What’s the Difference Between Redundancy and Severance Pay?
Upon termination employees are often entitled to different forms of compensation. Here we discuss two of them - redundancy and severance pay.
Once you terminate an employee, you need to take into consideration what their final payslip will contain. With this in mind, a lot of 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. This article looks to explain the difference between the two and when they are applicable.
Before we get to this, you may want to also have a read of What is Severance Pay?, which explains what severance pay is.
As mentioned in the above article, severance pay is compensation for early-ended employment contracts. Severance pay 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 on the Fair Work Ombudsman.
Redundancy occurs when the role or job is no longer required by the employer. It’s important to note that a redundancy mu.st be genuine to be legal. This can also happen when a business becomes insolvent or bankrupt. Here are some common situations where redundancy happen
- New technology (automating jobs)
- Moving services overseas
- Lower sales or production
- 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 which tend to overlap, but are technically different.
Ryan works as an executive assistant at a telecommunications company. The company has recently started outsourcing many of their 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.
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, it is important to consult an employment or redundancy lawyer if you plan on making an employee’s position redundant.
Abhinav is a legal intern at Lawpath as part of the content team. Currently in his 3rd year studying a Bachelor of Laws at Macquarie University (Major in Banking, Corporate, Finance & Securities Law). He is keen to learn more about Mergers & Acquisitions in the future.