Terminating an individual from their job is never easy, from the perspective of both the employee and employer.
For most people, their job is their primary source of income, and it can be hard to manage when this disappears.
This is where redundancy and severance pay comes in. As an employer, this type of payment is made once you terminate your employee’s contractual agreement.
Although they might sound the same, there are differences between redundancy and severance pay that you should know.
In our post, we’ll explain what redundancy and severance pay are and how they’re different.
The termination of an employment agreement is when you no longer require your employee to work. The term ‘termination’ and ‘dismissal’ are often used interchangeably in the Australian workplace and by the Fair Work Commission .
Suppose you do choose to terminate your employee. In that case, it must be a ‘genuine redundancy’, which is making an employee redundant for a valid reason, or it will be considered an unfair dismissal claim.
Therefore, you must have a proper reason for termination of employment. Some common examples of valid termination include:
Once you terminate an employee , you need to consider what their final payslip will contain. With this in mind, many 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.
Severance payment 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 by the Fair Work Ombudsman.
Redundancy occurs when the role or job is no longer required by the employer. It’s important to note that 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:
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 tend to overlap but are technically different. If you still don’t understand the difference, here is an example.
Ryan works as an executive assistant at a telecommunications company. The company has recently started outsourcing many of its 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.
The amount of severance payment and amount of redundancy that you offer your employee will be entitled to upon their notice of termination will depend on:
Once you figure out the information above, the Fair Work Ombudsman’s table of severance pay outlines the years of continuous service and the corresponding redundancy pay under the National Employment Standards (NES).
Here is what you need to know:
Based on the table above, you should pay the above amount depending on your employee’s pay rate for their hours worked. Furthermore, that amount should not include things like:
However, when calculating your employee’s severance and redundancy payment, redundant employees are also entitled to:
Redundancy for certain types of employee classes doesn’t carry severance pay. The list of non-applicable classes are:
You must provide your employee with written notice of the day their job ends. How much notice you give your employee will depend on either the terms of their contractual agreement or terms of employment in accordance with the Fair Work Act.
An industry-specific redundancy scheme is where you must provide redundancy payments to your employee. For example, the Building and Construction General On-site Award 2010 contains an industry-specific redundancy scheme that requires small business employers to provide a redundancy payment.
Payment in lieu of notice is when you choose to pay your employee an amount equal to their wages for the period of notice they are entitled to rather than giving them the required notice.
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, you should seek legal advice if you plan on making an employee’s position redundant.
Hire a lawyer today and ensure that you make your employee redundant legally.
