Redundancy is an area that no one likes to think about, let alone manage. However, learning how to carry out a lawful redundancy process will not only protect against potential legal claims – and there are several possibilities including unfair dismissal, adverse action, breach of an award or unlawful discrimination - but will also allow things to run more smoothly for all involved.
In this article, we look at the key aspects to conducting a redundancy process (including tax considerations).
What is a genuine redundancy?
The starting point is to determine whether or not the situation is a genuine redundancy. Employers can easily fall into the trap of using the term ‘redundancy dismissal’ when what they really mean is that they want to dismiss someone for poor performance or conduct reasons. It is important to ensure that any dismissal is properly categorised. ‘Dressing up’ a dismissal as something it is not will invariably lead to trouble.
Pursuant to section 385 of the Fair Work Act 2009 (FWA) a person’s dismissal will not be considered unfair where the dismissal was a case of genuine redundancy.
Section 389 of the FWA provides that a dismissal is a case of genuine redundancy when:
- the employer no longer requires the person’s job to be performed by anyone because of changes in the operational requirements of the enterprise; and
- the employer has complied with any obligation imposed by an applicable modern award or enterprise agreement to consult about the redundancy.
A dismissal will not be a genuine redundancy if it would have been reasonable in the circumstances to redeploy the affected employee.
It is therefore necessary to determine at the outset of a redundancy process that the job(s) which are to be made redundant are no longer required due to changes in operational requirements of the business.
This can sometimes be a difficult and challenging analysis to undertake, particularly when certain aspects of a job will still be required to be carried out but the role, as a whole, is no longer required. If in doubt as to whether a genuine redundancy situation exists, it is always best to speak to your legal advisors.
The technical obligation to consult with affected employees is, strictly speaking, limited to situations where consultation about workplace change is required by an applicable modern award or enterprise agreement. You can find further information regarding modern awards and enterprise agreements here.
Failure to comply with the consultation provisions of an applicable award or enterprise agreement can lead to prosecution – by an affected employee, their union or the Fair Work Ombudsman – for substantial civil penalties (plus compensation and whether or not an unfair dismissal or some other type of claim is also made!).
If no modern award or enterprise agreement applies, then there is no strict requirement to consult. Often, employers will choose to consult despite there being no requirement to do so. From an employee relations perspective, that is often encouraged. Further, consultation can assist an employer to establish a ‘genuine redundancy’ under section 389 of the FWA, in establishing that redeployment was not a reasonably available alternative to dismissal in all of the circumstances.
Consultation is an important part of a redundancy process and should be meaningful, not perfunctory. At its most basic, consultation should involve providing information, in writing, to the affected employee/s and any representatives:
- explaining the issues which have made the relevant changes necessary;
- setting out whether all feasible alternatives to the changes have been considered. Where redundancies are involved, this should include a discussion of possibilities for redeployment;
- provide a rough framework for the proposed changes, including their objectives and expected effects of the changes on the employee/s;
- asking for input and listening carefully to the response;
- making any necessary decisions, taking on board the input provided by affected employees and their representatives (if any); and
- implementing the decision/s and keeping an open mind about new ideas.
A person’s dismissal will not be a case of genuine redundancy if it would have been reasonable in all the circumstances to redeploy the person within the enterprise of the employer or any associated entity. Whether or not redeployment would be reasonable will depend on a number of factors including the alternative employment available and whether the redundant employee has the suitable skills and qualifications to undertake any available role.
The extent to which redeployment should feature in the consultation process will depend on a range of factors, including the scale of the employer’s businesses. In larger businesses it may be necessary to conduct enquiries across business units and geographical territories in order to identify available positions. If new positions are a prospect, it may be necessary to develop a position description for them for the purposes of the consultation process.
All available positions should feature in discussions about the prospects for redeployment. The process could be defective, even unreasonable, if, for example, a low level position was available but was not discussed with the affected individual – previously employed in a higher level position – as a redeployment opportunity.
Most employers will use their best endeavours to structure termination payments to departing employees as genuine redundancy payments. For tax purposes, the outcome for the employee is that all or part of the payment will be tax‑free. However, there are a number of requirements in the tax law that must be satisfied for the payment to receive this advantageous treatment. Many of these requirements are within the employer’s control and in other cases, this treatment is simply unavailable. The key risk is that an employer will treat a termination payment as being tax‑free for the employee and accordingly not withhold from the payment under the PAYG withholding regime. The penalties for an employer failing to withhold an amount from a termination payment as required by law include a liability to pay to the Commissioner of Taxation a penalty equal to that amount. This can be a significant amount, particularly where the employer has failed to withhold from termination payments made to a number of departing employees. Needless to say, it is always best to discuss the tax treatment of termination payments with your legal advisor.
Key takeaway point for employers
When carrying out redundancies, we always advise that you seek legal advice. The redundancy provisions found in the Fair Work Act appear to be relatively straight‑forward, but in practice there are often nuances that can quickly change the process from straight‑forward to complex.
At the very least, take into account the three step process:
- A redundancy arises where the employer no longer requires the person’s job to be performed by anyone because of changes in the operational requirements of the employer’s enterprise;
- ensure compliance with any obligation imposed by an applicable modern award or enterprise agreement to consult about the redundancy; and
- consider redeployment- a person’s dismissal will not be for a case of genuine redundancy if it would have been reasonable in all the circumstances to redeploy the person.