Need To Make An Employee Redundant? What Small Business Owners Must Know

Making a role redundant is one of the tougher decisions you’ll make as a small business owner. It can be the right step for your business, but it does come with strict legal rules in Australia.

The good news? With a clear plan, compliant process and the right documents, you can manage redundancy lawfully and respectfully - and reduce the risk of claims.

In this guide, we’ll break down what “genuine redundancy” means under Australian law, when you can use it, a step-by-step process to follow, what you must pay, and the key documents that help you stay compliant.

What Is A Genuine Redundancy In Australia?

Under the Fair Work Act, a redundancy is only “genuine” if:

• the job is no longer required to be done by anyone due to operational changes (for example, restructuring, technology, a downturn or closure), and
• you have complied with any consultation requirements in a modern award or enterprise agreement, and
• it would not have been reasonable to redeploy the employee within your business (or an associated entity).

Importantly, redundancy is about the role - not the person. It must not be used to dismiss someone for conduct or performance reasons. If there are performance concerns, follow a performance management process instead.

Many employees are covered by an award, which sets out consultation obligations and other rules you must follow. If an award applies, make sure you follow its consultation steps before making a final decision.

When Can You Make A Role Redundant (And When Shouldn’t You)?

You can consider redundancy when there’s a genuine business reason to remove or significantly change a role. Typical examples include:

• Restructuring to remove duplication or layers of management
• Automating functions or outsourcing work
• Closing a site or moving operations
• Ongoing downturn in demand or funding

You should not use redundancy to address poor performance, misconduct, or a breakdown in working relationships. Those situations require different processes (such as warnings, show cause letters and fair investigations). If you’re unsure whether your situation is redundancy or performance-related, it’s best to get advice before you act.

Small business redundancy pay exemption: Businesses with fewer than 15 employees (counting regular and systematic casuals) are generally exempt from paying redundancy pay under the National Employment Standards (NES). However, you still need to consult where required, provide correct notice (or pay in lieu), and meet all other obligations.

A Step-By-Step Redundancy Process For Small Businesses

Every workplace is different, but a fair and compliant redundancy process usually follows these steps.

1) Plan The Change And Confirm It’s A Genuine Redundancy

• Document the business rationale and the proposed structural change.
• Identify the role(s) affected and why the work is no longer required.
• If multiple employees are doing similar work, decide objective selection criteria (e.g. skills, qualifications, critical experience) and apply them consistently.

2) Check Awards, Contracts And Policies

• Confirm whether a modern award or enterprise agreement applies. Most awards include consultation clauses you must follow.
• Review the employee’s Employment Contract for any additional notice or redundancy terms.

3) Start Consultation (Before Any Final Decision)

• Meet with affected employee(s) to explain the proposed change, the reasons, the roles at risk and the timeframe.
• Invite feedback and genuinely consider any suggestions, including alternatives to redundancy.
• Provide details in writing and allow a reasonable opportunity for the employee to respond.

4) Consider Reasonable Redeployment

• Look for suitable alternative roles in your business (and any associated entity). “Suitable” considers the employee’s skills and location, and whether reasonable training could bridge any gap.
• Keep a record of roles considered and any offers made. If redeployment is reasonable, redundancy may not be genuine.

5) Confirm The Outcome And Provide Notice

• If redundancy proceeds, issue a written letter confirming the genuine redundancy, the termination date, notice period, and entitlements payable.
• Provide the minimum notice under the NES (or award/contract if more generous). If you need the role to end immediately, consider payment in lieu of notice.

6) Calculate And Pay Final Entitlements

• Pay outstanding wages, accrued annual leave, and any redundancy pay (unless you are exempt as a small business or another exemption applies).
• Include any applicable long service leave based on your state or territory’s rules.
• Issue the necessary documentation (e.g. payslips, separation certificate if requested).

7) Provide Support And Close Out

• Be clear, compassionate and professional in communications.
• Arrange return of property, revoke systems access, and complete handover as appropriate.
• Consider whether garden leave or a mutual separation arrangement is practical for a smooth transition. For context, see Garden Leave and Mutual Separation Agreement guidance.

What Payments And Documents Are Required On Redundancy?

