Redundancy is the word no business owner wants to mention, and no employee wants to hear. After all, redundancy can be one of the most stressful situations an employee faces.
Despite being used as a last resort, redundancies are an essential part of a business’ survival kit during challenging economic times.
Learn what it means to make an employee redundant, and how you can support them through the process.
What is redundancy?
As often as the word redundancy is used, it’s important to understand exactly what it means. The Fair Work Ombudsman defines redundancy as happening when an employer either:
- Doesn’t need an employee’s job to be done by anyone, or
- Becomes insolvent or bankrupt
The Ombudsman goes on to explain that redundancy can happen when a business:
- Introduces new technology
- Slows down due to lower sales or production
- Closes down
- Relocates interstate or overseas
- Restructures or reorganises because a merger or takeover take place
What is considered a ‘genuine redundancy’?
For a dismissal to be considered a genuine redundancy, the employer must be able to show that the employee’s job no longer exists.
This will involve the employer following any consultation requirements, enterprise agreements or other registered agreements.
As an employer, if your redundancy is genuine, the employee will not be able to make an unfair dismissal claim.
Redundancy is not the same as firing someone, or making a summary dismissal. You can’t use redundancy to get rid of someone who is a “bad fit” or who has been underperforming.
A redundancy isn’t genuine if the job still requires work, you have not followed the correct redundancy procedures, or could have reasonably given the employee a role elsewhere in the company or associated entity.
What is redundancy pay?
Redundancy pay is a payment made to an employee you have made redundant. Section 119 of the Fair Work Act 2009 states that an employee is entitled to redundancy pay if the employer ends the employee’s employment because the employer:
- no longer requires the job to be done by anyone, excepting in case of ordinary and customary turnover of labour; or
- the employer becomes insolvent or bankrupt.
How many weeks do you have to pay redundancy pay?
According to the National Employment Standards (NES), an employer must provide an employee with a minimum period of notice or payment in lieu of notice before terminating their contract.
Is there an alternative to redundancy?
Many businesses are keen to find alternatives to making their employees redundant. These can include:
- offering early retirement
- reducing your employees’ hours
- overtime freezes
- laying off contract workers and freelancers instead of contracted workers
- temporarily freezing all recruitment
- retraining employees to work elsewhere in the business.
If redundancy is unavoidable, you will need to carry out a redundancy consultation.
How do you choose employees for redundancy?
Even though redundancy is unpleasant, you must be strategic in the way you select employees for redundancy.
Failing to follow the correct protocol for redundancies can leave you and your business open to costly and time-consuming legal challenges for unfair dismissal.
Using a less-than-strategic approach to redundancy can also leave you with a workforce that’s ill-equipped to help you return to growth.
There are three broad steps to follow when selecting an employee for redundancy.
- Identify where cuts are needed and how many redundancies you need to make.
- Determine your redundancy selection pool.
- Set clear and objective criteria to help you decide which employees should be made redundant.
What are an employee's rights when being made redundant?
Employees who are being made redundant are eligible for certain rights. These can include a notice period, time off to look for a new job and redundancy pay. They are also entitled to be offered an alternative job in your company if one exists.
Employees who accept an offer of alternative work are entitled to a 4-week trial period to decide whether or not that role is suitable for them. If after the trial you both decide that the role isn’t suitable, they can still claim redundancy pay.
However, if you believe the job is suitable but the employee refuses to take it, they might lose any redundancy pay entitlement.
Support for companies making redundancies
Making redundancies is a daunting prospect which affects every person in an organisation. Make the business of redundancy easier using tools such as our redundancy pay calculator.
A crucial part of the redundancy process is documenting each redundancy. That information then needs to be stored for a minimum of six years. And no-one wants to be storing that in boxes at the back of the office.
A cloud-based HR software platform like Breathe saves you time, effort, and physical storage space. Along with the ability to manage performance, payroll and annual leave, you can also safely store all of your company documents to the cloud, indefinitely.