Bona fide redundancy in Australia and your obligations as an employer

When a restructure removes a role, the dismissal is only safe if it meets the genuine redundancy test in s 389 of the Fair Work Act 2009 (Cth). Get it wrong and the former employee can challenge the dismissal in the Fair Work Commission (FWC), and you may face an order for compensation or reinstatement on top of the disruption and cost of the dispute itself.

This guide sets out what the law requires of you when you make a position redundant: proving the operational change is real, consulting properly, considering redeployment, and paying the correct entitlements. It also covers the thresholds that change the rules, such as the 15-employee small business test, and where a lawyer should be involved.

Who the redundancy obligations apply to

The Fair Work Act binds national system employers, which covers most incorporated businesses, partnerships and sole traders with employees. The obligations apply whenever you dismiss an employee because their job is no longer needed, but the detail shifts depending on the size of the business and the employee's circumstances:

• Small business employers: under s 23 of the Fair Work Act, a small business employer is one that employs fewer than 15 employees. Regular casual employees are counted, and associated entities are counted together as one employer.
• Unfair dismissal protection: an employee is only protected from unfair dismissal after completing the minimum employment period, which is 6 months for most employers but 12 months for small business employers (ss 382 and 383). Employees earning above the high income threshold who are not covered by an award or enterprise agreement are also outside the unfair dismissal system.
• Redundancy pay: the NES redundancy pay scheme requires at least 12 months of continuous service (s 121), and small business employers are generally exempt from paying it.
• Casuals and limited-term engagements: periods of casual service generally do not count toward notice or redundancy pay entitlements (ss 117(4) and 119(3)), and the redundancy pay scheme does not apply to employees engaged for a specified period, task or season, or under certain training arrangements (s 123).

The threshold that most often catches businesses by surprise is the headcount. Because associated entities are treated as one employer, a company that believes it is a small business may not be once its sister companies or subsidiaries are counted. That mistake converts an exempt redundancy into one where the full NES redundancy pay obligation applies.

Duty one: prove the operational change is real

Under s 389(1)(a), the dismissal is only a genuine redundancy if the employer no longer requires the job to be performed by anyone, because of changes in the operational requirements of the enterprise. Common examples are a restructure, the closure of a site, new technology that automates the work, outsourcing a function, or consolidating two roles into one.

The test focuses on the job, not the person. If the work still needs to be done and someone else will do it, the dismissal is not a redundancy, and using redundancy to sidestep a performance problem will fail. This is also why the business case matters: keep the budgets, forecasts, board or owner decisions, and before-and-after organisation charts that show what changed and why. If the decision is later questioned, the FWC will look at whether the operational change was real and whether the role genuinely disappeared.

Duty two: consult in the way your award or agreement requires

Under s 389(1)(b), you must comply with any consultation obligations in a modern award or enterprise agreement that applies to the employee. Most modern awards contain a consultation clause covering major workplace change, and these clauses typically require you to notify affected employees of the proposed change, provide relevant information in writing, and give them a genuine opportunity to respond before decisions are finalised.

The Fair Work Act itself does not prescribe a minimum number of consultation days. Your award or agreement does, and it is the instrument you must follow. The practical test is whether employees had a real chance to raise concerns, suggest alternatives, and have those suggestions genuinely considered, including measures to mitigate the effects of the change. Skipping or rushing this step can make the redundancy not genuine even when the operational reasons are sound. Where a large number of employees are affected at once, separate notification obligations can also apply, so it is worth checking the position early in the process.

Duty three: consider redeployment

Under s 389(2), a dismissal is not a genuine redundancy if it would have been reasonable in all the circumstances to redeploy the employee within your enterprise or the enterprise of an associated entity. This is the limb that most often defeats an otherwise defensible redundancy.

The search must cover the whole group, not just the employee's immediate team or office. Suitability of an alternative role is judged case by case: the employee's skills and qualifications, seniority and pay, location, and whether reasonable retraining would make the role viable. Document what you searched, who you spoke to, and why each vacancy was or was not suitable. The question the FWC ultimately asks is whether redeployment was reasonable in all the circumstances, not merely whether you offered a role.

What happens if the redundancy is not genuine

If the dismissal does not meet the genuine redundancy test, the employee can apply to the FWC for unfair dismissal, and an application generally must be lodged within 21 days of the dismissal taking effect. The FWC then assesses the dismissal against the criteria in s 387: whether there was a valid reason, whether the employee was notified of it and given a chance to respond, whether a support person was allowed at discussions, and the size and resources of the business.

