Busting redundancy myths: a guide on when and how

The decision to make workers redundant is among the hardest businesses and employers can be faced with implementing.

Core concepts:

Redundancy is where the employer no longer requires the position to be performed.

The reasons why a position is made redundant may include:

• technological or economic changes
• restructuring of the workplace (where the business is re-ordering its duties for a range of reasons including making efficiencies)
• an employer’s inability to pay employees
• the sale of a business, i.e. employees are not kept on by the new owners.

Terminations due to redundancy, also known as ‘retrenchments’, do not automatically result in employment termination. When a position becomes redundant, the employee should be considered for and offered an alternative role, if available.

Myth 1-

Workers should not be required to apply and interview for a job as part of a redundancy process. For instance, if an employer has 5 employees but only needs 3, they should not ask the workers to apply for the remaining roles.

In termination, especially in redundancies, process is vital. It is important for employers to follow a proper process to argue that a worker is ‘genuinely redundant’ within the meaning of section 389 of the Fair work Act and therefore not eligible for an unfair dismissal claim. As they are not a ‘dismissed’ worker under section 386.

The process of redundancy involves consultation and selection criteria. These steps are taken before termination. There are different approaches to the consultation process.

Myth 2-

Consultation can be a general update at a toolbox talk by stating “it’s a bit quiet at the moment.”

It is important to note that consultation is not about reaching an agreement. Genuine consultation requires both parties to discuss the situation, its impact, and explore possible courses of action. This conversation should also include exploring alternatives to redundancy. Even in small businesses with limited alternatives, it can be worthwhile to explain what alternatives are possible and why they are not available.

Other topics that may be relevant for discussion include:

• timing of the process (the start of the consultation, the timing of the decision, and communication to staff)
• method of implementation (specifically how the employee(s) will be selected)
• outplacement and job seeking assistance
• possible referrals to other employers
• retraining assistance.

The consultation process may involve meetings with the selected worker(s), and there should be at least 2 meetings. For example, a meeting to present the company’s position, followed by giving the worker time to consider it, and then a second meeting to address any concerns raised by the worker before making the final decision to terminate their employment.

It is also important to discuss suitable alternative employment. This means considering any other roles within the business that the worker may be appropriate for. Even if those roles are not suitable or it is believed that the worker will not accept them, it is still valuable to have a discussion about them. If there are no other options, it is still important to acknowledge that the business considered alternative options.

Some guidance on selection:

The reasons for selecting workers to be made redundant can vary, but they should always be in line with legal and non-discriminatory practices.

There are several methods for selecting workers, including:

1. Last in, first out – While often overlooked, this can be an option as long as it does not result in indirect discrimination.
2. Highest Cost – Workers who receive significantly higher pay than others may be chosen. By removing the most expensive positions, an employer may be able to save multiple jobs.
3. Nepotism – Although commonly associated with poor governance, it is acceptable for a business to prioritise family members over other staff. In certain cases, the business may want to keep its children working with the expectation that they will eventually take over the business.
4. Skills Matrix – When it is challenging to make a selection or when the decision-making process may be seen as discriminatory, using a ‘skills matrix’ can be helpful. This involves scoring employees based on their skills, qualifications, experience, and potential to add value to the business.

The employer should be able to demonstrate that their criteria and method for determining which employees are made redundant were fair and objective. The individual circumstances of employees should also be taken into account.

Myth 3-

‘Redundancy’ does not apply to small businesses. As we’ve established above, redundancy and retrenchment are mechanisms by which employees’ employment may come to an end. Redundancy pay is those payments which go to the worker in the case of termination.

Small businesses (fewer than 15 employees) are excluded from the ‘severance’ pay component of a redundancy. However, there are still a number of potential inclusions in a redundancy payout including:

• redundancy or severance pay (if applicable)
• accrued annual leave and annual leave loading
• all owing super payments (up until the date of termination)
• long service leave if applicable
• outstanding wages and entitlements (e.g. RDO’s owing) up to the time of termination
• pay in lieu of notice (if the employee is not required to work out the notice)
• a separation certificate (if the employee requests a copy, contact Centrelink)
• a certificate of service
• process any CIRT payments (if applicable).

Exclusions include casual employees, workers with less than 12 months of continuous service, and apprentices (may vary if the business operates under an EBA).

Employers must be mindful of various factors when making workers redundant. Employers need to do their homework to achieve appropriate outcomes.

Additionally, it is important to debunk the myth that redundancy processes provide an easy solution for employers facing operational challenges. Redundancy is not a silver bullet by which an employer will get an easy-way-out of a difficult employment situation.