Redundancy payout and payment entitlements

Being made redundant can be an extremely stressful experience. If you are facing redundancy, it’s important to understand what you may be entitled to, how a redundancy payout works and what it could mean for your broader finances, including your super.

Can I get a redundancy payout?

If your job is made redundant, your employer will typically need to make a redundancy payment to you.

However, according to the Fair Work Ombudsman, there are some circumstances where your employer does not need to give a redundancy payout.

For example, if you are a casual worker or have been employed for less than 12 months, you may not be entitled to redundancy pay. Some small businesses also do not have to pay redundancy pay.

As explained by Fair Work, a redundancy occurs when your employer either doesn’t need your job to be done by anyone or becomes insolvent or bankrupt.

For example, this could be the case if the business has closed down or it slows down because of lower sales or production.

How much is a redundancy payout?

Redundancy pay is calculated based on the length of time you have been employed by your employer and your base rate of pay (excluding overtime and other bonuses).

According to Fair Work, the following redundancy pay applies:
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Source: Fair Work Ombudsman

These figures are set out in the National Employment Standards and generally apply to all employees covered by the national workplace relations system.

Your employer should provide you with a redundancy estimate prior to you agreeing to sign the terms of a redundancy.

The redundancy estimate should include details such as:

• The start date of your employment
• Your number of years of service used for redundancy calculations
• Your annual salary
• Any amount that is a payment in lieu of notice per your employment contract
• The redundancy payment amount (also known as severance pay)
• The calculated tax-free portion of the total redundancy payment
• The balance of any outstanding annual leave, long service leave or accrued sick leave (if your employment contract allowed sick leave to accrue).

It is wise to look back at your employment contract to cross-check any entitlements that apply in the event of redundancy.

If you are employed under an Award or Enterprise Agreement, the details of your redundancy entitlements will be included there.

Fair Work has a list of public sector and enterprise awards, or you can check out its longer list of private sector awards.

If you are a member of a union, the member services arm should be able to provide guidance as well.

Can I negotiate a higher redundancy payout?

The statutory requirements of a redundancy – such as annual leave, long service leave, sick leave and conditions that may be linked to an employment award or employment contract – generally cannot be negotiated.

However, do you have a unique knowledge of the company’s intellectual property? Or were you a key person in a client or supplier relationship? These kinds of circumstances may put you in a position to potentially negotiate a gratuity or ‘golden handshake’ which is more generous than a typical redundancy payment.

There is also no harm in making a counter-offer. You might want to seek some advice from your accountant or even an employment lawyer about what you may be able to include in a counter-offer.

Keep in mind, though, that the employer normally holds most of the power in this situation. They are the ones who ultimately decided to offer you a redundancy or make you redundant. However, pointing out to them that you have a key piece of knowledge about the business or hold key business relationships may assist with a second, more generous, redundancy package.

How is a redundancy payment taxed?

Certain redundancy payments may be tax-free up to a limit based on the number of years you have worked for your employer, according to the Australian Taxation Office (ATO)’s website. You may want to consult with an accountant as to what you have been offered.

The ATO offers a helpful summary of how a redundancy payment is generally taxed. To summarise, there are three main categories of redundancy payments:

Genuine redundancy

A genuine redundancy is when your employer has decided that your role is no longer required, the ATO says. In other words, your employer has made the decision to make you redundant.

A genuine redundancy payment is:

• tax-free up to a limit based on your years of service
• concessionally taxed as an employment termination payment (ETP) above your tax-free limit
• taxed at your usual marginal tax rate for any amount above certain caps.

Non-genuine redundancy

A non-genuine redundancy occurs when an employee:

• is dismissed because they have reached ‘normal retirement age’
• is their pension age or older on the day of dismissal
• leaves voluntarily
• has their contract terminated
• is dismissed for disciplinary or inefficiency reasons.

A payment for a non-genuine redundancy is taxed as part of the employee’s ETP, the ATO says. This means it will generally be taxed at a lower rate than their normal income, provided the payment does not exceed certain caps.

Amounts included and excluded from a redundancy

Depending on your employment conditions, a genuine redundancy payment may include:

• payment in lieu of notice
• severance payment of a number of weeks’ pay for each year of service
• a gratuity or ‘golden handshake’.

The following payments are not included in a genuine redundancy payment:

• salary, wages or allowances owing to you for work done or leave already taken for work completed
• lump sum payments of unused annual leave or leave loading paid on termination of employment
• lump sum payments of unused long service leave paid on termination of employment under a formal arrangement
• payments made in lieu of superannuation benefits.

Any payments that meet the conditions of a genuine redundancy are tax free up to a limit based on your years of service with your employer.

The tax-free limit is a fixed dollar amount, plus an amount for each year of completed employment with your employer. Indexation changes the tax-free limit on 1 July each year.

