Calculating redundancy and notice pay

Q. We have two employees whose positions will be redundant at the end of the month. They will be paid redundancy pay based on the appropriate scale under the National Employment Standards and will be paid five weeks’ pay in lieu of notice. 

The company is not sure at what rate of pay the employees are to be paid for both the redundancy pay and the payment in lieu of notice. Both employees are paid an over award payment. Is redundancy pay and payment in lieu of notice payable at the employees’ ordinary rate of pay or are they payable at some other rate?

The employees are covered under the Manufacturing and Associated Industries and Occupations Award 2020. 

A. The Fair Work Act defines the meaning of ‘ordinary pay’ for the purpose of calculating redundancy pay and payment in lieu of notice. The employer may also need to refer to the employee’s applicable modern award, enterprise agreement or contract of employment to determine whether a different definition of ordinary pay applies to that prescribed by the Fair Work Act. In this case, the applicable Award does not provide a definition of ordinary pay for redundancy pay or payment in lieu of notice. 

Redundancy pay 

Under section 119 of the Fair Work Act, redundancy pay is calculated using the employee's base rate of pay for their ordinary hours of work. The number of weeks payable depends on the employee's period of continuous service. 

The employee's base rate of pay excludes:

• incentive-based payments and bonuses;

• loadings;

• monetary allowances;

• overtime rates;

• penalty rates; and

• other separately identifiable amounts. 

As a result, over-award payments that form part of an employee's ordinary hourly rate will generally be included in the base rate of pay. However, allowances, penalties, overtime and similar payments are generally excluded.

Payment in lieu of notice 

Different rules apply to payment in lieu of notice.

Where an employer elects to make a payment instead of requiring an employee to work out their notice period, the employee must be paid as though they had worked the minimum notice period. This payment is calculated at the employee's full rate of pay. 

The Fair Work Act defines full rate of pay to include:

• incentive-based payments and bonuses;

• loadings;

• monetary allowances;

• overtime rates;

• penalty rates; and

• other separately identifiable amounts.

Accordingly, payment in lieu of notice is typically higher than redundancy pay because it includes a broader range of employment-related payments and entitlements.

Superannuation contributions 

Superannuation obligations should be considered separately from the Fair Work Act calculations for redundancy pay and notice payments.

Whether Superannuation Guarantee contributions are payable on a payment in lieu of notice will depend on current superannuation legislation and Australian Taxation Office guidance. Employers should ensure they comply with their superannuation obligations when processing termination payments.

Other separately identifiable amounts 

While the meaning of this term has not been subject to judicial review (except in regard to employer contributions to superannuation), other conditions of employment, such as company provided motor vehicle or mobile phone, may also be included in the employee’s full rate of pay for the purpose of calculating payment in lieu of notice under the Fair Work Act, particularly if the condition is subject to fringe benefits tax (FBT). The notifiable fringe benefit amount appearing on the employee’s PAYG tax payment summary may be considered a reasonable amount as the value of the relevant employment condition. 

If the motor vehicle or mobile phone are, however, considered a “tool of trade” then these items would not be included in the employee’s ordinary pay when calculating payment in lieu of notice. 

Bottom line 

Redundancy pay and payment in lieu of notice are calculated differently under the Fair Work Act. Redundancy pay is generally based on an employee's base rate of pay for ordinary hours of work, while payment in lieu of notice is calculated using the employee's full rate of pay, which includes a wider range of remuneration components. Employers should also check any applicable award, enterprise agreement or employment contract for more beneficial entitlements