How to Calculate Redundancy Pay
If your business is experiencing financial difficulties or if you no longer need specific team members’ services in a certain function or team, then it’s likely you may be considering redundancy as an option. You must determine each person’s entitlement to redundancy pay in this situation. Notably, the total sum you must pay can come at a high cost to your company. Incorrectly calculating a worker’s remuneration could expose you to legal claims as well. The following is explained:
- the definition of redundancy;
- the formula for determining redundancy pay;
- and the situations in which employees are not eligible for a redundancy payment.
The compensation a person receives after being let off from their job is known as redundancy pay.
Although the words “severance pay” and “redundancy pay” are occasionally used interchangeably, there are technical distinctions between the two.
When an employee is let go, it’s typically because their company no longer needs them to fulfil a particular task. Keep in mind that the work itself becomes redundant, not the employee. When redundancy may occur, for instance:
- New technology is implemented by the company, eliminating the necessity for a person.
- There is a decline in output or sales.
- The company moves or shuts down
- The company is being restructured.
- The company or employer experiences insolvency or bankruptcy.
Contrarily, severance describes situations in which the employee’s contract is terminated early for a variety of reasons, such as a breach of the employment contract. Due to their similarity, the phrases are sometimes used interchangeably, but it’s crucial to know the difference if you want to know your rights and obligations as an employer or employee and whether redundancy compensation applies to you.
How is redundancy pay determined?
The amount of redundancy pay for an employee is determined by how long they have worked continuously for the business. Continuous service relates to how long they have worked for the company. The base pay rate for regular hours performed by the employee determines the amount paid:
Redundancy compensation = Base Rate x Redundancy Pay Period
Using an example can help you comprehend how to calculate redundancy pay. Consider a Motor Mechanic who has been employed for eight and a half years continuously at a workshop that is currently shutting down and earns $91,000 per year. The Mechanic is entitled to a sum equal to 14 weeks of their yearly salary under the 14-week redundancy pay term.
Their severance package would consist of:
1**4/52 = 0.269 x $91,000 = $24,500**
Who is not eligible for redundancy pay?
If they are made redundant, several kinds of employees are exempt from receiving redundancy pay. Examples comprise:
- employees who have been with the company for less than a year
- workers with a fixed-term contract
- Casual workers (unless there is evidence that they have been employed on a regular and systematic basis)
- Employees of small businesses
- Small companies
Small-business employees are not eligible to redundancy pay. A small business employer is one who, at the time of the redundancy, employed no more than 15 people. The following factors must be taken into account when deciding whether an employer has less than 15 employees:
- At the time of redundancy, all employees must be counted.
- Casual workers are not included (however the same rules apply as above)
- Any workers that were terminated at the time are included.
- Linked entities are treated as a single entity.
Has the employer made an equivalent employment offer to the employee?
The amount of redundancy pay may be diminished or cancelled if a company offers the fired employee a comparable position and they decline it. In these situations, the employer will need to submit an application to the Fair Work Commission in order to either decrease or eliminate an employee’s redundancy pay.
What if the company is unable to pay redundancy benefits?
If a company finds itself in a situation where they are unable to pay its employees for redundancy, they may submit an order with the Fair Work Commission to have the redundancy amount reduced or even deleted, depending on the situation.
Is there really a redundancy?
When a company has good cause to lay off an employee, this is referred to be a genuine redundancy. The employer must also abide by any awards or enterprise agreements they have with its employees, which outline the fundamental rights and obligations that every worker is entitled to.
An employee does not have the right to sue their employer for an unjust dismissal if their termination was caused by a real redundancy.
What constitutes a false redundancy?
Redundancies are deemed untrue when:
- the employer has the power to reassign the employee inside the company but chooses not to do so;
- the employer hires a different individual to do the same duties as the fired employee;
- the employer disregards the obligations under an award or registered agreement.
An employee may file an unfair dismissal complaint against their employer with the Fair Work Commission if they feel that their layoff was not legitimate.
How may an employer reduce responsibility when laying off workers?
The proper steps must be followed if an employer decides to fire an employee due to redundancy in order to protect itself from any lawsuits. Before laying off someone, it’s crucial to take the following factors into account.
All employees who are going to be laid off must receive notice. Depending on how long an employee has been employed by the company, an employer must provide a certain length of notice. As a general rule, the following applies to minimum notice needs:
- Employers must honour any awards or collective bargaining agreements they have with the fired employee.
