WorkChoices, a new employer is bound by the previous employer’s workplace agreements and/or any applicable industrial instruments (awards) for a period of 12 months, after which time the new employer’s industrial instrument would then apply.

However, under the Fair Work Act there will no longer be a time limit on the application of the transferred instruments and they will instead transfer indefinitely. The only proviso to this is where there is an order from Fair Work Australia to the contrary. These transfer rules will also apply to any individual workplace flexibility agreement that is made under the ‘modern awards’ that come into force in January 2010.

Although transmission of business rules are typically just applied to new acquisitions, under the Fair Work Act this will expand to include in-sourcing and outsourcing. Businesses need to be aware if a function in their organisation is outsourced and they then decide to bring it back in house, they may find that enterprise agreements and awards follow the employees back into the business.

Claims that can arise out of redundancy

It is crucial for any business that any restructure or redundancy is considered carefully and is carried out following processes. If a redundancy is mishandled, it can give rise to unfair dismissal or even workers compensation claims.

Under the Fair Work Act, a person will not be able to claim unfair dismissal where there has been a “genuine redundancy”. A “genuine redundancy” will only occur where:

• A person’s employer no longer requires the person’s job to be done by anyone because of changes in operational requirements; and
• The employer has complied with any obligation (in modern award or enterprise agreement that applied to the employer) to consult about the redundancy.

The dismissal will not be genuine where it would have been reasonable (in the eyes of Fair Work Australia) for the employee to be redeployed within the employer’s business or the business of another employer. This has serious ramifications for the organizations with related bodies corporate.

A failure to fully comply with all applicable terms of the Fair Work Act, applicable industrial award, workplace agreement contract or policy may expose an employer to risk. The onus is on the employer to disprove any claim.

Businesses facing impending redundancies would do well to seek good advice, very soon, as to their redundancy obligations either under ‘ Work-Choices’ or ‘Fair Work’, and to ensure their record keeping will withhold scrutiny from either unions or the AIRC/Fair Work Australia.

Robyn Anderson
My Business, May, 2009


« Back