Do Small Businesses Have To Pay Redundancy?

Redundancies are one of the hardest decisions a small business owner will ever make. When cashflow tightens or your operating model changes, you might need to reshape roles - but understanding if, when and how redundancy pay applies is crucial in Australia.

The short answer is: under the National Employment Standards (NES), small business employers generally do not have to pay redundancy pay. However, there are important exceptions and other legal obligations you still need to meet, including consultation, notice, final pay and record-keeping requirements.

In this guide, we’ll break down how redundancy works for small businesses, where the exemptions start and end, and practical steps to stay compliant and fair to your team.

What Counts As A Small Business Employer Under Fair Work?

In Australia, a small business employer is one with fewer than 15 employees. This headcount includes:

• All employees at the time you give notice (not just the ones being made redundant)
• Casual employees if they are employed on a regular and systematic basis
• Employees of associated entities (where relevant)

You count each person once (full-time, part-time and eligible casuals each count as one). Contractors are not employees and aren’t included in this calculation.

This definition matters because it determines whether the small business redundancy pay exemption applies.

When Do Small Businesses Have To Pay Redundancy?

Under the NES, redundancy pay is generally not required for small business employers. That’s the default position.

However, there are situations where a small business might still need to make a redundancy payment or apply similar entitlements:

• Registered agreements or specific industry provisions: Some enterprise agreements or industry schemes may set redundancy benefits for small businesses. Always check the applicable instrument before you act.
• Transferring business (sale or restructure): If a business is sold and an employee isn’t offered comparable employment with the new employer, redundancy pay may be triggered (depending on the circumstances).
• Voluntary payments or contractual terms: If your employment contracts or policies promise redundancy benefits (even if not legally required by the NES), you’ll need to honour them.

Even if redundancy pay isn’t owed, the dismissal still needs to be a genuine redundancy to avoid unfair dismissal risks. In practice, that means the job is no longer required to be done by anyone, you’ve complied with any consultation duties, and redeployment isn’t reasonably available.

If you’re unsure how these rules apply to your situation, it’s best to get tailored advice before making a decision. As a sense-check, some employers also refer to a redundancy calculator to estimate what might be payable when the small business exemption doesn’t apply.

Who Is Excluded From Redundancy Pay?

Even outside the small business exemption, some employees don’t qualify for redundancy pay under the NES. These include:

• Employees with under 12 months’ service
• Casual employees (including regular casuals)
• Apprentices
• Employees terminated for serious misconduct
• Employees on fixed-term contracts where the contract simply expires at the end of the term

There are also rules that can reduce redundancy pay if you’ve offered suitable alternative employment or if an industrial instrument provides a different method for redundancy benefits. As always, check any applicable award or registered agreement.

What Are My Other Legal Obligations If I Make Roles Redundant?

Even if redundancy pay isn’t required, there are several legal steps you still need to follow to ensure the termination is lawful and fair.

1) Ensure It’s A Genuine Redundancy

A redundancy is only “genuine” if the role is no longer required to be performed by anyone due to changes in operational requirements, you have complied with any consultation obligations in an award or agreement, and there’s no reasonable redeployment opportunity.

If a dismissal isn’t a genuine redundancy, an employee might pursue an unfair dismissal claim. For context on how the Fair Work Commission assesses dismissals, see the considerations in section 387 of the Fair Work Act.

2) Consult Under Any Award Or Agreement

If an employee is covered by a modern award or enterprise agreement, you’ll likely have a duty to consult about major workplace changes. This usually involves notifying affected employees, sharing key information, and genuinely considering their input.

3) Give Notice (Or Pay In Lieu)

Notice obligations apply regardless of redundancy pay. You must either let the employee work out their notice period or make a payment in lieu of notice. The length of notice depends on the employee’s continuous service and age, so it’s important to check notice period rules before issuing a termination letter.

4) Pay All Final Entitlements

Final pay typically includes notice (if paid in lieu), accrued but unused annual leave, and any other entitlements under an award, agreement or contract. Our guide to calculating final pay covers the basics you’ll need to consider.

5) Superannuation On Termination Payments

Super is not generally payable on redundancy pay itself, but it may be payable on some other components of termination pay depending on how they’re classified. For more detail, see superannuation on termination payments.

