Do small businesses have to pay redundancy?

Updated 12 August 2022

Making staff redundant is never an easy thing to do. There is a lot to consider. One question is, do small businesses have to pay redundancy? This is a great question. But a complex one to answer. The short answer is that most small businesses do not have to pay redundancies but there are some exceptions.

So let’s take a look at what that means.

In a hurry? Jump ahead. 

What is a small business?

First of all let’s define what we mean by a small business. Australian law defines a small business as one that has less than 15 employees. Based on the section 23 of the Fair Work Act 2009 (Cth), calculate this in the following way:

• All employees working for the company at the time.
• The person whose employment you are terminating.
• Any other person whose employment you intend to terminate.
• Only count employees who are part time or full time.
• Do not include casual employees unless you employ them on a regular, systemic basis at the time.
• Associated entities, such as a group of companies, count as one.

Do small businesses have to provide benefits?

Section 121 of the Fair Work Act 2009 (Cth) means that most small businesses do not have to pay redundancies to their employees when making their position redundant. But it does depend on the industry you operate in and the enterprise agreement you have in place.

The following are some industry awards that require you to pay employees redundancies:

• Mannequins and Models Award 2010
• Joinery and Building Trades Award 2010
• Manufacturing and Associated Industries and Occupations Award 2010 
• Textile, Clothing, Footwear and Associated Industries Award 2010
• Timber Industry Award 2010.

Even if you do not need to make redundancy payments, you still need to pay out the final benefits owed to anyone you make redundant.

This can be complex to fully understand, so talk to your lawyer for guidance. You do not want to make any mistakes or you could end up in hot water.

The following table from section 119 of the Fair Work Act 2009 (Cth) sets out how to calculate what you need to pay eligible employees based on their term of service.

Table 1—Redundancy pay period

Do small businesses pay taxes?

This is not taxation advice so make sure you check the ATO website for further information.

When an employer makes a redundancy payment, it is tax free up to certain limits if it is a genuine redundancy. The tax free component of a redundancy payment may include:

• An amount paid in lieu of notice.
• A severance payment of a certain number of weeks for every year worked for the employer.
• A golden handshake or gratuity.

Notice period when making an employee redundant

When making an employee redundant, follow the established standard minimum notice period set out in section 117 of the Fair Work Act 2009 (Cth).

The minimum notice required for the years continuously worked for an employer is as follows:

• 1 year or less — 1 week's notice.
• More than 1 to 3 years — 2 weeks’ notice.
• More than 3 to 5 years — 3 weeks’ notice.
• More than 5 years — 4 weeks’ notice.
• Additionally, if an employer is more than 45 years old and worked for the employer for a minimum of 2 years, they receive an extra week’s notice.

An employer should tell an employee in person of their intention to make them redundant or send a notice to their home address.

Key message

It is important to check your applicable award or enterprise agreement to see if your small business needs to pay redundancy. Also remember that a genuine redundancy is when and you decide the job is no longer required in the organisation and you will not be hiring to fill the position in future.

And, as always, be sure to get advice if you are in doubt.

Do you have questions or comments about redundancy pay? Be sure to leave them below.