Can you reduce an employee’s redundancy payment?


Reducing a redundancy payment can ease pressure on a business during tough times. But it’s only possible in certain circumstances – and making a mistake could cost you.

As the COVID-19 saga drags on and employers in the Greater Sydney region and elsewhere face protracted lockdowns, job losses seem inevitable; the pandemic still has more pain to inflict on businesses large and small.

For HR professionals, administering redundancies is a balancing act. On the one hand, it’s important to treat departing employees with care and respect. But the needs of the employer must also be considered. In particular, large redundancy payouts can put strain on an organisation when it is already struggling.

In tough times, employers might think that reducing redundancy payments can help them to stay afloat. While this is true, the circumstances in which you can legitimately do so are limited. Also, this won’t be an easy conversation to have with the employee in question. This news will, rightly so, upset them. So it’s important you weigh up the pros and cons before diving in.

Below, solicitor Pooja Kapur from Owen Hodge Lawyers explains the ins and outs of the process.

When is a redundancy payment not necessary?

“Before you look at reducing a redundancy payment, it’s worth checking whether you need to pay it at all,” says Kapur. “You may be surprised to discover that you [sometimes] have no obligation.”

A range of employees do not qualify for redundancy pay, including:

  • Casual employees.
  • Trainees employed under an apprenticeship agreement or similar.
  • Employees who are being terminated/dismissed for breaching a key term of their employment contract, such as engaging in serious misconduct.
  • Staff members employed for less than 12 months.

In addition, certain types of employers are exempt from making redundancy payments: principally, those that the Fair Work Act (FWA) defines as ‘small businesses’. 

“The FWA definition of a small business is one that has less than 15 regular employees, not counting casuals, unless those casuals have been working on a regular and systematic basis,” says Kapur. “You must include the employees who are being terminated in the count.” 

Another exception is if the business has recently changed hands. 

“If a business acquires a new owner and the employees’ service with the former employer is discontinued, but the employees remain in the business under a new employment contract with the new employer, their employment essentially resets and they are not eligible for redundancy pay for 12 months,” says Kapur.   

When can a redundancy payment be reduced?

If an employee does qualify for redundancy pay, the employer may still be able to reduce the amount by making an application to the Fair Work Commission (FWC)  – you can find the application to vary redundancy payment here.

“There are basically two scenarios when reducing the payment is possible,” says Kapur. “If the employer offers other acceptable employment to the employee, or if the employer cannot pay the full amount due to their financial situation.”

Offering the employee a less-skilled or lower-paid job does not qualify as “acceptable” alternative employment, notes Kapur: the FWC must deem the jobs equivalent. 

Employers who argue that they cannot afford to pay the full amount must provide a full explanation and supporting documentation. 

“The pandemic may not, in and of itself, be a justifiable reason, if recent cases are any indication,” says Kapur.

What else should employers consider?

Kapur says the COVID-19 situation has made two relatively unusual redundancy scenarios more common. 

“The first scenario is when employees have signed a variation to their contract. They might have spent years as full-time employees doing shift work but, because of COVID, the business has now limited their hours to nine-to-five, making them ineligible for overtime.”

If an employee is subsequently made redundant, the employer is only obligated to make a redundancy payment based on that employee’s current contract and ordinary hours worked, not the previous arrangement.

The second scenario involves employees whose hours have been reduced but who are still employed. 

“A recent Federal Court decision shows that if an employer has made a unilateral decision to significantly reduce an employee’s hours, essentially putting them in an inferior position, those employees may actually be able to claim redundancy pay, even though they are still technically employed,” says Kapur. 

What if you reduce payments without going through the FWC?

Terminated employees can, and do, challenge employers over the amount of redundancy pay they receive.

“If they believe they are owed less than $20,000 and the payment is owing to them within a period of six years, they can go to Small Claims Court,” says Kapur. “If it’s more than that, they can go to another local court division or perhaps the Federal Circuit Court, depending on the amount being claimed.”

Alternatively, they could report the employer to the Fair Work Ombudsman. 

“That could kick-start an investigation into that business, not just for the redundancy pay but for underpayment of wages across the board.”

She advises employers with aggrieved former employees to attempt mediation, rather than become entangled in a court process. 

“Resolving these things privately, even with the assistance of a lawyer, is almost always cheaper than going to court.”


Need to upskill in employment law matters? AHRI’s short course, Introduction to HR Law, will equip you with the skills you need. Book into the next course on 22 September 2021.


guest
2 Comments
Inline Feedbacks
View all comments
Max Underhill
Max Underhill
1 month ago

The key is to get the base pay correct in the beginning. Great position valuation systems were developed in the 1990’s; these also can be used to value the applicant or incumbent but fell out of use a lot after the economy recovered. This separates the base salary from performance pay (base salary is for performing at target) and any other remuneration element. This will include any negotiated amounts above the true value.

It is a little to late to close the gate after the horse has bolted.

Shannon Louise
Shannon Louise
1 month ago

It’s important to check whether any unusual definition of ‘redundancy’ applies in specific circumstances. For example, under some construction industry Awards, ‘redundancy’ can include resignation (the definition of ‘redundancy in the Plumbing and Fire Sprinkler Award 2020, as recognised by case law, can cover resignation where employment is over 12 months in duration). Similar glitches may exist elsewhere in Enterprise Agreements.

