How Employers Should Manage Redundancy Payments

Making a role redundant is never easy. As a small business owner, you’re juggling care for your team, tight budgets and strict legal rules - all while trying to keep the business healthy.

When you do need to restructure, understanding redundancy pay (also called redundancy payout or severance pay) is essential. Paying it correctly helps you stay compliant with the Fair Work Act, reduces the risk of disputes, and supports a respectful exit for your employee.

In this guide, we’ll walk through what redundancy payments are, who is entitled, how they’re calculated, what else is due on termination, and practical steps to follow so your redundancy process is fair, lawful and well-documented.

What Is Redundancy Pay - And When Is It Required?

Redundancy pay is money paid to an employee when their job is genuinely made redundant - in other words, the employer no longer needs that job to be done by anyone, usually due to changes like restructuring, cost pressures, new technology, or business closure.

Under the National Employment Standards (NES), redundancy pay is generally required for eligible employees based on their continuous service. However, there are important exceptions:

• Small business employers (fewer than 15 employees) are usually exempt from NES redundancy pay.
• Casual employees, apprentices and trainees, and employees engaged on a fixed-term contract (ending at the agreed term) are not entitled under the NES.
• If you offer suitable alternative employment (redeployment) that is reasonable and the employee accepts it, redundancy pay may not be payable.
• Some modern awards or enterprise agreements include different redundancy entitlements - always check the applicable industrial instrument.

A key risk is paying a “redundancy” when it isn’t genuinely a redundancy (for example, if you simply replace the employee or don’t properly consider redeployment). To understand the test for a genuine redundancy, it’s worth revisiting section 389 of the Fair Work Act, which sets out the elements: the job is no longer required, you’ve complied with any consultation obligations, and redeployment isn’t reasonable in the circumstances.

How Is Redundancy Pay Calculated In Australia?

NES redundancy pay is calculated using an employee’s period of continuous service with your business. It’s expressed as a number of weeks’ pay, increasing with service length (often referred to as the “redundancy payment table”).

As a starting point, the minimum entitlement under the NES ranges from a few weeks for shorter service to a higher cap for long service. Some awards and enterprise agreements provide more generous amounts, and service may be calculated differently in certain industries - so it’s important to check the relevant instrument before you finalise the figure.

For a step-by-step method and to avoid costly arithmetic mistakes, many employers rely on a simple tool such as Sprintlaw’s redundancy calculator or this practical guide on how to calculate your redundancy payment.

What counts as “a week’s pay”?

Generally, a week’s pay is the employee’s base rate for ordinary hours (it won’t usually include overtime, bonuses or allowances unless an applicable award or agreement says otherwise). Double-check the wording of any modern award, enterprise agreement or contract to confirm inclusions.

Do small businesses pay redundancy?

If you have fewer than 15 employees (counting all employees across associated entities at the time of dismissal), you’ll typically be exempt from NES redundancy pay. However, if a modern award or enterprise agreement applies to your employee and includes redundancy entitlements for small businesses, those terms can still apply. Don’t assume “small business” is a complete exemption - verify the instrument first.

Do all years of service count?

Redundancy pay is based on continuous service with your business. Periods of authorised unpaid leave generally don’t break continuity but may not count towards length of service. If prior service was with a different employer and there’s been a transfer of business, special rules can apply. This is another reason to sanity-check the calculation before paying.

Redundancy Pay Vs Other Termination Payments

Redundancy pay is only one part of an employee’s final pay. You’ll need to review and process all entitlements owing at termination. As an employer, it helps to think of the payout in components:

• Redundancy pay: Based on service (the statutory minimum under the NES or as set by an award/enterprise agreement/contract).
• Notice or payment in lieu: If you’re not requiring the employee to work out their notice period, payment in lieu of notice must be included and correctly calculated.
• Accrued annual leave: Any untaken annual leave should be paid out at termination.
• Long service leave: Check state or territory long service leave laws for payout rules and rates.
• Unpaid wages and allowances: Ensure all hours worked up to termination are paid.
• Other benefits under a contract or policy: Some employers include ex gratia amounts, outplacement support, or extended EAP access in a redundancy package.

Sick or personal leave generally does not get paid out on termination, but there can be exceptions under some agreements or policies. To keep everything consistent and on time, many employers follow a checklist like the one in this guide to calculating final pay.

Do I need to pay superannuation on redundancy?

In most cases, superannuation is not payable on genuine redundancy amounts because they’re not ordinary time earnings. However, super can be payable on some components like payment in lieu of notice depending on the circumstances. The rules can be nuanced - this short explainer on superannuation on termination payments outlines what typically attracts super and what doesn’t. You should also seek accounting or payroll advice for tax and super edge cases.

Making It A Genuine Redundancy: Process Steps For Employers

The “what” matters (the amounts you pay), but the “how” matters just as much. Following a fair and consultative process is critical to ensuring the redundancy is lawful and reducing the risk of unfair dismissal claims.

1) Plan your restructure and selection criteria

Document the business reasons for the restructure (e.g. financial performance, role duplication, new technology) and the roles affected. If you need to choose between multiple employees in similar roles, use objective selection criteria (skills, qualifications, performance records) and keep clear notes of your assessment.

2) Check industrial instruments and contracts

Before you do anything, review the applicable modern award or enterprise agreement and the employee’s contract. Some instruments include extra consultation steps, redeployment obligations, or redundancy pay above the NES. If you’re unsure how they interact with the NES, it’s wise to get tailored redundancy advice.

