As we commence 2023, there is no doubt that this year will bring various challenges to many employers. As a result of various factors, including high inflation rates, rising interest rates, a slowing economy and lingering effects of the Covid 19 Pandemic, it is likely that this year will see organisations experience uncertainty and/or financial hardship. Recent changes to legislation will also put upward pressure on a number of businesses. This will likely result in organisations opting to restructure their businesses or make staff members redundant as a way to cut costs or down-size their businesses.
Further, since the start of 2023, we have seen multinational organisations, such as Google, announce that they will lay off 12,000 staff members amid fears of a looming recession. In addition, Microsoft also recently announced that they will be conducting rounds of redundancy as part of their strategy to decrease their workforce as a result of “macroeconomic conditions and changing customer priorities”.
Substantial redundancies such as the ones we are starting to see around the world, are a good indicator that Australian companies will likely follow suit. We have already started to see indicators of this towards the end of 2022, when large organisations such as Ogilvy, M&C Saatchi, WPP and Cummins & Partners began to undergo redundancies within Australia.
In light of the foregoing, we have set out below a timely reminder about the redundancy process, including a breakdown of the correct steps and processes that employers must take into account when they are contemplating redundancies, as well as a reminder of the risks to employers of getting it wrong.
Introduction to Redundancy
Redundancy occurs where a staff member’s position is no longer necessary, and there is no other role within the organisation the employee is able to perform, necessitating the termination of the employment relationship. Many businesses choose to make staff redundant within the context of restructuring their business, downsizing or cutting costs. According to the Fair Work Act 2009 (“FW Act”) a genuine redundancy occurs when an employer no longer requires anyone to perform the role because of operational requirements. Further, to be considered a genuine redundancy for the purposes of the unfair dismissal jurisdictional exemption, the employer must have complied with the specific consultation and redeployment requirements that apply.
While the redundancy process can be an effective way for businesses to achieve the objectives set out above, employers must ensure that they comply with the requirements of the redundancy process to minimize the risk of unfair dismissal claims and breaches of the General Protection provisions. The redundancy process is a complex process which varies based on various factors such as industrial instruments that apply to the employment relationship, such as enterprise agreements and modern awards, as well as the employee’s length of continuous service with the business.
Unfortunately, many employers are not well informed, and use redundancy as a convenient excuse for terminations that are not redundancies. For example, many employers mistakenly believe that the redundancy process is an effortless way to terminate the employment of an underperforming, or unfavourable, staff member. This in turn unnecessarily exposes businesses to legal and financial risks.
To this end, this article will focus on the process required to be followed by employers making employee roles redundant, so as to qualify for the unfair dismissal exemption. We note that not all employees will be necessarily subject to this regime, especially those employees who do not qualify for unfair dismissal because of their seniority or insufficient length of service. However, it is nevertheless recommended that the process be followed for all employees as it will insulate the business from other types of claims, including the risk of a General Protection claim. More importantly, it treats the employee with respect, and this is important for the employees who remain and the workplace culture.
Taking the Correct Steps in the Redundancy Process
The first step to commencing the redundancy process is objectively assessing whether a redundancy is justified under the circumstances. In order for a redundancy to be considered a genuine redundancy, the business must provide a justifiable reason for why the business no longer requires that position. The factors for which a redundancy will be considered justifiable will be specific to each situation and will depend on the circumstances, but the business must be able to demonstrate that it no longer needs the position to be performed by anyone. In other words, the focus is on the role and not the person performing the role. If there is more than one person performing the same role, for example there are 3 salespeople in the organisation, and the business wants to reduce that to 2, the issue will then become, which person will be chosen to be made redundant. It is advisable that an objective assessment of each incumbents’ skills and capacity is used to determine who should be chosen for redundancy. Often companies will do a “spill and fill” which requires the employees to apply for the remaining roles, although this process tends to be more objective, it is not necessary. As long as the employer can objectively demonstrate why it has chosen to make one person redundant over the others and the reasons relate to their suitability for the role, then the employer is able to make that determination unilaterally.
The next step in the process is to consult with the affected employee(s) of the proposed redundancy. Consultation requirements vary based on industrial instruments such as the enterprise agreements and modern awards that may apply to the employee. To that end, employers should check any applicable industrial instruments to ensure that they comply with any consultation requirements. At a minimum, employees should be informed about the possible changes, and given an opportunity to have some input into the decision to ultimately make the role redundant. Consultation must be genuine and not perfunctory and should provide the employee with a real opportunity to raise pertinent matters. It is also the opportunity to determine whether there are any other suitable roles the employee may be able to perform. Employers should not assume that this is not the case. It may be that a salesperson may have the requisite skills to perform an IT role, but without speaking to the employee, the employer may be unaware of these matters.