6) Document The Process

Keep clear records: business reasons (operational changes), consultation steps, redeployment considerations, and the termination letter. Good paperwork is your best protection if the decision is later questioned.

Practical Alternatives To Redundancy For Small Businesses

Redundancy is not the only option when you need to cut costs or reshape roles. Depending on the situation, consider whether any of these alternatives could work (and be lawful) first:

• Reduce Hours Or Duties: You can explore amending hours, days, or responsibilities by agreement. There are specific legal considerations when reducing employee working hours, so make sure the change is genuine, recorded correctly, and compliant with any applicable award or agreement.
• Temporary Leave Arrangements: Employees may agree to take annual leave or leave without pay. Ensure any arrangement is voluntary and properly documented.
• Role Redesign And Redeployment: Offering a suitable alternative role can retain talent and avoid redundancy pay obligations where the NES would otherwise apply.
• Contract Variation: If the business model has changed, it may be appropriate to update employment terms (with the employee’s agreement). Learn more about changing employment contracts the right way.
• Mutual Separation: In some cases, both sides prefer to part ways. A well-drafted separation agreement can finalise the relationship and manage risk.

The best path depends on your business case, the employee’s circumstances and any applicable industrial instruments. Whatever you choose, get the paperwork right and keep communication open and respectful.

How To Work Out Notice, Final Pay And Timing

Once you’ve decided a genuine redundancy is required, map out the timeline and payments before you break the news. This helps you answer questions confidently and avoid errors.

Step 1: Confirm Coverage And Eligibility

• Check if you are a small business employer (fewer than 15 employees).
• Identify the applicable award or agreement and its consultation rules.
• Confirm whether redundancy pay applies (or is excluded) in your situation.

Step 2: Plan Consultation And Meetings

• Prepare a business rationale for the change and the roles affected.
• Schedule a consultation meeting and provide required information in writing.
• Consider alternatives raised by the employee and document your responses.

Step 3: Calculate Notice And Final Pay

• Determine notice owed, or decide on a payment in lieu of notice.
• Calculate accrued annual leave, any long service leave (state-based rules apply), and other entitlements.
• Check whether any super is payable on termination components using the guidance on superannuation on termination payments.

Step 4: Issue Documents And Pay On Time

• Provide a clear termination letter setting out the reasons, effective date, notice and entitlements.
• Pay all amounts due by the required time (often on the employee’s final day or the next payroll cycle, depending on the instrument and state rules).
• Provide any required certificates or statements (for example, separation certificate if requested).

If your situation is complex, or you’re handling multiple redundancies, it’s sensible to get a quick compliance check before issuing paperwork - a small step that can prevent costly disputes later.

Common Redundancy Pitfalls For Small Businesses

We regularly see well-meaning small businesses run into avoidable problems. Keep an eye out for these issues:

• Confusing performance with redundancy: If the issue is performance, use a fair performance process. Labeling a dismissal as redundancy when the job still exists can lead to unfair dismissal risks.
• Skipping consultation: If an award or agreement requires consultation, failing to do it properly can undermine the “genuine redundancy” defence.
• Missing notice or underpaying entitlements: Double-check your notice period and final pay. Errors here are common and easy to avoid with a quick review.
• Not exploring redeployment: If a comparable role is available and reasonable, you must consider redeployment before proceeding.
• Inconsistent treatment: Apply your criteria consistently across employees to reduce the risk of discrimination or adverse action claims.

Key Takeaways

• Under the NES, small business employers (fewer than 15 employees) generally do not have to pay redundancy pay - but you still need to follow the correct process.
• Check if any award, enterprise agreement, contractual term or business sale scenario alters the default position for your employees.
• For a dismissal to be a genuine redundancy, the job must no longer be required, you must consult where required, and redeployment must be considered.
• Notice, final pay and super rules still apply even if redundancy pay doesn’t - verify notice entitlements, consider payment in lieu and check super on termination payments.
• Before moving to redundancy, consider lawful alternatives like reducing employee hours, redeployment, or a documented separation agreement.
• Careful planning and documentation reduce legal risk and support a respectful, compliant process for everyone involved.

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