A redundancy guide for Australian small businesses

22 April 2020

You may have heard that Australian small businesses don’t need to pay redundancy. 

Well, that’s not always the case.

Here’s what you need to know about redundancy pay for employees and small businesses.

In a hurry? Jump ahead. 

Small business definition

First, when we are talking about a small business, we’re talking about employers with fewer than 15 employees.

And, this calculation includes:

  • all employees employed at that time
  • the employee who is being dismissed
  • any other employee who is also being dismissed or whose employment is also being terminated, and
  • a casual employee is NOT to be counted unless, at that time, they have been employed on a regular and systematic basis.
  • associated entities (eg grouped companies) are taken to be one entity

People usually get the idea that small businesses don’t need to pay redundancy because of section 121 of the Fair Work Act 2009 (Cth) which is below.

Section 121 Fair Work Act

Here's section 121:

Section 119 (redundancy pay) does not apply to the termination of an employee's employment if, immediately before the time of the termination, or at the time when the person was given notice of the termination as described in subsection 117(1) (whichever happened first):

(a)  the employee's period of continuous service with the employer is less than 12 months; or

(b)  the employer is a small business employer.

(2)  A modern award may include a term specifying other situations in which section 119 does not apply to the termination of an employee's employment.

(3)  If a modern award that is in operation includes such a term (the award term ), an enterprise agreement may:

(a)  incorporate the award term by reference (and as in force from time to time) into the enterprise agreement; and

(b)  provide that the incorporated term covers some or all of the employees who are also covered by the award term.

Awards that require small businesses to pay redundancy

Despite section 121 above, there are small businesses in certain industries that are not exempt from paying redundancy entitlements to their employees because of their industry awards. 

Awards that provide for small businesses to pay redundancy to employees

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

Redundancy payment clause - examples

Joinery and Building Trades Award example

Below is the small business redundancy pay clause from the Joinery and Building Trades Award 2010. 

17.4 Redundancy pay for employee of small business employer

(a) Clause 17.4 applies to an employee of a small business employer except for an employee who is excluded from redundancy pay under the NES by sections 121(1)(a),123(1),123(4)(a) or 123(4)(d) of the Act.

(b) In paragraph (a) an employee is an employee of a small business employer if, immediately before the time the employee’s employment is terminated, or at the time when the employee is given notice of termination as described in section 117(1) of the Act (whichever happens first),the employer is a small business employer as defined by section 23 of the Act.

(c) Subject to paragraphs (f) and (g),an employee is entitled to be paid redundancy pay by the employer if the employee’s employment is terminated:

(i) at the employer’s initiative because the employer no longer requires the job done by the employee to be done by anyone, except where this is due to the ordinary and customary turnover of labour; or

(ii) because of the insolvency or bankruptcy of the employer.

(d) The amount of the redundancy pay in paragraph (c) equals the total amount payable to the employee for the redundancy pay period specified in column 2 of Table 2—Redundancy pay period according to the period of continuous service of the employee specified in column 1, worked out at the employee’s base rate of pay for his or her ordinary hours of work.

Table 2—Redundancy pay period

Below is how many week's pay for employees that are eligible for redundancy pay.

Employee’s period of continuous service with the employer on termination

Redundancy pay period

Less than 1 year

Nil

At least 1 year but less than 2 years

4 weeks

At least 2 years but less than 3 years

6 weeks

At least 3 years but less than 4 years

7 weeks

At least 4 years and over

8 weeks

(e) In paragraph (d) continuous service has the same meaning as in section 119 of the Act.(f) The terms of section 120 of the Act apply as if section 120 referred to ‘paragraph 17.4(c) above rather than ‘section 119’.

NOTE:Under section 120 of the Act the Fair Work Commission can determine that the amount of redundancy pay under the NES is to be reduced if the employer obtains other acceptable employment for the employee or cannot pay that amount.

Paragraph (f) applies these arrangements also to redundancy pay under clause 17.4.(g) The terms of section 122 of the Act apply as if section 122 referred to ‘clause 17.4’rather than ‘this Subdivision’ and to ‘paragraph 17.4(c) above’rather than ‘section 119’.

NOTE:Under section 122 of the Act transfer of employment situations can affect the obligation to pay redundancy pay under the NES and the Fair Work Commission can make orders affecting redundancy pay. Paragraph (g) applies these arrangements also to redundancy pay under clause 17.4.

Mannequins and Models Award 2010 example

The clause below is another example of a redundancy clause for small businesses for the mannequins and models industry.

And it is based on a decision issued on 24 December 2019. Any party opposing the provisional view must file a submission to the Fair Work Commission setting out their position by 4pm on Thursday 23 January 2020.