Finally, employers are required to consider suitable redeployment opportunities for the employee. Redeployment of an employee involves offering the affected employee(s) the opportunity to redeploy, or transfer into, another position within the business. While redeploying an employee is not required, the consideration of such opportunities is required. Further, offering an employee another possibility within the business, even if the opportunities are seen as less attractive than the employee’s current position, provides the employee with the opportunity to stay employed by the business.
Legal Entitlements Owed to Employees on Redundancy
In circumstances where the employee’s position will be terminated by reason of redundancy and no suitable alternative position is provided, the employer must provide the employee with written notice of termination indicating the last date of the employee’s employment. It is possible for payment in lieu of notice to be made. The employer is also required to pay the employee the following entitlements at the termination of employment:
- all outstanding wages up to and including the last day of employment;
- payment in lieu of notice (if applicable);
- all accrued (but unused) annual leave;
- all accrued (but unused) long service leave (if applicable);
- redundancy pay (if applicable); and
- any applicable bonuses or commission in accordance with the employee’s contract of employment which may be owed.
Notice of Redundancy
In relation to providing notice of termination, an employer is able to elect for the employee to work throughout the notice period or pay the employee the length of the notice period in lieu of attending for work.
The relevant employment agreement should state the amount of notice the employer is required to provide the employee, but at the very least, it must be no less than the minimum notice required under the FW Act.
In this regard, the FW Act provides the following periods of notice:
- Not more than 1 year – 1 week pay
- More than 1 year but not more than 3 years – 2 weeks’ pay
- More than 3 years but not more than 5 years – 3 weeks’ pay
- More than 5 years – 4 weeks’ pay
Notably, an employer over 45 years of age and who has worked in the business for at least two years, are entitled to an additional one week’s pay in addition to the above periods of notice.
Notice is paid on the employee’s full rate of pay if they had worked the minimum notice period including incentive-based payments and bonuses, loadings, allowances and overtime or penalty rates unless the contract of employment specifies otherwise.
Redundancy Pay
An employer has a minimum obligation (subject to any enterprise-specific regime providing a more generous redundancy entitlement) to pay redundancy pay under the FW Act in accordance with the following scale:
- Less than one year’s continuous service — Nil
- At least one year but less than 2 years continuous service — 4 weeks’ pay
- At least 2 years but less than 3 years continuous service — 6 weeks’ pay
- At least 3 years but less than 4 years continuous service — 7 weeks’ pay
- At least 4 years but less than 5 years continuous service — 8 weeks’ pay
- At least 5 years but less than 6 years continuous service — 10 weeks’ pay
- At least 6 years but less than 7 years continuous service — 11 weeks’ pay
- At least 7 years but less than 8 years continuous service — 13 weeks’ pay
- At least 8 years but less than 9 years continuous service — 14 weeks’ pay
- At least 9 years but less than 10 years continuous service — 16 weeks’ pay
- At least 10 years continuous service — 12 weeks’ pay.
For completeness, redundancy pay is separate and in addition to an employee’s entitlement to notice and any other statutory benefits (such as annual leave or long service leave) which an employer is required to pay upon termination.
Who Does Not Receive Redundancy Pay?
There are some employees who are not entitled to redundancy pay under the FW Act. Specifically, this includes:
- where the employer has offered the employee suitable redeployment opportunities;
- the employee has less than one year continuous service (in accordance with the FW Act scale mentioned above);
- the business has fewer than 15 employees;
- the employee is employed for a specific period of time or task, or for any specific duration or season and the contract comes to an end;
- the employee is an apprentice; and
- the employee is a casual.
Consequences of Getting It Wrong
In circumstances where an employer fails to follow the proper redundancy process, the employer will be exposed to possible disputation including unfair dismissal, adverse action, breach of contract and discrimination claims.
In addition to causing a financial risk for employers, employees bringing claims against an organisation create significant reputational risk of damage to a company and affect the business workplace culture.
Key Takeaways
To ensure that the correct steps have been complied with and to ensure the business avoids unnecessary risks, we advise that employers take the following steps:
- Conduct an objective assessment to determine whether redundancy is justified based on the circumstances;
- Ensure that the legal requirements have been met – this includes notification, consultation and redeployment (if possible);
- Put into place a communication strategy to the affected employee, and the possible workforce as a whole, if the redundancy would impact other employees or departments;
- Document the process and maintain good records of the redundancy process; and
- Ensure that the severance and termination benefits, as well as the entitlements, have been paid.
We regularly advise our clients on their legislative obligations and provide advice about how an employer should proceed with redundancy, to ensure compliance and avoid legal risks.
To that end, if you require any assistance or information in relation to this alert, please do not hesitate to contact us.
This alert is not intended to constitute, and should not be treated as, legal advice.