Small Business Redundancy Exemption: What Employers Need To Know In Australia

Making a role redundant is one of the hardest decisions you’ll make as a small business owner. You’re balancing cashflow, the future of your business, and the impact on someone who’s been part of your team.

If you’ve heard that “small businesses don’t have to pay redundancy”, you’re probably thinking: Is that actually true, and does it apply to me?

In Australia, there is a specific rule under the National Employment Standards (NES) that’s commonly referred to as the small business redundancy exemption. It can mean you don’t have to pay redundancy pay under the NES if you’re a small business employer. But it doesn’t remove all your obligations, and getting the process wrong can still expose you to disputes and claims.

Below, we’ll break down what the exemption is, when it applies, and how to handle a redundancy in a way that protects your business.

What Is The Small Business Redundancy Exemption?

The small business redundancy exemption is a rule under the Fair Work Act 2009 (Cth) that says:

• If you’re a small business employer (generally, fewer than 15 employees), you are not required to pay redundancy pay under the NES when you make an employee redundant.

This exemption is only about redundancy pay (the severance-style payment based on length of service) under the NES. It does not mean you can skip:

• Providing the correct notice of termination (or pay in lieu)
• Any consultation obligations under an award or enterprise agreement
• Final pay requirements (annual leave, outstanding wages, etc.)
• Compliance with general protections (for example, adverse action claims)

Also, while the NES may not require redundancy pay for a small business employer, redundancy-style payments can still sometimes arise under an employment contract, an enterprise agreement, or a company policy (depending on how it’s written and whether it’s legally binding). So it’s important to check what applies in your business before assuming there is no redundancy pay owing.

So, even if the redundancy pay component is exempt under the NES, the termination still needs to be handled carefully and legally.

Redundancy Pay vs Notice: They’re Not The Same Thing

This is where many small businesses get tripped up.

• Notice of termination is about giving an employee time to prepare for the employment ending (or paying them instead).
• Redundancy pay is a separate amount paid because the job is no longer required.

You may be exempt from redundancy pay under the NES, but you can still owe notice (or payment in lieu of notice), plus other entitlements.

Do You Qualify As A “Small Business Employer” (And How Do You Count Staff)?

To rely on the exemption, you must be a small business employer at the time of the redundancy. This is usually defined as an employer with fewer than 15 employees.

That sounds simple, but the counting rules matter a lot. When working out whether you have fewer than 15 employees, you generally count:

• Full-time employees
• Part-time employees
• Casual employees if they’re employed on a regular and systematic basis

It’s also important to understand that some employment relationships can be complex in practice, particularly if you’ve got:

• Related entities (multiple companies within a group)
• Labour hire arrangements
• People who look like contractors but may legally be employees

If you’re close to the 15-employee threshold, it’s worth getting advice before you treat a redundancy as exempt. A single misclassification can change whether redundancy pay is owed.

What If You Grow Above 15 Employees Later?

The test is generally applied at the time of termination. If you were under 15 employees at the time you ended employment, that’s the key question for the exemption.

That said, headcount can change quickly, and disputes often focus on whether the business was truly under the threshold at that time. Keeping good records (payroll, rosters, employment contracts, start dates) can really help if your decision is ever questioned.

When Does The Exemption Apply (And When Doesn’t It)?

The exemption applies when:

• There is a genuine redundancy situation (the role is no longer required); and
• You are a small business employer (fewer than 15 employees); and
• The employee’s employment ends due to redundancy.

However, there are several common situations where small businesses assume they’re exempt, but the legal risk still exists.

1) The Redundancy Isn’t Genuine

A redundancy is generally “genuine” when the job is no longer required to be performed by anyone due to operational changes (for example, downturn in work, restructure, new technology, closure of a location).

If the employee is effectively being replaced, or the role still exists but under a different title, that can be a red flag.

Even if redundancy pay isn’t owed under the NES due to the exemption, a “non-genuine redundancy” can increase the risk of:

• Unfair dismissal claims (where the employee is eligible to bring a claim)
• General protections claims
• Disputes about consultation and process

It’s also worth noting that most small businesses (fewer than 15 employees) are not covered by unfair dismissal until an employee has completed the minimum employment period of 12 months. Even where unfair dismissal doesn’t apply, other claims (like general protections) can still be relevant, so it’s important not to treat redundancy as “risk-free”.

2) You Still Have Consultation Obligations

Many modern awards (and enterprise agreements) require you to consult with employees about major workplace changes, including redundancy.

Consultation often involves:

• Notifying the affected employee(s) of the proposed change
• Discussing the reasons and likely impact
• Genuinely considering their feedback
• Exploring redeployment options (where possible)

Skipping consultation is a common compliance gap for small businesses because it feels like “extra process” during an already stressful time. But it’s one of the first things that gets raised if the termination is challenged.

3) The Exemption Doesn’t Remove Notice Requirements

Even with the small business redundancy exemption, you still need to provide minimum notice (or pay in lieu). The correct notice period can depend on:

• The employee’s length of service
• Their age (in some cases)
• Any additional requirements in an award, enterprise agreement, or contract

It’s also important to ensure your written Employment Contract is consistent with your obligations, particularly around notice, termination, and final pay timing.

