Redundancy advice – are you entitled to a severance payment?

Notice and severance are to be distinguished

Notice and severance payments are not to be confused. The period of notice provides the employee with an income while seeking other employment. A severance payment, however, is intended as compensation for inconvenience and hardship and the loss of future entitlements to long service leave and accrued sick leave.

The courts in Australia will imply a term of reasonable notice into a contract of employment where there is no explicit term otherwise dealing with the issue. This, however, is not the case with redundancy. In other words, there is no implied term for a severance payment. This means that, as an executive, you will usually have a limited basis for mounting any claim for a redundancy payment.

Entitlement to a redundancy payment?

A claim for a redundancy payment can only be found in a redundancy policy, contract of employment or provisions of the Fair Work Act 2009. Not every employer has a written redundancy policy, and where such documents exist, each policy needs to be considered on its merits. Some policies offer a generous severance payout that you are unlikely to find anywhere else, while others simply repeat what is set out in the Fair Work Act 2009. Although it was fairly rare in the past, it is now becoming more common for executive contracts of employment to make explicit provision for redundancy and set out the formula to be applied.

However, absent any written redundancy policy or express provision in the contract of employment, the Fair Work Act 2009 sets out a statutory scheme which cannot be contracted out of. That legislation sets out a “steps and stairs” formula based on years of service. An employee with at least 9 years’ service but less than 10 is entitled to receive 16 weeks’ severance. Where there is in excess of 10 years’ service, there is an entitlement to a 12 weeks’ severance payout. The payout drops at the 10-year mark because at that point, long service leave applies.

Even though most executive employees are not covered by any industrial instrument, a severance payout under that legislation still applies where the preconditions are met.

Redundancy payments under Fair Work Act 2009

Section 389 (1 & 2) of the Fair Work Act 2009 sets out 3 criteria for a redundancy to be genuine. Firstly, the employee’s position must no longer be required due to changes in operational requirements. Secondly, there is an obligation to consult – but that only applies if an award/enterprise agreement is applicable to the position. For most middle/senior executives, that would not be the case. Thirdly, the employer must show that there was no basis for redeployment within the company or an associated business.

Note that the traditional understanding of redundancy was that the position was no longer required to be performed by anybody. However, it is now understood that it also extends to a situation where the duties and responsibilities that go to make up the role are split up and redistributed amongst other continuing employees. As indicated above, that is known as “role fragmentation”.

A position/job has been defined as being a “collection of functions, duties and responsibilities entrusted, as part of the scheme of the employer’s organisation, to a particular employee”. If the employee no longer has any duties left to discharge, or functions to perform, then their job is no longer required.

It is clear from the case law that the question is not whether the “duties” have endured the organisational change but whether the position itself has endured. Therefore, if certain aspects of your duties and responsibilities are still being performed by retained executives – or now performed by independent contractors – then you will probably still be entitled to a redundancy payout.

For a middle management executive who is not covered by an industrial instrument, the redundancy payout under the Fair Work Act 2009 may still be highly relevant. While the obligation to consult does not apply where an award/certified agreement does not cover the executive, nevertheless, where termination has occurred for operational requirements and there is no basis for redeployment, then a severance payment should be made.

Wrongful termination or unfair dismissal dressed up as a redundancy

It is not uncommon for an employer to seek to portray the wrongful termination of an executive as a “redundancy”.

However, the employer may seek to characterise the process, the fact remains that the contract is being brought to an end at the initiative of the employer.

Suitable alternative position

Remember, if an employer offers you a Suitable Alternative Position, then it may be let off the hook from making a redundancy payment if you decline to accept it. The “suitability” of any alternative role needs to be assessed against factors such as remuneration, seniority and status.

Irrespective of whether you are entitled to a redundancy payment, you may still have a common law claim for reasonable notice.

Even if it is not a genuine redundancy, if an employer is prepared to treat a termination as if it were, that may be to your benefit. This not only opens up the possibility of a redundancy payment, but also affords you a helpful “exit narrative”. To be made “redundant” carries with it no criticism as to an employee’s performance or conduct.

Watch to see if your employer starts advertising your position

If you have concerns that your employer may be actively seeking to replace you, it would be prudent to keep an eye on online and print advertisements to see if you can identify your position. If this occurs, you may be better off going on the front foot and having a discussion with your manager after taking legal advice.

Address the issues relating to redundancy entitlements at the time of your appointment

You should make no assumptions about whether, upon being made redundant, you will receive any severance payment that goes beyond the provisions of the Fair Work Act 2009. You should take legal advice on that question. Ideally, you should attempt to address this issue of redundancy entitlements at the time of negotiating your employment contract.

Take urgent legal advice if your position is about to be made redundant

If you have no contractual right to a redundancy payment, it becomes even more important to ensure that you do nothing to jeopardise a possible common-law reasonable notice claim. In this regard, you should take urgent legal advice if it seems likely that your contract of employment is about to be terminated.