Getting the numbers and paperwork right is essential. Here’s what to consider.

Notice Or Payment In Lieu

You must provide the required notice period (based on length of service and any award or contract) or pay in lieu of that notice. If you’re unsure about the correct timing, this overview of calculating employee notice periods is helpful.

Redundancy Pay

Redundancy pay (severance) applies under the NES based on years of continuous service, unless an exemption applies (for example, small business with fewer than 15 employees). To estimate liabilities, you can use our redundancy calculator and then cross-check your exact entitlements using this guide to calculating redundancy payments.

Accrued Leave

• Accrued annual leave is paid out on termination.
• Long service leave may be payable depending on service length and state or territory legislation.
• Personal/carer’s (sick) leave is not paid out, but there are special considerations if redundancy occurs while an employee is on sick leave. See redundancy and sick leave.

Superannuation And Tax On Termination

Superannuation rules depend on the type of payment. Whether super is payable on termination amounts like payment in lieu of notice can vary - start with these overviews on payment in lieu and superannuation and super on termination payments, and seek specific accounting advice for tax treatment.

Final Pay And Records

Final pay should be made promptly and include all owed amounts and leave entitlements. A short checklist for calculating final pay can help you ensure nothing is missed. Employees may also request a Centrelink separation certificate; here’s what to know about employer separation certificates.

Common Risks And How To Avoid Them

Most disputes arise from process issues, not the business reason itself. Watch out for these pitfalls:

• Deciding before you consult: If an award applies, you must consult before making a final decision. Keep an open mind and genuinely consider feedback and alternatives.
• Targeting a person, not a role: Redundancy can’t be used to sidestep performance management or misconduct procedures. If conduct is the issue, use warnings and, where appropriate, show cause letters, not redundancy.
• Unclear selection criteria: If multiple employees are affected, use objective criteria you can explain and evidence.
• Not considering redeployment: You must explore reasonable redeployment options in your business (and associated entities) before finalising redundancy.
• Incorrect entitlements: Miscalculating notice, redundancy pay or leave can create legal and reputational issues. Double-check your calculations and keep records.
• Insufficient documentation: Keep written notes of consultation, decisions, alternatives considered, offers of redeployment and payments made. Good paperwork will protect your business if challenged.

If you need a bundle of the right forms and letters to run a compliant process, Sprintlaw’s Employee Termination Documents Suite can save time and reduce risk.

Key Employment Documents To Have In Place

Having the right contracts and policies makes redundancy far smoother. Consider the following:

• Employment Contract: Sets clear terms on notice, duties, location and changes to duties, which helps during restructuring. A well-drafted Employment Contract reduces uncertainty.
• Workplace Policies: Establish standards and processes (e.g., consultation, conduct, email/IT use). These help ensure decisions are consistent and fair.
• Termination Letters And Checklists: Scripts, consultation letters, outcome letters, and payout checklists support a compliant process - see the Employee Termination Documents Suite.
• Mutual Separation Agreement: Useful where both parties want to end employment on agreed terms (for example, to avoid a redundancy process in favour of a negotiated outcome). This can complement or, in some cases, replace redundancy where appropriate - more on a Mutual Separation Agreement here.
• Garden Leave Clause: Allows you to direct an employee not to attend work during notice while remaining employed and bound by duties, which can be helpful in transitions - see Garden Leave.

You won’t need every document in every scenario, but most employers will rely on at least the contract, policies and termination letters. Tailoring these to your business now makes any future restructure much easier to manage.

Key Takeaways

• Redundancy must be genuine: the role is no longer required, you’ve consulted as required, and redeployment isn’t reasonable.
• Follow a fair process: plan the restructure, check awards and contracts, consult early, apply objective criteria, and document decisions.
• Pay the right entitlements: notice or payment in lieu, any redundancy pay (unless exempt), accrued annual leave and any long service leave.
• Small businesses (fewer than 15 employees) are generally exempt from redundancy pay, but all other obligations still apply.
• Get the numbers and paperwork right using tools like the redundancy calculator, and be mindful of super and tax treatment on termination payments.
• The right contracts and policy framework make restructures smoother and reduce legal risk.

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