4) You May Still Owe Other Entitlements

Even if redundancy pay is exempt under the NES, you generally still need to pay:

• Outstanding wages up to the termination date
• Unused annual leave (and potentially leave loading, depending on the employee’s terms)
• Any accrued entitlements required under law or the employee’s contract

If you want a quick sense-check of what redundancy pay might have been (or to sanity-check a scenario where you’re not sure the exemption applies), it can help to run the numbers using a redundancy calculator as a starting point.

How To Handle A Redundancy The “Small Business” Way (Without Creating Legal Risk)

Small businesses often don’t have a dedicated HR team, and redundancies are usually handled by the owner or a manager. That’s completely normal.

The key is to use a clear, defensible process that matches your size and resources while still meeting your legal obligations.

Step 1: Document The Business Reason For The Change

Before you speak to the employee, write down (even in a short internal note):

• What has changed in the business (sales drop, contract loss, restructure, automation)
• Why the role is no longer required
• Why alternatives weren’t viable (if relevant)

This isn’t about creating paperwork for the sake of it - it’s about being able to show that the decision was based on genuine operational needs.

Step 2: Check The Award/Agreement And The Employment Contract

You’ll want to confirm:

• Whether the employee is covered by a modern award
• Whether that award requires consultation, and what steps it sets out
• Notice requirements (NES minimums vs any additional contractual/award requirements)

If you’re unsure which rules apply, it’s worth getting advice early. Underpayment and termination compliance issues can attract serious consequences, and Fair Work Act penalties can be significant in the right circumstances.

Step 3: Consult (Even If The Outcome Seems Obvious)

Consultation doesn’t mean you’re asking for “permission” to restructure. It means you’re:

• informing the employee of what’s proposed,
• explaining why, and
• listening to any suggestions or concerns.

In practice, consultation can be one meeting and a follow-up - as long as it’s genuine and you keep brief records (meeting notes, emails, letters).

Step 4: Consider Redeployment Options

Even in a small business, it’s worth asking:

• Is there another role available (even part-time or different duties) the employee could reasonably do?
• Could hours be reduced (by agreement) instead of termination?
• Could the employee be retrained for another role?

If redeployment isn’t possible, noting why can help show the redundancy was genuine.

Step 5: Provide Written Notice And Confirm Final Pay

When you confirm the redundancy, provide a written letter that covers:

• The termination date
• The notice period (or payment in lieu)
• Final pay items (wages, annual leave, etc.)
• A brief explanation that the role is no longer required due to operational changes

Having clear, consistent documents reduces misunderstandings and helps everyone stay on the same page during an emotional time.

Common Mistakes Small Businesses Make With Redundancy (And How To Avoid Them)

Even where the small business redundancy exemption applies, disputes usually come from process, communication, or confusion about entitlements.

Mistake 1: Assuming “Exempt” Means “No Rules Apply”

The exemption is narrow: it’s about redundancy pay under the NES only. You still need to follow the NES (including notice), awards, enterprise agreements, and any contractual obligations.

Mistake 2: Replacing The Role Immediately

If you terminate someone for redundancy and then hire someone else to do essentially the same job, you can expect questions.

If your business genuinely needs different skills or a different structure, document those differences clearly.

Mistake 3: Skipping Consultation Because It Feels Awkward

Consultation can feel uncomfortable - especially if cashflow is tight and you feel like there’s no alternative.

But consultation is often a legal requirement and a practical risk-management step. It’s also a chance to identify options you hadn’t considered (for example, reduced hours or a different role).

Mistake 4: Underestimating The Importance Of A Clean Exit

A redundancy can still lead to legal claims if the employee believes the real reason was something else (for example, because they raised a workplace issue, asked for leave, or made a complaint).

If you’re a small business employer, it’s also worth being aware of the Small Business Fair Dismissal Code, which can apply to dismissals (including in some redundancy situations) and can be relevant if an unfair dismissal claim is made. While redundancy pay is a separate issue, following a careful and consistent process can help reduce risk either way.

It’s also why having a consistent approach to termination is so important - including in other contexts like probation. If you’re managing a broader restructure, it can help to understand your options around termination during probation and ensure your practices are consistent across the business.

Mistake 5: Not Getting Advice When Things Are “Borderline”

Some redundancy situations are straightforward. Others are not - particularly where:

• You’re close to the 15-employee threshold
• There are multiple employees in similar roles and you need selection criteria
• The employee has recently raised a complaint, taken leave, or requested flexible work
• You’re restructuring duties rather than eliminating a role entirely

If you’re in that “grey zone”, getting redundancy support early can help you avoid a much bigger cost later. This is where redundancy advice can be a practical step to protect your business while keeping the process fair.

Key Takeaways

• The small business redundancy exemption generally means businesses with fewer than 15 employees don’t have to pay redundancy pay under the NES, but it doesn’t remove other termination obligations.
• You still need to manage notice (or payment in lieu), final pay, and any award/enterprise agreement consultation requirements.
• Whether you’re under the 15-employee threshold depends on how you count employees, including some casual staff who work regular and systematic hours.
• A redundancy should be genuine and well-documented - particularly if duties are being redistributed or the business is restructuring rather than closing a role entirely.
• In some cases, redundancy payments can still be payable under a contract, enterprise agreement, or binding policy even if the NES exemption applies, so it’s important to check your documents.
• Clear communication and a simple, consistent process reduces the risk of disputes and helps you protect your business during a difficult transition.

This article is general information only and does not constitute legal advice. If you’d like a consultation on managing redundancy in your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.