Do Small Businesses Need To Pay Redundancy? Not Usually

Redundancies are both heart-breaking and legally complex for small business owners. In this article, we outline your legal obligations for redundancy pay, so you can properly manage your business and support your employees.

Small business redundancy

What is redundancy?

As a small business owner, you can’t just dismiss one of your employees and call it a redundancy. In the eyes of the law, a redundancy has a very specific meaning.

A dismissal is only considered a genuine redundancy if:

  • You no longer require a job to be performed by anybody because the operational needs of your business have changed
  • You have complied with any obligation in a modern award or enterprise agreement (if applicable)

There are a few common situations that bring about genuine redundancies, including restructuring your business, implementing new technology that replaces somebody’s job, and downsizing during a downturn in business.

Fair Work Act 2009 Genuine Redundancy

The Fair Work Act 2009 definition of a genuine redundancy

What is not a redundancy?

If you dismiss somebody and it doesn’t meet the criteria above, then it is not a redundancy. This means that a dismissal is not a redundancy if:

  • You still need the job to be done by somebody (e.g. if you hire somebody else to do the job)
  • You could have reasonably given the dismissed employee another job within your business

As a small business owner, you should be very cautious when making employees redundant. If you incorrectly label a dismissal as a redundancy, then the employee can make an unfair dismissal claim with the Fair Work Commission.

Not only will their unfair dismissal claim cost you plenty in legal fees, you might end up having to pay the employee compensation. It can be very painful for all involved!

Man made redundant

You cannot make somebody redundant if somebody else does their job

What is a ‘small business’ when it comes to redundancy?

There is also a very specific legal definition of ‘small business’ in the context of redundancies.

According to the Fair Work Act 2009, a small business employs fewer than 15 people, including any employees that are being made redundant.

There are a couple of clarifications that will help you figure out exactly how many employees you have. You should:

  • Exclude any casual employees, unless they have been employed on a regular or consistent basis
  • Include any employees that are contracted with ‘associated entities’ (e.g. grouped companies)
Fair Work Act 2009 definition of small business

The Fair Work Act 2009 definition of small business

Small businesses do not have to pay redundancy (usually)

If you meet the small business requirements above and the dismissal is a genuine redundancy, then you do not have to pay your employee redundancy pay.

A small business with fewer than 15 employees will usually not have to pay redundancy (unless those employees were hired under a modern award with redundancy pay requirements)

The exception: Modern awards with redundancy pay requirements

A very small number of businesses will have hired employees under a modern award that includes a redundancy pay requirement. These include:

  • Joinery and Building Trades Award 2010
  • Mannequins and Models Award 2010
  • Manufacturing and Associated Industries and Occupations Award 2010
  • Textile, Clothing, Footwear and Associated Industries Award 2010
  • Timber Industry Award 2010

If you have hired an employee under a modern award with a redundancy requirement, you should research the award to understand exactly what your requirements are.

And if you’re unsure whether you’ve hired an employee under a modern award, speak to your lawyer or check out the Fair Work Ombudsman’s redundancy calculator.