More on HRM

Can you reduce an employee’s redundancy payment?


Reducing a redundancy payment can ease pressure on a business during tough times. But it’s only possible in certain circumstances – and making a mistake could cost you.

As the COVID-19 saga drags on and employers in the Greater Sydney region and elsewhere face protracted lockdowns, job losses seem inevitable; the pandemic still has more pain to inflict on businesses large and small.

For HR professionals, administering redundancies is a balancing act. On the one hand, it’s important to treat departing employees with care and respect. But the needs of the employer must also be considered. In particular, large redundancy payouts can put strain on an organisation when it is already struggling.

In tough times, employers might think that reducing redundancy payments can help them to stay afloat. While this is true, the circumstances in which you can legitimately do so are limited. Also, this won’t be an easy conversation to have with the employee in question. This news will, rightly so, upset them. So it’s important you weigh up the pros and cons before diving in.

Below, solicitor Pooja Kapur from Owen Hodge Lawyers explains the ins and outs of the process.

When is a redundancy payment not necessary?

“Before you look at reducing a redundancy payment, it’s worth checking whether you need to pay it at all,” says Kapur. “You may be surprised to discover that you [sometimes] have no obligation.”

A range of employees do not qualify for redundancy pay, including:

  • Casual employees.
  • Trainees employed under an apprenticeship agreement or similar.
  • Employees who are being terminated/dismissed for breaching a key term of their employment contract, such as engaging in serious misconduct.
  • Staff members employed for less than 12 months.

In addition, certain types of employers are exempt from making redundancy payments: principally, those that the Fair Work Act (FWA) defines as ‘small businesses’. 

“The FWA definition of a small business is one that has less than 15 regular employees, not counting casuals, unless those casuals have been working on a regular and systematic basis,” says Kapur. “You must include the employees who are being terminated in the count.” 

Another exception is if the business has recently changed hands. 

“If a business acquires a new owner and the employees’ service with the former employer is discontinued, but the employees remain in the business under a new employment contract with the new employer, their employment essentially resets and they are not eligible for redundancy pay for 12 months,” says Kapur.   

When can a redundancy payment be reduced?

If an employee does qualify for redundancy pay, the employer may still be able to reduce the amount by making an application to the Fair Work Commission (FWC)  – you can find the application to vary redundancy payment here.

“There are basically two scenarios when reducing the payment is possible,” says Kapur. “If the employer offers other acceptable employment to the employee, or if the employer cannot pay the full amount due to their financial situation.”

Offering the employee a less-skilled or lower-paid job does not qualify as “acceptable” alternative employment, notes Kapur: the FWC must deem the jobs equivalent. 

Employers who argue that they cannot afford to pay the full amount must provide a full explanation and supporting documentation. 

“The pandemic may not, in and of itself, be a justifiable reason, if recent cases are any indication,” says Kapur.

What else should employers consider?

Kapur says the COVID-19 situation has made two relatively unusual redundancy scenarios more common. 

“The first scenario is when employees have signed a variation to their contract. They might have spent years as full-time employees doing shift work but, because of COVID, the business has now limited their hours to nine-to-five, making them ineligible for overtime.”

If an employee is subsequently made redundant, the employer is only obligated to make a redundancy payment based on that employee’s current contract and ordinary hours worked, not the previous arrangement.

The second scenario involves employees whose hours have been reduced but who are still employed. 

“A recent Federal Court decision shows that if an employer has made a unilateral decision to significantly reduce an employee’s hours, essentially putting them in an inferior position, those employees may actually be able to claim redundancy pay, even though they are still technically employed,” says Kapur. 

What if you reduce payments without going through the FWC?

Terminated employees can, and do, challenge employers over the amount of redundancy pay they receive.

“If they believe they are owed less than $20,000 and the payment is owing to them within a period of six years, they can go to Small Claims Court,” says Kapur. “If it’s more than that, they can go to another local court division or perhaps the Federal Circuit Court, depending on the amount being claimed.”

Alternatively, they could report the employer to the Fair Work Ombudsman. 

“That could kick-start an investigation into that business, not just for the redundancy pay but for underpayment of wages across the board.”

She advises employers with aggrieved former employees to attempt mediation, rather than become entangled in a court process. 

“Resolving these things privately, even with the assistance of a lawyer, is almost always cheaper than going to court.”


Need to upskill in employment law matters? AHRI’s short course, Introduction to HR Law, will equip you with the skills you need. Book into the next course on 22 September 2021.


guest
2 Comments
Inline Feedbacks
View all comments
Max Underhill
Max Underhill
1 month ago

The key is to get the base pay correct in the beginning. Great position valuation systems were developed in the 1990’s; these also can be used to value the applicant or incumbent but fell out of use a lot after the economy recovered. This separates the base salary from performance pay (base salary is for performing at target) and any other remuneration element. This will include any negotiated amounts above the true value.

It is a little to late to close the gate after the horse has bolted.

Shannon Louise
Shannon Louise
1 month ago

It’s important to check whether any unusual definition of ‘redundancy’ applies in specific circumstances. For example, under some construction industry Awards, ‘redundancy’ can include resignation (the definition of ‘redundancy in the Plumbing and Fire Sprinkler Award 2020, as recognised by case law, can cover resignation where employment is over 12 months in duration). Similar glitches may exist elsewhere in Enterprise Agreements.

More on HRM