What should I do with my redundancy payment?

1. Prepare for a period of unemployment

When was the last time you completed a household budget? It could be helpful to use a budget tracking tool such as MyProsperity (which we use with our clients at CreationWealth) or Canstar’s free budgeting calculator.

This could help you understand where you spend your money. Once you know this, you can prioritise what costs you may be able to reduce in the short-term while you look for a new job.

Once you have an idea of what your core expenses will be, you can use this as a guide as to how long you can survive without a steady income coming through the door. It can also help to manage stress by giving you some understanding of how many months of living expenses are covered by your redundancy payout and your savings.

2. Consider getting career advice

Many people want to ‘get through’ their redundancy and fast forward to the other side in another job as quickly as possible. However, if you take a moment to stop and reflect, you may realise that role redundancy offers a rare opportunity to really think about what you want the next phase of your life to look like.

You might want to consider getting some career coaching to help you with this. When a client informs me that they are being made redundant, I always ask if their current employer is going to provide some outplacement service or career coaching to help them find a new job.

Employers who are letting their staff go may still pay for this service. If it is not being provided, I encourage my clients to seek their own professional help.

A career coach I often work with shared some interesting statistics with me recently. When his team first engages with a client, 72% of clients assume they are going to race back into the same sort of job in the same or similar industry. After their coaching program, this drops to 35%, with 40% choosing to make a change in role or industry and around one in four making a complete life change.

3. New job? Time for a new financial plan

Once you have a new job, it may be a good time to get a new financial plan. A redundancy payout may help you reduce some debt, make some additional contributions to superannuation, purchase some assets such as shares or put together a deposit to purchase an investment property.

However, it may be best to wait until you have secured a new job before considering these kinds of longer-term financial commitments using the proceeds from your redundancy payout.

Can I get Centrelink if I am made redundant?

If you are in the unfortunate situation of being made redundant, you may become eligible for the JobSeeker Payment.

However, you may have to sit through a waiting period first.

According to Services Australia, an income maintenance period may apply if you have lost your job and your employer has paid you a redundancy payment. How long you have to wait is based on how much redundancy pay you have received.

For example, if you received a 10-week redundancy payment, Services Australia says you may have to wait 10 weeks.

You may be eligible for JobSeeker if you are between 22 and Age Pension age, you reside in Australia and you meet either of the below criteria:

• You are unemployed and are looking for work
• You are temporarily unable to work or study due to an illness or injury.

There are also residency, income and assets tests that need to be satisfied to receive the JobSeeker payment. The details of these means tests change regularly, so it could be worth consulting the Services Australia website to work out how they could apply to you.

If you are making or receiving child support payments, receiving JobSeeker payments may impact your obligations.

What could a redundancy payment mean for my super and insurance?

Any taxable portion of a redundancy payment will be added on top of any income that you have received in that financial year. This may tip you over the next threshold to pay a higher marginal tax rate.

A redundancy may present an opportunity to make an additional concessional (pre-tax) contribution to your superannuation.

Concessional contributions are taxed within your super fund at 15%, according to the ATO. Therefore, it may present a tax saving compared to paying your marginal tax rate on income.

In recent years, law changes mean that you can hold off on deciding to make concessional contributions to superannuation until the last month of a financial year.

It is possible to make a concessional contribution to superannuation from personal cash funds and still claim a deduction. You might want to seek advice from an accountant or financial planner to help you with this.

Check the policy details of any income protection insurance you may have.

Several insurers now provide a benefit that in the event of an involuntary redundancy they will waive your insurance premiums for anywhere between one to three months.

Many people mistakenly believe that income protection covers you in the event of redundancy. It does not.

It protects you if you cannot work due to injury or illness.

That said, some insurers may offer ‘redundancy cover’ or ‘involuntary unemployment cover’ as an optional extra on their income protection policies.

Check with your insurer.

Another mistake some people make is to cancel their income protection insurance after they have been made redundant. Many income protection insurance policies may still cover you for a period of up to 12 or 13 months after a redundancy.

This could mean, for example, that if you are unemployed and are unfortunate to have an injury or illness that prevents you from returning to work, you may still be eligible for an income protection benefit.

It is important to note that each policy and insurer is different. Making a phone call to your financial adviser, insurer, insurance broker or superannuation fund will help to clarify the terms of your existing income protection policy and how it applies to redundancy.

About Andrew Zbik

Andrew Zbik is a senior financial adviser at CreationWealth, based in Sydney. His qualifications include a Bachelor of Business Administration, a Bachelor of Laws and a Diploma of Financial Services. Andrew is also a Registered Tax (Financial) Adviser and has a SMSF Specialist Advisor (SSA) Accreditation.

Main image source: Vera Petrunina/Shutterstock.com.