We’ve all heard of the industrial revolution, when mankind took that leap forward into machine manufacturing. Looking back we all agree this was a necessary step to advance our civilisation. However at the time it meant businesses had to reduce large parts of their workforce.
In many of these tragic circumstances employees were left without work as their skills were no longer in demand, so the only option was to, at their own cost, change their skill-set to find employment in different areas. These days, there are more protections for workers and opportunities to either be compensated or re-trained in new areas by their employers.
Downsizing is a difficult and stressful time for both employers and employees alike. For employers reducing their employees, there needs to be careful consideration of employment law, employee rights and also morale and productivity within what is left of your workforce. Getting it wrong can be costly for employers and so voluntary redundancy has become a useful strategy to consider when dealing with the messy business of downsizing.
What is Redundancy?
This is when an employer no longer requires an employee to fill their position. Most of us have heard examples of redundancy through innovation and technology changes however redundancy can occur for a number of reasons such as new processes, reduced demand for product, a business closing or simply a business relocating.
Under the National Employment Standards (NES) certain employers are required to offer compensation to employees when their position has become redundant. The amount of redundancy entitlements differ between the different industry awards. The entitlements generally consist of a number of weeks of pay and a number of weeks of notice depending on years of service.
Example: Standard Clerical Roles
If you have worked over 2 years the redundancy pay will be 6 weeks of pay with 2 weeks of notice.
For more information on your specific industry you can search on the Fair Work Australia website.
What is Voluntary Redundancy?
Let’s take a look at what constitutes voluntary redundancy. When a business has excess staff and requires reduction in their labour force (for various reasons), they can approach employees to resign and in return offer a redundancy payment to the employee.
In this way the employee voluntarily accepts the redundancy rather than being forced by their employer. There are a number of up-sides to this because in these situations an employer is more protected from a claim against the employer. In return for accepting the financial payment they sign a legal document that protects the employer from any wrongdoing. There is also less hassle to the employer because they can offer redundancy to workers that may be retiring soon or are less satisfied with their job. This in turn can come across better for morale and helps with the remaining staff relationships.
As most employers know, not all employees are equal in their talent and work ethic. Most employers would be able to immediately identify their key staff and so they need to be careful in offering a blanket voluntary redundancy to all employees. If their key employees leave the business, they may be left in a worse situation than before the redundancy.
Who isn’t entitled to Redundancy?
There are a few categories of workers that Fair Work Australia excludes from being entitled to redundancy. These are employees:
- with less than 12 months service
- on contract for a specific period, task or season
- terminated for serious misconduct
- engaged as casual employees
- as trainees under a trainee agreement and apprentices
- under some Small Businesses
If a small business has less than 15 employees and under section 121 of Fair Work Australia Act 2009, they generally do not have to pay redundancy for their employees. There are a few awards that still require redundancy within a small business so check with Fair Work Australia if considering this as an option.
Genuine Redundancy and Taxes
Up until this point you might be thinking that it is the obvious choice to enact a voluntary redundancy, however when considering voluntary redundancy as an employee, you must also take into account the tax you would pay. It should be noted that if you leave voluntarily your redundancy may not be considered “Genuine”.
Any redundancy article would not be complete without looking at how redundancy works with regards to tax. Under Income Tax we generally will pay tax on wages, however when receiving a redundancy there is the possibility of receiving the payment tax free if it is a genuine redundancy.
A non-genuine redundancy occurs when, as an employee:
- Your dismissal is because you reached retirement age
- You’re at or over aged pension age on the day of dismissal
- You leave voluntarily
- Your leaving on termination of your contract
- Your dismissal is for disciplinary or inefficiency reasons
A non-genuine redundancy is generally taxed at a lower rate than your normal income, however if the redundancy is genuine then the tax free threshold is currently $10,638 + ($5,320 x years of service).
To receive the payment tax free is a considerable benefit and should be considered when thinking of accepting a redundancy.
For more information on genuine redundancy, visit the Australian Taxation Office website.