Legal

How to be legal, and ethical, when overseeing a redundancy

David Sharrock /

When it comes to making an employee redundant, there are lots of traps.

For the employer, whenever redundancy is considered, it pays to be very careful indeed about proper reason, good process and appropriate payment.

Proper reason

When considering making an employee redundant, an employer should determine that the position itself no longer needs to be filled by anyone (or the employer has become bankrupt or insolvent, compelling redundancies).

Commonly in the former instance, redundancy arises with new technology, a downturn in business, the closure of a business, relocation of premises, or with restructure or organisational changes from a sale of business, merger or takeover. These are the usual triggers for a genuine redundancy.

With a genuine redundancy, an employer can distribute the work differently by having a smaller number of team members take over the work of the employee who is to be made redundant. Contracting the work out to an independent contractor or upgrading the role to require qualifications, albeit, with similar duties, both involve a genuine redundancy.

Naturally, it all depends on the circumstances. But there must be an actual commercial reason for the position to no longer be required.

If a purported redundancy is not based on these sorts of triggers and in these sort of circumstances, then there are real risks for an employer.

A concocted reason to be rid of an unwanted employee or to avoid a claim for unfair dismissal or unlawful termination of employment is always risky. 

Good process

However, notwithstanding good reason for a redundancy, an employer might fail to adopt good and essential process, such as complying with consultation obligations and exploring reasonable redeployment opportunities.

Consultation by an employer is essential to afford due process to the employee and may also be required by an employment contract, award or enterprise agreement. 

Commonly, there is a requirement upon the employer to speak to or meet with an employee to advise the circumstances surrounding the redundancy decision. Input and feedback should be sought on ways to minimise the effect of the redundancy on the employee and to give consideration to what an employee is saying. Outplacement counselling might be offered. 

An employer is obliged to consider reasonable redeployment possibilities for the employee within the enterprise.  This obligation might extend to other positions, perhaps either in other departments or in an associated employer entity.  Questions of reasonableness and commerciality arise, with appropriate explanations being given to the employee about the nature of any other positions, necessary qualifications, the employee’s skills, qualifications and experience, location, and remuneration.

Good process includes retaining supporting documents relevant to the redundancy, the keeping of notes about conversations during the consultation process, detail concerning reasonable redeployment opportunities, and the reasons why a particular employee has been selected over other employees.

An appropriate letter to the employee should then include such full particulars and advise termination of employment based on redundancy.

During this process, care, concern and respect for the employee are important.

Appropriate payment

Whenever employment has been terminated on the basis of redundancy, a redundancy payment must be made, unless the employee is casual, or has been continuously  employed for less than 12 months, or is employed on a fixed-term or project-based contract (where there is no reasonable expectation of an extension or where it is customary for employment to end upon project completion), or unless the employer is a small business employer having fewer than 15 employees (noting that some modern awards might require a small business employer to pay redundancy pay regardless). 

Furthermore, redundancy pay is not required where the business is sold or transferred with the employee accepting employment with that new business owner and having their previous period of service with the original employer recognised.

If a business is sold or transferred and the employee refuses to accept employment with the new business owner, upon substantially the same terms of employment as provided by the original employer, then the employee cannot demand a redundancy payment in the absence of application being made to the Fair Work Commission. 

An employer can apply to the commission for relief if there is a claim for redundancy which is unaffordable or lacks merit because a suitable alternative position was found for the employee.

The amount of redundancy pay is calculated with reference to an employee’s period of continuous service at minimum levels set out in the Fair Work Act.  Employment contracts, awards and enterprise agreements may have more generous redundancy provisions.

Proper reason, good process and appropriate payment will ensure legal compliance and protection for an employer against a claim for unfair dismissal or unlawful termination of employment. 

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice.

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David Sharrock

David is the managing principal of Sharrock Pitman Legal, a Melbourne-based, boutique commercial law practice. He is an accredited business law specialist, an accredited mediator, a public speaker, and the author of Fighting for Enterprise Success: Through the Eye of the Tiger.