Most employers are aware that terminating an employee by way of redundancy is an option in some circumstances.  However, many employers are not aware of precisely what those circumstances are, how the Fair Work Act 2009 (Cth) (FW Act) affects redundancy, or of Fair Work Australia decisions on the issue.

When does a redundancy arise?

Essentially, a redundancy occurs where, for operational reasons, the employer no longer wishes to have a particular job performed by anyone.  That is, it is the job itself that is redundant.

A redundancy may occur if a job disappears entirely - for example, as a result of technological change or lack of work.  It may also occur if an employer decides, for operational reasons, to terminate the job and divide the duties of the position up to be performed by people who do (or will) perform other jobs. 

The natural consequence of the redundancy of the job may be the termination of employment of the person who holds the job, as there may be no work for that person to do.  In these circumstances, the employee’s termination will be due to redundancy.

It is always dangerous to attempt to cloak as a redundancy a termination which is in truth occurring for other reasons - for example, poor performance, conduct, or because the employee has an attribute protected by anti-discrimination law.  This may give rise to a variety of legal claims by the employee and to other risks for the employer (for example, tax issues).

How does the FW Act affect redundancy?

Relevantly, the FW Act requires certain payments to be made in a redundancy situation.  It also contains a particular definition of “genuine redundancy” which is relevant for the purposes of unfair dismissal claims.

Payments due in a redundancy situation

The National Employment Standards (NES) prescribed by the FW Act require an employer to make minimum payments in a redundancy situation, as follows:

  • payment of accrued untaken annual leave;
  • payment of notice (1 to 5 weeks, depending upon the employee’s age and length of service); and
  • payment of redundancy pay (up to 16 weeks’ pay, depending upon recognised length of service.  For employees who did not have access to redundancy pay under a law, award, workplace agreement or contract at 31 December 2009, only service from 1 January 2010 will be recognised for this purpose).

If a contract of employment or statutory award or agreement applies which requires payment of higher than minimum FW Act benefits (for example, a greater amount of redundancy pay), this must be complied with.

A payment of long service leave may also be required under State or Territory legislation, depending upon the employee’s length of service.

NES redundancy payments may be able to be withheld in some situations where alternative employment is provided, or at least offered, to an employee.  Whether or not this also applies in the case of payments derived from a source other than the NES (eg, a contract or a workplace agreement) will depend upon the terms of that source.

Some redundancy payments may be subject to beneficial tax treatment.

“Genuine redundancy” and unfair dismissal

A significant proportion of Australian employees is now able to make an unfair dismissal claim under the FW Act.

If a claim is brought following a termination by way of redundancy, one defence an employer may rely upon in is that the termination was one of “genuine redundancy”.  However, an employer can only rely on that defence if the redundancy meets the test set down in section 389 of the FW Act.  Section 389 states that for a redundancy to be genuine, the employer must:

  • for operational reasons, no longer require the employee’s job to be performed by anyone;
  • have complied with any statutory award or agreement obligation to consult with the employee about the redundancy.  It is important to ensure compliance with the precise consultation obligation set down in the relevant instrument; and
  • where it was reasonable in the circumstances, have redeployed the employee within the employer’s enterprise, or the enterprise of an associated entity (such as a related company).

Importantly, in Ulan Coal v Honeysett & Ors [2010] FWAFB 7578, a Full Bench of Fair Work Australia made the following comments in relation to the redeployment obligation under section 389:

  • the question of whether redeployment would have been reasonable is to be applied at the time of the dismissal.  A number of matters are relevant in this regard, including  the nature of any available position, the qualifications required to perform the job, the employee’s skills, qualifications and experience, the location of the job in relation to the employee’s residence and the remuneration which is offered;
  • the degree of “managerial integration” between an employer and its associated entity is likely to be relevant in determining whether it would be reasonable to redeploy redundant employees to an associated entity; and
  • on the issue of redeployment, if a suitable vacancy exists (with the employer or an associated entity), it is likely to be found reasonable for the employer to automatically redeploy the redundant employee to that vacancy. It is unlikely that it will be sufficient for an employer to simply advise employees of other vacancies in the business of the employer or an associated entity, then leave employees to compete with other external applicants for those vacancies.   

Other issues

There are several decisions of courts and the former Australian Industrial Relations Commission, which provide guidance on a range of other issues relevant in redundancy situations. 

In particular, there are cases considering when selection criteria for redundancy may be discriminatory or unfair and thus impugn the selection process and the termination.  Selection criteria are especially important when selecting employees for redundancy from a pool of potentially redundant employees.  For example, due to lack of work an employer may need to reduce the total number of machine operators in its business.  It may, however, continue to require some machine operators to remain in employment.  The employer will need to formulate selection criteria to choose which machine operators will remain, and which will be made redundant, with care.

What steps should you take before making employees redundant?

When contemplating making an employee redundant, we recommend you consider the following:

  • Whether the termination is truly a redundancy - that is, is it motivated by operational requirements or something else?  What risks may exist in this regard?
  • Your obligations under industrial instruments, legislation and/or employment contracts.  In particular, what must you do to meet your consultation obligation?  Court and tribunal decisions suggest it may be advisable to engage in some consultation even if there is no obligation under an industrial instrument to do so.  There may also be other obligations you have to consider, such as an obligation under a workplace agreement to first offer voluntary redundancies.
  • What are your obligations in relation to redundancy payments?  Have you considered all potential sources of obligations and tax issues?
  • Whether you can reasonably redeploy an employee in your own business or that of an associated entity.  You may be at risk of a finding that you have acted unreasonably if, at the time of dismissal, a suitable position is available and you fail to automatically redeploy a redundant employee into that position.  In this regard, case law suggests that although there is no obligation to create a position that would not otherwise exist, you should offer a redundant employee any potentially suitable position that is available, even if you do not think (for whatever reason) that the employee is likely to accept it.  For example, in the recent matter of Iryna Margolina v Jenny Craig Weight Loss Centres Pty Ltd [2011] FWA 5215, Commissioner Ryan of FWA criticised the employer for simply assuming the employee would not accept a lower paying position rather than offering the employee that option.
  • What criteria you will apply when selecting employees from a pool to be made redundant or redeployed.  Could the criteria be construed as unfair or discriminatory?  

As all cases turn on their facts, other considerations may be relevant in a particular instance.  We recommend you seek specific advice.