Making team members redundant is one of the most challenging decisions a business can face. While redundancies are sometimes unavoidable due to changing business conditions or restructuring needs, Australian law ensures employees are supported through this transition with fair compensation.

So, how do you calculate redundancy pay for your employees? In this guide, we’ll walk you through the calculations and your legal obligations as an Australian employer. 

What is redundancy pay in Australia?

Redundancy pay, also known as severance pay, is a form of financial compensation for employees whose employer no longer requires their jobs. 

If your business restructures, downsizes, or closes, you’ll have to consider this payout. Redundancy pay provides financial support to employees during their transition to new employment.

In Australia, redundancy pay is governed by the National Employment Standards (NES) under the Fair Work Act 2009. These standards set out the minimum entitlements for employees and guide employers in calculating redundancy payouts for their staff.

Types of redundancy pay

While the NES provides a baseline for redundancy pay, several factors will influence the amount of the payout for each employee. 

1. Statutory redundancy pay: This is the minimum amount set by the NES based on how many years you have continuously employed them. 
2. Contractual redundancy pay: Some employment contracts or enterprise agreements may offer more generous redundancy terms than the statutory minimum.
3. Industry-specific redundancy schemes: Certain industries have their own redundancy schemes that may provide different entitlements. For example, the building and construction industry has a broader definition of redundancy pay, recognising the increased worker mobility due to the nature of the industry. 

Eligibility for redundancy pay typically depends on the following factors:

• Length of continuous service (usually at least 12 months)
• Employment status (permanent employees are generally eligible, while casual employees are not)
• Size of the employer’s business (small businesses with fewer than 15 employees are usually exempt)

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Exceptions to redundancy pay

There are several exceptions to who is eligible to receive redundancy pay and under what circumstances. It is crucial to understand your obligations as an employer and properly calculate redundancy payouts. 

The following types of employees may not be eligible for severance pay:

• Casual employees
• Employees hired for a specific period, task, or season
• Apprentices and trainees
• Employees terminated due to serious misconduct
• Employees of small businesses (with fewer than 15 employees)

Note that these exceptions may vary depending on specific awards, enterprise agreements, and by industry. 

Failing to pay mandatory redundancy pay can have severe consequences for employers. As such, it is always best to hire a lawyer or your local regulator to ensure correct calculations. 

Factors influencing redundancy payouts

So, how do you work out the redundancy pay for each employee? The exact amount will depend on the factors below. 

1. Years of service: The longer an employee has worked for the company, the higher their redundancy pay, up to a certain limit.
2. Base rate of pay: Redundancy is calculated using the employee’s base rate for ordinary hours worked.
3. Age of the employee: Some awards or agreements may provide additional payments for older employees.
4. Industry-specific agreements: Certain industries may have their own redundancy schemes with different entitlements.
5. Employment contract terms: Some contracts may offer more generous redundancy terms than the statutory minimum.

Step-by-step guide to calculating redundancy pay

Here are the steps you should follow to calculate redundancy pay. Remember that these are general steps, and the exact amount will depend on your industry and the specific terms set out in your employment contracts. 

1. Determine the employee’s continuous service period. Count the years and completed months of continuous service with your company.
2. Identify the employee’s base rate of pay. This is the rate for ordinary hours worked, excluding bonuses, loadings, or overtime.
3. Consult the redundancy pay scale. Use the table provided by the Fair Work Ombudsman to determine the number of weeks’ pay based on the years of service.
4. Calculate the redundancy pay. Multiply the number of weeks from step 3 by the employee’s weekly base rate of pay.

The formula is: Base Rate of Pay x Redundancy Pay Period = Redundancy Pay

Here’s the redundancy pay scale as per the NES (as of November 2024). 

Remember, this is the minimum entitlement. Always check the applicable award, enterprise agreement, or employment contract for any additional entitlements.

Examples of redundancy pay calculations

Let’s look at some examples to illustrate how redundancy pay is calculated. 

Example 1: Long-term employee

Sarah has worked for her company for 8 years and 6 months. Her base rate of pay is $1,000 per week.

• Redundancy pay period: 14 weeks (for 8-9 years of service)
• Calculation: $1,000 x 14 weeks = $14,000
• Sarah’s redundancy pay would be $14,000.

Example 2: Short-term employee

John has been with his employer for 1 year and 3 months. His base rate of pay is $800 per week.

• Redundancy pay period: 4 weeks (for 1-2 years of service)
• Calculation: $800 x 4 weeks = $3,200
• John’s redundancy pay would be $3,200.

Example 3: Employee under different contract terms 

Emma works in an industry with a specific redundancy scheme. Their award provides an extra week of pay for employees over 45 years old with more than 2 years of service. Emma is 47 and has worked for the company for 5 years and 2 months. Her base rate is $1,200 per week.

• Standard redundancy pay period: 10 weeks (for 5-6 years of service)
• Additional entitlement: 1 week (for being over 45 with more than 2 years of service)
• Total redundancy pay period: 11 weeks
• Calculation: $1,200 x 11 weeks = $13,200
• Emma’s redundancy pay would be $13,200.

If your business has many employees with a range of different contracts and terms, these calculations can become daunting. Make sure to keep clear records of everyone’s contract types and use HR software to track your obligations. This can help reduce potential errors in redundancy payouts, protecting your business from legal fees and audits. 

FAQ

How many weeks of pay do you get for redundancy in Australia?

The number of weeks of pay for redundancy in Australia ranges from 4 to 16 weeks, depending on your years of continuous service. For example, if you’ve worked for 1-2 years, you’ll get 4 weeks’ pay, while 9-10 years of service entitles you to 16 weeks’ pay.

Can I get Centrelink benefits if I am made redundant?

Yes, you may be eligible for Centrelink benefits if you’re made redundant. You might qualify for JobSeeker Payment, which provides financial support while you’re looking for work. However, there may be a waiting period depending on your redundancy payout.

Does redundancy get taxed?

Redundancy payments are generally tax-free up to a certain limit. This tax-free amount is based on your years of service and is adjusted annually. Any amount above this limit is taxed as an employment termination payment (ETP) at concessional rates.

Final thoughts

Understanding redundancy pay in Australia is crucial for both employers and employees. While the process may seem complex, breaking it down into steps and considering all relevant factors can help you ensure fair and accurate calculations.

Still unsure how to calculate redundancy payouts? Talk to one of our lawyers, who will walk you through the process and make sure you meet your obligations.