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.
Being terminated from your job is never easy. For most people, their job is their main source of income and it can be hard to manage when this disappears. This is where redundancy and severance pay come in. These types of payments are made by employers to employees after termination. In this article, we’ll explain what redundancy and severance pay are and how they’re different.
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.
Before we get to this, you may want to also have a read of What is Severance Pay?, which explains what severance pay is.
Severance pay 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 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 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 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.