Terminating an individual from their job is never easy, from the perspective of both the employee and employer.
For most people, their job is their primary source of income, and it can be hard to manage when this disappears.
This is where redundancy and severance pay comes in. As an employer, this type of payment is made once you terminate your employee’s contractual agreement.
Although they might sound the same, there are differences between redundancy and severance pay that you should know.
In our post, we’ll explain what redundancy and severance pay are and how they’re different.
What is termination?
The termination of an employment agreement is when you no longer require your employee to work. The term ‘termination’ and ‘dismissal’ are often used interchangeably in the Australian workplace and by the Fair Work Commission.
Suppose you do choose to terminate your employee. In that case, it must be a ‘genuine redundancy’, which is making an employee redundant for a valid reason, or it will be considered an unfair dismissal claim.
Therefore, you must have a proper reason for termination of employment. Some common examples of valid termination include:
- Serious misconduct – If your employee violates company policy, violates their employment contract, or violates the law.
- Poor performance – Poor performance can include a lack of skills, care or work quality
- Employee Capacity – indicates an employee’s ability to perform their job duties
- Redundancy – This is when you decide that you no longer need an employee’s job to be done by anyone or if you become insolvent or bankrupt.
Once you terminate an employee, you need to consider what their final payslip will contain. With this in mind, many small businesses may have to pay redundancy or severance entitlements for those employees who have been terminated or when they leave on their own accord.
What is severance pay?
Severance payment is compensation for early-ended employment contracts. This is a general term that applies to situations when you terminate an employee.
This can include redundancy payments and is usually based on how long an employee has been in their role for. It is often used as a broader term and is more commonly used in the United States.
Severance pay can also include additional entitlements such as health insurance coverage for a specific amount of time until the employee finds new employment.
In Australia, it is the same as redundancy pay as outlined by the Fair Work Ombudsman.
What is redundancy pay?
Redundancy occurs when the role or job is no longer required by the employer. It’s important to note that redundancy must be genuine in order to be legal.
Redundancy means that the job itself no longer exists.
Redundancy can also happen when a business becomes insolvent or bankrupt. Here are some common situations where redundancy happens:
- New technology (automating jobs)
- Moving services overseas
- Lower sales or production/ poor economic conditions
- Departmental or company shutdown
- Corporate restructuring
Therefore, the broader term for termination payments is severance pay. Redundancy is subsequently an aspect of severance pay in Australia.
Hence, the similarity in the two terms tend to overlap but are technically different. If you still don’t understand the difference, here is an example.
Ryan works as an executive assistant at a telecommunications company. The company has recently started outsourcing many of its jobs to the overseas market.
The company has realised that they can employ someone to work remotely and virtually for a tenth of the cost it is to employ their in-house executive assistants.
Ryan is made redundant, along with several other executive assistants. Ryan’s redundancy pay falls under the broader term of severance pay.
How is redundancy and severance pay calculated?
The amount of severance payment and amount of redundancy that you offer your employee will be entitled to upon their notice of termination will depend on:
- Length of service — This is your employee’s total period of continuous service with your business. The years of service is a period of unbroken ordinary hours of service with your business.
- The number of weeks payable
- Pay the base rate for the weeks owed
Once you figure out the information above, the Fair Work Ombudsman’s table of severance pay outlines the years of continuous service and the corresponding redundancy pay under the National Employment Standards (NES).
Here is what you need to know:
Based on the table above, you should pay the above amount depending on your employee’s pay rate for their hours worked. Furthermore, that amount should not include things like:
- Penalty rates
- Incentive-based payments
However, when calculating your employee’s severance and redundancy payment, redundant employees are also entitled to:
- Outstanding wages
- Accumulated annual leave
- Long service leave due upon termination
When do redundancy and severance pay not apply?
Redundancy for certain types of employee classes doesn’t carry severance pay. The list of non-applicable classes are:
- Casual employees — Casual employees are not entitled to redundancy and severance pay because section 123 of the Fair Work Act excludes them explicitly from those entitlements. This should also be stated in their employment agreements.
- Trainees and apprentices
- Fixed-term contracts — certain period of time, season or task
- Dismissal for misconduct–you still need to pay the employee any unpaid wages and any applicable entitlements up to the point of the dismissal
- Small business employees — If your small business has fewer than 15 employees, you will be exempt from paying the redundancy payment. However, this may be impacted by a:
- Enterprise agreement
- Modern award
- Employment contract
- Company policy
Frequently asked questions (FAQs)
How long is a redundancy notice period?
You must provide your employee with written notice of the day their job ends. How much notice you give your employee will depend on either the terms of their contractual agreement or terms of employment in accordance with the Fair Work Act.
What is an industry-specific redundancy scheme?
An industry-specific redundancy scheme is where you must provide redundancy payments to your employee. For example, the Building and Construction General On-site Award 2010 contains an industry-specific redundancy scheme that requires small business employers to provide a redundancy payment.
What is payment in lieu of notice?
Payment in lieu of notice is when you choose to pay your employee an amount equal to their wages for the period of notice they are entitled to rather than giving them the required notice.
Redundancy and severance pay often mean the same thing, but there are situations where they will differ.
Due to the similarity and overlapping tendencies of these terms when it comes to termination, you should seek legal advice if you plan on making an employee’s position redundant.
Hire a lawyer today and ensure that you make your employee redundant legally.