Managing Reduncancy and Retrenchment

Redundancy is initiated when the employer decides a particular position an employee holds, through no fault of the employee, is no longer needed or required to be filled by anyone, or where job tasks can be reallocated to other staff members. Essentially, the position an employee filled ceases to exist (or becomes redundant), rather than the employee becomes redundant. Further, the termination of an employee whose position has been made redundant is called retrenchment.

Redundancies should be genuine, conducted fairly and not used as a strategy to terminate poor performing staff.

Employers are faced with a number of legal considerations and employment obligations when deciding to retrench employees. Therefore, before retrenching any employee an employer should conduct a review of all employees’ awards/agreements/contracts to determine what obligations need to be complied with before proceeding with a redundancy. The checklist included provides a guide to assist you here.

Genuine redundancy
Both the Fair Work Act 2009 and the Minimum Conditions of Employment Act 1993 (the Acts) requires that a redundancy must be ‘genuine’ otherwise the retrenched employee can make an unfair dismissal claim. Genuine redundancy can be initiated by changes in the operational requirements of a business including;
  • A machine or technology replaces the job performed by an employee.
  • A downturn in the business, or in the economy generally the affecting the operational requirements.
  • Overstaffing – e.g. where the employer only needs three people to do a particular task or duty instead of five.
  • The employer restructures their business to improve efficiency.
  • Outsourcing particular tasks.
  • Relocation or sale of business.
  • No requirement for a permanent role as the role is now required on an ad-hoc basis (or vice-versa).
A ‘genuine redundancy’ will prevent an employee challenging the employer’s redundancy selection criteria as unjust and reduce the risk of an unfair dismissal claim. Despite being protected from unfair dismissal claims, employers should be aware that an employee who cannot access unfair dismissal remedies may access other general protection or legal claims protecting them from unlawful termination.

Consultation and notification obligations
Prior to implementing retrenchments, employers have an obligation to consult with the affected employee/s in accordance with the Acts including their relevant award or registered agreement. All awards and registered agreements have a consultation process for when there are major changes to the workplace, such as redundancies. Consultation is part of ensuring there is procedural fairness throughout the process.

The consultation process should be done as soon as possible after the decision has been made to make positions redundant and includes:
  • Notifying the employee/s who may be affected by the proposed change/s.
  • Providing the employee/s with information about these changes and their expected effects.
  • Discussing steps taken to avoid and minimise negative effects on the employee/s.
  • Considering employees ideas or suggestions about the changes.
Once a decision has been finalised on which position/s will be made redundant a meeting should be held individually with each employee whose position is being made redundant.

A retrenched employee must be given the minimum period of notice based on their years of continuous service in accordance with the notice provisions specified in the Acts and relevant industrial instruments.
Failure to comply with the consultation and notification requirements may expose an employer to a breach of the employee’s relevant award/agreement or an unfair dismissal claim.

A genuine redundancy involves an employer reasonably trying to redeploy the employee elsewhere in the business or in an associated entity. Although redeployment is not defined under the Acts it can be broadly defined as transferring the employee to another job within the business or associated entity that is equal to their previous position. An employer looking at demoting or transferring the employee to a less favourable position risks exposure to unfair dismissal or the genuineness of the redundancy may be questioned, unless the employee agrees to accept such a position (Award entitlements may apply where an employee is transferring to lower paid duties).  An employee may challenge a genuine redundancy with an unfair dismissal claim if they could reasonably have been redeployed within the business, or in an associated entity.

The impact on selecting employees to be retrenched can impinge on anti-discrimination obligations. In all retrenchment situations, an employer should keep evidence that proves selection processes and redundancies were not based on a prohibited discriminatory ground that breached anti-discrimination laws. There is an obligation to treat all employees fairly and not to unlawfully discriminate against them. Furthermore, choosing fair selection criteria and processes can avoid unlawful termination and general protection claims.

Selection criteria
There are a number of options an employer can nominate to assist them to decide which employee/s need/s to be retrenched, all of which have their advantages and disadvantages. Some of which may include;
  • “Last on, first off” basis – those recently employed are the first to be retrenched. Although common, the “last on, first off” option does not consider well performing new employees.  In regards to a first on, first off basis, retrenching long standing employees may remove a level of experience from a business or may expose employers to age discrimination. However, this option can also provide an opportunity to introduce new skills into the business.
  • “Voluntary” – allows employees to choose to leave the business instead of being selected. Employers can choose to offer more generous severance payments for employees who volunteer for redundancy. Employers must however take care to control the number of employees who take up this offer, otherwise mass redundancies can lead to a shortage of skills, loss of productivity and business viability.
  • “Performance based” – those with the poorest performance are retrenched. This option can be helpful in “house-cleaning” underperforming staff but raises issues if a formal performance management system is not in place, if performance reviews are not conducted in a procedurally fair manner, or if the retrenched employee was unaware of their poor performance. Employers should be cautious making poor performing employees redundant especially where their performance is being managed as it could be seen to be unfair and a punishment to them.
  • “Promotability” – those employees with the least prospects are retrenched. Unlike performance based retrenchments, issues arise if the selection process was unfair or subjective, especially considering employees skills and human resource forecasting. Caution is needed around unlawful discriminative factors such as age, gender, caring responsibilities, religious belief etc.
Redundancy (severance) Pay

In the case of genuine redundancy, an employee may be entitled to redundancy pay under the Acts according to their years of service. The Acts provide minimum entitlements for notice of termination and redundancy pay and will override the terms of an employee’s relevant award, registered agreement or contract if the notice and redundancy pay entitlements are less than stated in the Acts.
Note: there are some awards that will provide employees with extra entitlements to severance pay.
Some exclusions may apply where redundancy pay is not required to be paid by the employer, for example by some small businesses and to casual employees. It is recommended to contact the HR Help Desk Service for further information on redundancy and severance payments.

Legal risks
Redundancy exposes a business to legal risk where an employee can challenge the redundancy decision and take action in the following areas:
• Unfair dismissal claim.
• Adverse action or discrimination claim
• Breach of contract or company policies
• Breach of award or enterprise agreement
• Misrepresentation claim
• Workers compensation claim
• Work, health and safety prosecution for stress related injuries
• Tax offences and penalties

Common mistakes
Redundancies should be carefully considered:
• Try and have a solid business case, analysis and evidence supporting your redundancy decisions.
• Do not use redundancy to get rid of an underperforming employee.
• Try and consider all redeployment options.
• Do not select employees to be retrenched based on unlawful discriminatory reasons, or because they are exercising a workplace right.
• Always consult employees who will be affected by redundancies, even if they are on authorised leave (e.g. maternity leave, annual leave) or where possible, wait until they return to work from leave.
• Consider offering counselling and other activities to support employees and minimise the effect of redundancy e.g. outplacement services.
• Always consider the impact of redundancy on remaining employees.
• Always consider the impact of negative publicity.

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This document does not constitute human resource or legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should contact the HR Help Desk or seek professional advice before acting or relying on any of the content. © Wentworth Advantage Pty Ltd 2017