12. Redundancy

NOTE: Redundancy pay is provided for in the NES. See sections 119–123 of the Act. Clause 12 supplements the NES by providing redundancy pay for employees of a small employer.

12.1 Transfer to lower paid duties on redundancy

(a) Clause 12.1 applies if, because of redundancy, an employee is transferred to new duties to which a lower ordinary rate of pay applies.

(b) The employer may:

(i) give the employee notice of the transfer of at least the same length as the employee would be entitled to under section 117 of the Act as if it were a notice of termination given by the employer; or

(ii) transfer the employee to the new duties without giving notice of transfer or before the expiry of a notice of transfer, provided that the employer pays the employee as set out in clause 12.1(c).

(c) If the employer acts as mentioned in clause 12.1(b)(ii), the employee is entitled to a payment of an amount equal to the difference between the ordinary rate of pay of the employee (inclusive of all-purpose allowances and penalty rates applicable to ordinary hours) for the hours of work the employee would have worked in the first role, and the ordinary rate of pay (also inclusive of all-purpose allowances and penalty rates applicable to ordinary hours) of the employee in the second role for the period for which notice was not given.

12.2 Employee leaving during redundancy notice period

(a) An employee given notice of termination in circumstances of redundancy may terminate their employment during the minimum period of notice prescribed by section 117(3) of the Act.

(b) The employee is entitled to receive the benefits and payments they would have received under clause 12 or under sections 119–123 of the Act had they remained in employment until the expiry of the notice.

(c) However, the employee is not entitled to be paid for any part of the period of notice remaining after the employee ceased to be employed.

12.3 Job search entitlement

(a) Where an employer has given notice of termination to an employee in circumstances of redundancy, the employee must be allowed time off without loss of pay of up to one day each week of the minimum period of notice prescribed by section 117(3) of the Act for the purpose of seeking other employment.

(b) If an employee is allowed time off without loss of pay of more than one day under clause 12.3(a), the employee must, at the request of the employer, produce proof of attendance at an interview.

(c) A statutory declaration is sufficient for the purpose of clause 12.3(b).

(d) An employee who fails to produce proof when required under clause 12.3(b) is not entitled to be paid for the time off.

(e) This entitlement applies instead of clauses 11.2 and 11.3.

12.4 Severance pay—employees of a small business employer

(a) Clause 12.4 applies to an employee of a small business employer, except for an employee who is excluded from redundancy pay under the NES by sections 121(1)(a), 123(1), 123(4)(a) or 123(4)(d) of the Act.

(b) In paragraph (a) an employee is an employee of a small business employer if, immediately before the time the employee’s employment is terminated, or at the time when the employee is given notice of termination as described in section 117(1) of the Act (whichever happens first), the employer is a small business employer as defined by section 23 of the Act.

(c) Subject to paragraphs (f) and (g), an employee is entitled to be paid redundancy pay by the employer if the employee’s employment is terminated:

(i) at the employer’s initiative because the employer no longer requires the job done by the employee to be done by anyone, except where this is due to the ordinary and customary turnover of labour; or

(ii) because of the insolvency or bankruptcy of the employer.

(d) An employee of a small business employer whose employment is terminated by reason of redundancy is entitled to the following amount of redundancy pay in respect of a period of continuous service:

Table 2—Redundancy pay period

Employee’s period of continuous service with the employer on termination

Redundancy pay period

Less than 1 year

Nil

At least 1 year but less than 2 years

4 weeks

At least 2 years but less than 3 years

6 weeks

At least 3 years but less than 4 years

7 weeks

At least 4 years and over

8 weeks

(e) In paragraph (d) continuous service has the same meaning as in section 119 of the Act.

(f) The terms of section 120 of the Act apply as if section 120 referred to ‘paragraph  (c) above’ rather than ‘section 119’.

NOTE: Under section 120 of the Act the Fair Work Commission can determine that the amount of redundancy pay under the NES is to be reduced if the employer obtains other acceptable employment for the employee or cannot pay that amount. Paragraph (f) applies these arrangements also to redundancy pay under clause 17.4.

(g) The terms of section 122 of the Act apply as if section 122 referred to ‘clause 12.4’ rather than ‘this Subdivision’ and to ‘paragraph (c) above’ rather than ‘section 119’.

NOTE: Under section 122 of the Act transfer of employment situations can affect the obligation to pay redundancy pay under the NES and the Fair Work Commission can make orders affecting redundancy pay. Paragraph (g) applies these arrangements also to redundancy pay under clause 17.4.

Key message

Always check your applicable award to see if your small business needs to pay redundancy. 

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. 


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Vivian Michael
 

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to deliver the best quality business legal services to entrepreneurs launching an Australian business, wherever they are in the globe.

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