The remedies available are reinstatement or compensation, which is capped at six months' pay or the high income threshold amount, whichever is lower. Separate risks sit alongside the unfair dismissal claim. If you fail to pay notice or redundancy pay you can be ordered to pay the amounts, and contravening the National Employment Standards can attract civil penalties. A redundancy that is genuine under s 389 can still be attacked as adverse action if a prohibited reason, such as a discriminatory one, motivated the decision, so selection criteria must never rest on protected attributes like age, disability or pregnancy.

What you must pay when the redundancy proceeds

If the redundancy is genuine and you proceed, the payment obligations are set by the NES, any applicable award or enterprise agreement, and the contract of employment.

• Notice of termination: under s 117, the minimum notice period is 1 week for up to 1 year of service, 2 weeks for 1 to 3 years, 3 weeks for 3 to 5 years, and 4 weeks for more than 5 years. Employees over 45 with at least 2 years of service get an extra week. You can pay in lieu of notice instead of requiring the employee to work it out.
• Redundancy pay: under s 119, the NES scale at the employee's base rate of pay for ordinary hours is:
  • 1 to 2 years of service: 4 weeks
  • 2 to 3 years: 6 weeks
  • 3 to 4 years: 7 weeks
  • 4 to 5 years: 8 weeks
  • 5 to 6 years: 10 weeks
  • 6 to 7 years: 11 weeks
  • 7 to 8 years: 13 weeks
  • 8 to 9 years: 14 weeks
  • 9 to 10 years: 16 weeks
  • 10 or more years: 12 weeks

Redundancy pay is not payable where the employee has less than 12 months of continuous service or the employer is a small business (s 121), and the scheme does not cover casuals, employees engaged for a specified period, task or season, apprentices, or dismissals for serious misconduct (s 123). The FWC can also reduce the amount, including to nil, where you obtain other acceptable employment for the employee or genuinely cannot pay (s 120). Awards and agreements can provide more generous arrangements, so always check the instrument.

• Annual leave: accrued but untaken annual leave, and any leave loading the award or agreement requires, is paid out when employment ends.
• Long service leave: payment on termination is governed by the long service leave legislation of the state or territory where the employee works, and depends on the employee's service history. Check the applicable rules before calculating.
• Personal leave: unused sick leave is not paid out under the NES.
• Superannuation: as a general rule, superannuation is not payable on redundancy pay itself because it is not ordinary time earnings, but it is payable on notice worked and on leave paid out. Confirm the treatment with your payroll provider.
• Tax: a genuine redundancy payment is tax-free up to a limit that is indexed on 1 July each year. In 2023-24 the limit was $11,985 plus $5,994 per completed year of service, and the tax-free treatment requires the employee to be under age pension age (ATO). Amounts above the limit are treated as employment termination payments and taxed at concessional rates, so it is worth running the numbers before finalising a package.

A compliance checklist for a defensible redundancy

Work through these steps in the order shown before any dismissal is finalised, and keep a written record of each step as you complete it:

• Confirm the headcount: count all employees, including regular casuals and associated entities, to establish whether the 15-employee small business threshold applies (s 23).
• Check the instruments: review the modern award and any enterprise agreement for consultation, selection, and redundancy pay provisions.
• Build and keep the business case: budgets, forecasts, decisions, and before-and-after organisation charts.
• Consult in writing: notify affected employees, provide information, allow genuine time for feedback, and record the responses.
• Apply objective selection criteria: where roles are compared, use business-related criteria, apply them consistently, and keep assessment notes.
• Search for redeployment: look across the business and associated entities, consider retraining, and document why each option was unsuitable.
• Calculate entitlements: notice, redundancy pay, annual leave, long service leave, superannuation and tax for each employee.
• Document the termination: written notice or payment in lieu, a termination letter setting out the reason and final entitlements, and prompt payment of what is owed.

Where a lawyer should be involved

A lawyer adds the most value before the announcement, not after the claim lands. Before you communicate anything, a practitioner can assess whether the dismissal is likely to meet s 389, check the award or agreement for consultation and selection requirements, review the redeployment search, and pressure-test selection criteria for discrimination risk. They can also draft the consultation and termination letters and check the entitlement calculations, including the tax treatment of the redundancy payment.

If an unfair dismissal or general protections application is lodged, a lawyer can prepare the response for the FWC, assess the strength of the genuine redundancy defence, and negotiate a resolution if that is the better commercial outcome.

The redeployment duty is where most redundancies fail

Of the three limbs in s 389, redeployment is the one most often missed. Operational change and consultation can be handled well, and the redundancy will still fail if it was reasonable to redeploy the employee within the business or an associated entity. The related trap is the headcount: because associated entities are counted together under s 23(3), a business that assumes it is exempt from redundancy pay may discover otherwise after the dismissal, when it is too late to fix.

The first action this week, before announcing anything, is to run the redeployment search and document it, and to confirm whether your group really employs fewer than 15 people. Those two checks are cheap to do now and expensive to skip.