As an employer and small business owner, are you liable to pay your terminated employee redundancy pay? Understanding the legal promulgations and relevant considerations in this small business exemption will help you better perform your obligations as an employer and also maximise on the exemption policy’s benefits.
To better understand the redundancy pay exemption afforded small businesses, you, as an employer and/or business owner, need specific answers to, and be clear with – especially legally – the following questions:
- What is a small business?
- What is a redundancy pay?
- Which employees are not entitled to redundancy pay?
What is a small business?
A company that employs fewer than 15 employees/workers is considered a small business. At the time of dismissal, the company is determined whether indeed a small business or otherwise by counting the number of employees including:
- The employee to be terminated and any other employee(s) who also face dismissal
- Regular and systematic casual employees of the company during the redundancy (note that not all casual employees are systematic)
- Employees whose services are engaged by associated/affiliated business entities including employees based overseas
As promulgated by the Fair Work Act of 2009 (Cth) sections 23, 121 and 123, the size of the business – which determines whether it is a small business or not – is counted the earliest when the:
- Employee facing a dismissal is notified that he or she will be terminated
- Notice of termination is given to the employee
If you’ve ticked off all the above considerations and legal promulgations, then you are a small business.
Now, before proceeding with the termination, you need to make certain whether you, as an employer and/or business owner, are required to pay the redundancy payment. Thus, you need to make sure you thoroughly understand the process of making an employee redundant and determining – then establishing – that the circumstance is indeed a genuine redundancy.
After making sure you are certain with all the considerations mentioned above, you now need to be clear with what a redundancy pay really is, as promulgated by legislation.
What is a redundancy pay?
Redundancy pay or employment termination payment (ETP) is a lump sum paid to an employee made redundant. The lump sum payment is made up of several components or items that usually include:
- Severance pay — number of weeks’ pay, with the amount based on the worker’s employment duration with your company
- A one-off goodbye payment, also called a “golden handshake”
- Payment in lieu of notice — for example, instead of giving your employee a two-week termination notice, you might decide to pay him or her for said duration but will no longer require the said employee to work or render any other services to your company
Note that the Australian Taxation Office (ATO) does not consider the following as technically part of a redundancy payment:
- Back-pay — amount owed for the services your employee rendered to your company
- Leave loading and/or accrued annual leave payouts
- Superannuation benefits payments
- Unused long service leave payouts
Which employees are not entitled to redundancy pay?
Not all employees who get terminated are entitled to redundancy pay. You, as an employer and/or business owner, are not liable to pay redundancy pay to:
- An employee who rendered a continuous service to your company for less than 12 months
- Employees whose services were engaged only for a specified duration, in a determined project or task, or in a specifically stated season
- Employees who were served with termination due to serious misconduct
- Trainees and apprentices
Note that when businesses change ownership, a special arrangement should be made with and among employees making transfers to the new owner, when the said business is sold.
Now that you thoroughly understand the legal promulgations on the redundancy exemption policy, its requirements and specifics, consider the following tips to help you maximise on its benefits as well as avoid unnecessary risks and/or devastating legal consequences:
- Make sure you have the correct and specific notice of termination to be given to your employee
- Inspect and review whether redundancy payment is required
- Maximise on the minimum period advantage
- Document award flexibility
- Legally enable yourself, as a business owner or manager, to terminate fixed terms of contract the earliest possible time
Make sure you have the correct and specific notice of termination to be given to your employee
The Fair Work Act mandates and determines minimum notice of termination periods depending on the employee’s continuous service. Account for the minimum periods mandated by the act in figuring out and deciding on a termination period. Doing so will help you avoid unnecessarily paying for extra notice.
Inspect and review whether redundancy payment is required
Unless the redundancy payment is included as a specific entitlement in an enterprise bargaining agreement (EBA), in your individual employment agreement with your employee, or in a modern award, your business and all other small businesses are generally not required to pay it. That’s why it is necessary that you inspect and review all legal promulgations and relevant employment documents to ascertain whether or not a redundancy pay is expected from your business to your terminated employee(s).
Maximise on the minimum period advantage
The terminated employee may only make a lodgment and claim unfair dismissal to the Fair Work Commission when he or she has completed the minimum employment period – a probationary period, typically lasting for a year for small businesses.
During this given probation time, thoroughly assess and evaluate your employee and his or her performance to make sure he or she is an excellent fit for the job. If things aren’t satisfactory even during this probationary time, it is unlikely that your employee’s performance will get better, so it is advisable that you make the necessary and appropriate decisions during this probationary period.
Document award flexibility
Note that modern awards govern most industries, businesses and occupations. These awards determine minimum pay rates and other relevant entitlements. Generally, modern awards allow for flexibility arrangements between employers and employees.
You, as an employer, can decide with your employee to pay him or her a specific amount to offset other entitlements, such as allowances, overtime pay and penalty rates, among others. Provided that this agreed upon payment to your employee is better off in the overall, you may then document your agreement with him or her in writing. Documenting the said agreement cannot be overemphasised, as failure to do so and not explicitly laying out the specifics on the agreements in writing may expose you, as an employer, to more risks; for example, repaying the entitlements that were originally agreed upon to be already covered by the over-award payment.
Legally enable yourself, as a business owner or manager, to terminate fixed terms of contract the earliest possible time
It is of utmost importance that you design and appropriately implement a provision stating that employment may be terminated with notice, if you have employees with fixed-term contracts. Without explicitly including this provision, you may be liable to pay your terminated employee for the remainder of the duration agreed upon in your contract, even if you have already effected dismissal on them earlier.
To simplify, if you are a small business or a business with fewer than 15 employees, you are generally exempt from paying the redundancy pay on terminated employees. There are always exemptions to the rule, they say, and this is true to the redundancy pay exemption policy, too, so make sure to account for all relevant legal promulgations and considerations.
If still unclear or unsure, you may always contact and consult your trusted lawyer with a proven expertise on the subject matter.
- ‘Don’t assume how employees will react to redundancy’
By Simon Rountree
- Customers behaving badly: ‘My time is worth more than yours’
By Adam Zuchetti
- What businesses can learn from Sir Roger Bannister
By Adam Zuchetti