Redundancy can bring on a whirlwind of emotions: uncertainty, stress, disappointment, and maybe even a bit of fear. Fortunately, to ease you through this transition, you will often receive a redundancy payment aligned with your period of continuous service.
Understanding the ins and outs of redundancy, its associated payments, and the taxation laws around it can go a long way toward easing your worries and helping you prepare for the future.
“Knowledge is power. Understanding your redundancy rights, taxation and financial implications can help you to transform a challenging situation into a springboard for new possibilities.“
Whether you’re researching industry-specific redundancy schemes or found yourself right in the thick of them, this article offers some actionable advice to ensure you are informed and prepared.
What is Genuine Redundancy?
Redundancy refers to eliminating a particular role, not necessarily the person performing it. Unlike being dismissed for poor performance or serious misconduct, the employee’s job is removed from the business as it is no longer required.
Redundancy could stem from a variety of reasons. Perhaps your company has moved, restructured or, unfortunately, gone out of business. These circumstances often result in certain job roles becoming unnecessary or obsolete and are considered genuine reasons for redundancy.
Your Rights and Entitlements in Redundancy Situations
Redundancy is only permissible if an employer’s business can demonstrate that:
- The role is genuinely no longer required for ongoing operations
- They have operated within the requirements of the relevant award or enterprise agreement
- They have, if possible, offered any impacted & eligible employees a suitable role elsewhere in the organisation
If this hasn’t happened, an employee may have grounds for unfair dismissal and can appeal to the National Workplace Relations System.
If these steps have been followed and you are made redundant, under the National Employment Standards in the Fair Work Act 2009, you, as an employee, are provided with minimum entitlements for notice of termination and redundancy pay. We should note, however, that this is for permanent employees only. Casual employees, employed seasonal workers, and other non-permanent staff are not included.
Minimum Notice Period
As stipulated by the Fair Work Ombudsman of Australia, an employee facing redundancy must receive notice – written notice – in a timeframe that relates to their period of continuous service:
- One year or less: 1 week
- More than one year – 3 years: 2 weeks
- More than three years – 5 years: 3 weeks
- More than five years: 4 weeks
If an employee over 45 has completed at least two years of service when they receive notice, they are awarded an additional week of notice.
If an employer does not honour the notice period, they can pay the employee instead of giving notice. The amount would be not only the employee’s base rate, but also any additional income they would have received had they worked the minimum notice period, including:
- Incentive-based payments
- Loadings
- Allowances
- Overtime and penalty rates
Redundancy Pay & Employment Termination Payments
Employment termination payments refer to one-time sums paid out upon the conclusion of your employment.
The redundancy pay you receive is determined based on the duration of your employment with your employer. It is calculated based on your basic weekly wage at the time of redundancy. This figure excludes additional payments such as allowances, penalty rates, loadings, or bonuses.
The amount includes:
- 1 – 2 years: 4 weeks of pay
- 2 – 3 years: 6 weeks of pay
- 3 – 4 years: 7 weeks of pay
- 4 – 5 years: 8 weeks of pay
- 5 – 6 years: 10 weeks of pay
- 6 – 7 years: 11 weeks of pay
- 7 – 8 years: 13 weeks of pay
- 8 – 9 years: 14 weeks of pay
- 9 – 10 years: 16 weeks of pay
- 10+ years: 12 weeks of pay (assuming long-service leave entitlements are present)
The figures above are the minimum entitlement under the National Employment Standards, plus any outstanding wages. You may be entitled to more under your applicable modern award, agreement or employment contract.
Diving into the Tax Implications of Redundancy Payments
Tax treatment for ETPs differs based on their nature. In certain situations, your payments could be completely exempt from tax, such as payments linked to invalidity or employment before July 1st, 1983.
Should your employer confirm your redundancy is genuine, you’ll be exempt from tax up to a certain limit. In the 2023/2024 tax period, this limit for an individual is determined by a base amount of $11,985 plus an additional $5,994 for every year of completed service, subject to a maximum ceiling of $235,000. Payments exceeding your threshold will incur taxes at the standard rates applicable.
The exemption doesn’t apply if you are of pension age; in this case, your payment will be subject to taxation at the prevailing rates.
In calculating a genuine redundancy payment, it’s important to omit specific amounts. These exclusions encompass:
- Payments corresponding to salary, wages, or allowances for work already performed or leave that has already been utilised;
- Payments in lieu of superannuation benefits;
- One-time payments on employment termination for unutilized annual leave or leave loading;
- Lump sum disbursements for untaken long service leave are provided at termination under an established agreement.
These exclusions must be considered carefully in the computation of a genuine redundancy payment to adhere to tax laws.
Key Takeaways
- Employers must engage in open dialogue with employees about potential changes in the workplace that could lead to redundancies.
- Understand that business transfers may lead to redundancy pay obligations for current permanent employees (not a seasonal or casual employee).
- Note the elements that contribute to Notice pay, including bonuses, overtime rates, and allowances.
- Realise that several factors, such as relocation, business closure, or restructuring, may influence the legitimacy of redundancies.
- Recognise that even insolvent, bankrupt or liquidating businesses can be considered small businesses, but they still need to provide redundancy pay.
- Attempt to circumvent redundancies to minimise the risk of unfair dismissal claims and additional costs like redundancy pay and unclaimed leaves.
- Remember, skipping the necessary consultation with employees before redundancies could invalidate the process and be deemed unfair.
- Understand and implement the consultation process required for major workplace changes, such as redundancies under the Fair Work Act 2009 and awards/registered agreements.
- A portion of your ETP is exempt from tax up to $11,985, plus an additional $5,994 for every year of completed service, subject to a maximum ceiling of $235,000. Payments exceeding your threshold will incur taxes at the standard rates applicable.
Learn More on Your Redundancy Entitlements & Obligations
Handling redundancy can be complex with many financial obligations, so you must navigate it accurately and fairly.
If you’re feeling overwhelmed by all this information, or if you just want to ensure that you’re doing everything right, don’t hesitate to reach out to us at KNS Accounting. Our experienced team can provide you with personalised advice and assistance, ensuring that you comply with all the necessary requirements and avoid potential pitfalls.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