3) Consult with the employee

Consultation is a core part of a genuine redundancy. Share information about the proposed changes, the expected impact, and the timing. Invite feedback and consider any suggestions, including alternatives to redundancy (retraining, changed hours, redeployment). If an award or agreement prescribes how and when to consult, follow it closely and record the steps.

4) Consider redeployment

Assess whether there is a suitable alternative role (in your business or an associated entity) that the employee could reasonably perform. Suitability takes into account skills, location, pay and seniority. A genuine redundancy requires that redeployment isn’t reasonable in the circumstances - this links directly to section 389.

5) Confirm the decision in writing

Once the process is complete, issue a formal letter confirming the redundancy, the last day of employment, the notice period (or payment in lieu), and a breakdown of all amounts that will be paid. Provide information about any assistance you’re offering (e.g. outplacement) and property return arrangements.

6) Pay the correct entitlements on time

Process the final pay by the required time (check any award/EA timelines) and include all components outlined above. Keep payroll records, consultation notes and calculation worksheets on file in case questions arise later.

Designing A Redundancy Package: Beyond The Minimums

While the NES sets the minimum redundancy payout for eligible employees, many employers choose to include additional support to acknowledge service and preserve goodwill. A “standard redundancy package” can include:

• Statutory redundancy pay (or award/EA redundancy if higher)
• Payment in lieu of notice where appropriate
• Accrued annual leave and long service leave
• Ex gratia top-up (e.g. an extra week or two) - optional
• Outplacement or career coaching - optional
• Extended EAP access - optional
• Agreement to provide a reference - optional

When you offer anything above the minimum, it’s common to document the terms in a Deed of Release, which finalises claims and clarifies confidentiality and non-disparagement. If you’re preparing a suite of documents for a small restructuring, a streamlined set like a redundancy document suite can save time and reduce risk.

Common Employer Questions About Redundancy Pay

How much redundancy pay am I entitled to offer?

The law sets the minimum you must pay if the employee is eligible (NES or award/EA). You can’t offer less, but you can offer more. Use a reliable method for the base calculation, such as the redundancy calculator, then consider if you want to add ex gratia support.

What’s the difference between redundancy and dismissal for performance?

Redundancy is about the role no longer being required. Performance or conduct dismissal is about the person’s performance or behaviour. If the job is still needed, termination should be managed under performance or conduct processes, not redundancy.

Can I reuse the redundant position later?

If you re-create the same role shortly after the redundancy, it may cast doubt on whether the redundancy was genuine. If business conditions change in the future, make sure there’s a clear, documented rationale for any new hiring.

Do I need to include a notice period as well as redundancy pay?

Yes. Redundancy pay is separate from notice. If you don’t require the employee to work their notice, you’ll usually need to include payment in lieu of notice on top of the redundancy pay.

Is there extra redundancy pay in NSW for employees over 50?

The NES does not provide age-based uplifts. However, some industry awards have contained additional severance amounts for certain age groups or service lengths at various times. Always check the current award or agreement that applies in your industry to ensure you meet (or exceed) those requirements.

What are the tax rules on redundancy payouts?

Genuine redundancy payments can include a tax-free component up to a threshold, with the balance treated as employment termination payments (ETPs). Tax can be complex and depends on age, service and exact components. It’s sensible to obtain payroll or tax advice alongside your legal checks.

Avoiding Legal Risks When Managing Redundancies

Redundancies can attract legal scrutiny. Here are the key risk areas to watch:

• Not genuinely needing the role to end (or failing to consider redeployment).
• Missing a required consultation step under a modern award or EA.
• Selecting employees using criteria that could be discriminatory (e.g. age, disability, pregnancy, union membership).
• Underpaying where an award/EA or contract provides higher redundancy than the NES.
• Not paying notice correctly or on time.
• Misunderstanding superannuation on termination or ETP tax treatment.

Getting your process and paperwork right goes a long way to reducing these risks. If you’re planning a restructure that affects multiple employees, getting early legal advice can help you design a compliant pathway before you start consulting.

Related Processes That Often Come Up

Redundancy rarely happens in isolation - you’ll often need to consider related processes and payments at the same time.

• Calculating notice correctly and deciding whether to use payment in lieu (more detail in the employer guide to payment in lieu of notice).
• Preparing an accurate final pay breakdown (wages, leave, redundancy, super) - see the final pay guide for a quick checklist.
• Confirming whether super applies to any components - this short article on superannuation on termination payments is a helpful refresher.
• If you need to sense-check the redundancy amount, refer to the practical walkthrough on how redundancy pay is calculated.

Key Takeaways

• Redundancy pay is required when a role is genuinely no longer needed and the employee is eligible; small businesses under 15 employees are generally exempt under the NES, but always check the applicable award or agreement.
• Calculate redundancy pay using the employee’s continuous service and the correct “week’s pay” definition, and keep clear records of the calculation.
• Final pay is more than redundancy: include notice (or payment in lieu), accrued annual leave, long service leave (as applicable), and unpaid wages.
• Follow a fair process: plan objectively, consult under the award/EA, consider redeployment, and confirm the decision in writing to support a genuine redundancy under section 389.
• Tax and super on termination can be nuanced; check whether super applies to any components and get payroll or tax input where needed.
• If you’re unsure about entitlements or process, early advice and well-drafted documents (e.g. a redundancy document suite) can prevent costly errors and disputes.

If you’d like a consultation about redundancy pay and managing a lawful restructure in your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.