Redundancy - the cost of getting it wrong
Out with the old and in with the new financial year.
Whilst it is an exciting time for businesses as they communicate updated financial budgets, promotions and salary increases, in the present challenging economic times, there is no doubt some businesses may be dealing with the reality of poor financial performance. The changes in customer/client demands, operational requirements etc. necessitating business restructure may bring about the need to make redundancies.
To avoid the pitfalls of poorly planned and executed redundancies, companies need to understand its employer obligations and have a robust plan in place to avoid the steep costs of getting it wrong, including legal, financial and cultural risk.
This article provides employers with a best practice game plan as a general guide to the steps involved and what needs to be considered during the process to manage the organisational risks that may arise along the way.
Under section 119(1) of the Fair Work Act 2009 (Cth) (FWA), redundancy occurs when the employee is terminated because:
the job is no longer required to be done by anyone, except where this is due to the ordinary customary turnover of labour; or
because of the insolvency or bankruptcy of the employer.
Where this occurs, an employee is entitled to the amount of redundancy pay set out at sub-section 119(2).
There are exceptions to when redundancy pay is required to be paid, which we outline later in this article.
When can “genuine redundancy” arise?
Under section 389 of the FWA, “genuine redundancy” arises when the following conditions are satisfied:
The employer no longer requires the job to be performed by anyone because of changes in operational requirements of the employer’s enterprise;
The employer has complied with any consultation obligations set out in a modern award or enterprise agreement that applied to the employment; and
It was not reasonable in all the circumstances for the person to be redeployed within the employer’s enterprise or an associated entity of the employer.
It is in the employer’s interest to ensure the above conditions of a “genuine redundancy” are satisfied, to mitigate the legal risk of a successful unfair dismissal claim being brought by an employee. This is because the employer bears the onus of proving that the conditions of section 389 of the FW Act has been satisfied to defend an unfair dismissal application brought by an employee who was dismissed for reasons of a “genuine redundancy”.
Best practice redundancy process
As a best practice approach, each of the following steps should be well-documented and supported with evidence.
1. Assess the reason for redundancy
Ask whether the job no longer needs to be performed by anyone because of “changes in operational requirements of the employer’s enterprise.”
While “changes in operational requirements of the employer’s enterprise” is not defined in the FW Act, it includes, but is not limited to:
changes in the performance of the business (eg. downturn in trade)
the state of the market in which the business operates (eg. site or business closure, economic conditions)
steps that may be taken to improve efficiency by installing new processes, equipment or skills, or by arranging labour to be used more productively (eg. new machinery replacing the job of an employee, outsourcing).
2. Consider whether there are alternatives to redundancy
Identify any available roles in the business, or associated entities within the business group (where available) and consider whether it would be reasonable in the circumstances to transfer, retrain or redeploy the employee into the role.
This exercise requires an assessment of a number of factors including, but not limited to, the skills, qualifications and experience required for the role, the location of the role and remuneration.
Employees should be consulted about any roles identified before a definite decision is made that there are no alternatives to redundancy. This is because an employer cannot presume that an employee will refuse a position that provides, say a lower income and less responsibility, or in another geographic zone or division of the company. Such information can only be obtained through consultation and discussion with the employee.
Note the following:
If acceptable employment has been found for the employee but the employee chooses to reject the offer, it is possible to apply to the Fair Work Commission (FWC) under section 120 of the FW Act, to reduce the amount of redundancy pay required to be paid to the employee set out under section 119.
Where there is a transfer of business it is possible that where the second employer has agreed to offer employment to the employee and the employee rejects the offer, subject to certain conditions, redundancy may not be required to be paid. Further legal advice should be sought in this regard.
3. Identify employees for retrenchment
Where a pool of employees has been identified as at risk of redundancy, employers must ensure that an objective merit-based selection criteria is used to determine who will be selected for redundancy.
Courts have accepted that the following selection criteria is acceptable:
Prior to assessing employees against a selection criteria, employers may consider giving employees the opportunity to take up voluntary redundancy. It is also possible that the employer is obliged to offer voluntary redundancies according to a relevant award, agreement, contract or company policy.
Voluntary redundancies can ease the stress of termination and is likely to be better for preserving company morale by providing employees with a choice rather than forcing redundancy. Oftentimes, employees are provided with a financial incentive that is subject to a Deed of Release or other form of a release agreement to encourage this option.
4. Consult employees
As redundancy is a major change that will impact the business, identify from applicable awards, agreements, contracts and employer policies the consultation and notification obligations that apply.
This is particularly important to demonstrate that the redundancy was genuine.
It is important that consultations are meaningful and not perfunctory, which means providing the employee with the bona fide opportunity to influence the decision maker. It is not sufficient to consult after a definite decision has been made to make a position redundant as the employee has not been provided with the opportunity to provide input.
5. Identify and pay entitlements owed to employees
After a decision has been made to make an employee’s position redundant, employees must be provided with certain entitlements which we outline below. It is important to calculate how much it will cost the business to make an employee redundant as the above entitlements can add up, particularly if it relates to long-serving employees.
a. Notice period
An employee must be provided with notice of their redundancy and final date of employment in writing.
The minimum notice period required to be provided to employees is set out at section 117(3) of the FW Act, which depends on the employee’s length of service. Otherwise, if a contract or employment, applicable award, agreement or company policy stipulates a higher notice period, that notice period should be provided to the employee.
If the notice period cannot be worked out, it will need to paid out in lieu.
b. Redundancy pay (also known as severance pay)
Identify the employee’s entitlement to redundancy pay unless an exception applies.
The amount of redundancy pay required to be provided to employees is set out at section 119(2) of the FW Act, which depends on the employee’s period of continuous service with the employer on termination. Otherwise, if a contract or employment, applicable award, agreement or company policy stipulates a higher notice period, that notice period should be provided to the employee.
Exceptions to redundancy pay apply to the following employees:
Employees of a small business – ie. businesses with less than 15 people
Employees whose period of continuous service with the employer is less than 12 months
Employees employed for:
a stated period of time
an identified task or project
a particular season
Employees dismissed for serious misconduct
Trainees engaged only for the length of the training agreement
Employees to whom an industry-specific redundancy scheme in a modern award applies.
c. Termination entitlements
Calculate termination entitlements that are payable to employees in accordance with the employee’s applicable modern award, enterprise agreement and/or contract of employment.
Note, as the definition of a “genuine redundancy payment” under the Income Tax Assessment Act 1997 differs from the definition of a “genuine redundancy” under the FW Act, an accountant or tax advisor should be consulted to apply the correct tax treatment of the various payments paid in connection with a genuine redundancy.
As this article outlines in general terms only the best practice steps to be taken in navigating redundancy, feel free to contact us for tailored legal advice that considers your strategic business objectives.
Authors: Shawn Skyring & Jessica Park