- These differ based on the employee’s line of work and any other employment-related agreements that have been established.
- Determining the Appropriate Redundancy Pay Amount
- Employers are required to make sure the worker receives the appropriate amount of redundancy pay. The method outlined above outlines the usual procedure used to calculate how much redundancy compensation an employee should get.
Employees are exempt from redundancy pay in certain circumstances. We’ve already mentioned that it doesn’t apply to contract workers or employees who have been with a company for less than a year. Employers may also be exempt in certain circumstances from this computation. Four scenarios are listed below that call for various procedures:
Instead of laying off a worker, an employer might offer them a similar position elsewhere inside the company. Depending on whether the offer is appropriate for them, the employee has the freedom to accept or reject it. If the employee accepts, their job will not be terminated and they will not be eligible for redundancy pay.
A business might, as an example, close one facility. Employees at this site might be offered a job at a different location run by the same company with the same hours. If the workers agree, they will carry on working for the business in the new location. Employees have the option of accepting the matching redundancy payment if they choose not to.
When a company is bought or sold by a new owner, it could no longer need the assistance of its workers. The employment of the personnel may be agreed upon by the seller and the buyer. Employees’ redundancy benefits are typically covered by the seller if the buyer decides not to keep them. Employee contracts may affect the selling price of a business since sellers can avoid paying redundancy fees if the buyer keeps the personnel.
Think about a supermarket owner selling their company to a buyer who wants to implement self-checkouts as an example. The buyer might want to keep half of the personnel, and the cash registers would take the place of the rest. The redundancy entitlement must be paid by the seller to the non-retained employees.
Employers in small businesses are not required to provide redundancy benefits. A company with fewer than 15 employees is considered a small business. While casual workers are not included in this number, it does include employees that are being laid off.
For instance, if a company has 22 employees and fires 12 of them, it is not considered a small business and is not free from having to pay redundancy benefits. However, a tiny business is one that employs 22 people, eight of whom are contract workers. The employer is not compelled to make redundancy payments if this company let go of three full-time employees.
Failing to Pay
Businesses that are struggling financially might not be able to pay redundancy benefits. Employers might request to have their redundancy obligations reduced. If employers qualify for a reduced wage, the Fair Work Commission can examine this application and make that determination.
How are redundancy payments determined if the application is approved by the commission in this case?
The payments may be subject to a percentage reduction by Fair Work, and the remaining percentage will be determined using the original formula.
For instance, a retail company that had to close its locations owing to low sales may now generate lower profits and lay off staff. The business may be granted exemption if its financial resources fall short of what it needs for redundancy payments.
When an employee is made redundant and fired from their job, they are entitled to redundancy pay.
The following formula is used to determine redundancy pay:
Redundancy compensation equals base rate times redundancy pay term.
The length of time the person has worked for the company determines how much redundancy pay they will receive.
In order to defend themselves against allegations of unfair dismissal, employers should make sure that any redundancies they make are real. This entails:
- giving employees adequate notice of the redundancy,
- abiding by any agreements and awards in force,
- and calculating the appropriate amount of redundancy compensation that the employee is entitled to.
Commonly Asked Questions
When will I receive my redundancy payment?
When you should get your redundancy payment is not something that is governed by a standard norm. However, when you quit working, payments are usually made on the following normal payday. Before you leave, your employer might let you know how much you will be paid. Check with your employer if it differs from the sum determined by the formula.
Do I have to pay taxes on my severance money?
There are a few variables that determine whether you must pay taxes on your redundancy payment. Depending on how many years you spent working for the company, it will be tax-free up to a certain amount. The maximum is a set amount plus an extra sum for each year you worked there. Any sum over this exempt level may be subject to taxation.
Can I receive more than the required minimum?
It’s possible for your employer to give you redundancy benefits that go over the legal minimum. Good financial standing allows employers to provide loyal workers with a hefty redundancy benefit. This can improve their reputation and serve as a motivator for other workers inside their company.
What to Next
If you have any inquiries about the required minimum redundancy payment, Australian redundancy rules, the impact of unused annual leave on termination compensation, or anything else.
Please get in touch with our business lawyers team of experts for more details or legal counsel on employment issues. We can connect you with the best business lawyers in major cities in Australia including Parramatta, Perth, Newcastle, Canberra, Geelong, Adelaide and many more cities.