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13/05/2024

Redundancy: What small business employers need to know

In this article, we discuss the Small Business redundancy exemption and how the Fair Work Legislation Amendment (Closing Loopholes) Act 2023 (Cth) (‘Closing Loopholes legislation’) has closed a notable loophole.

 

Defining what is a small business

A small business employs fewer than 15 people.

  • If you have 14 or fewer employees, you are a small business.
  • If you have 15 or more employees, you are not a small business.

When you are calculating how many employees are in your business, you may need to include:

  • Any employees in subsidiary companies or associated entitles
  • Any casual employees
  • Any fixed term-contract employees

 

What is the small business redundancy exception?

It is necessary for small businesses to understand the exemptions that apply to them under the FW Act. One such exemption relates to redundancy pay, which is part of the National Employment Standards (‘NES’).

If you are a small business and you need to make a position redundant, you may not be required to pay the employee any redundancy pay. However, it is important to note some small businesses may still be obligated to make redundancy payments under their modern award or enterprise agreement, or due to a workplace policy obligation.

When determining whether the redundancy exemption applies, the business must count all employees who are employed at the time of the termination.

 

What was the loophole?

The Closing Loopholes legislation aimed to address medium or large businesses becoming small businesses when they went through liquidation or insolvency. In this scenario, these businesses would have to gradually reduce their workforce through redundancies. Once they reached the threshold of 14 employees or fewer, they would become a small business as per the FW Act definition. As a small business they would now be exempt from paying redundancies to the remaining 14 employees.

 

Scenario 1:

Jane’s Jeans (company) has gone into bankruptcy. They have 30 employees currently on their books. As they are going through bankruptcy, they need to pay redundancy amounts to their employees as they are terminating them.

Employees 30 to 15 receive all their entitlements paid put as well as their redundancy pay as per the national employment standards. Once they have terminated person 15 in their payroll system Jane’s Jeans is now a small business as per the FW Act definition. As a small business they were no longer required to pay redundancies to the 14 employees still working for them.

As of the 15 December 2023 this loophole closed.

 

How has this loophole closed?

Under the Closing Loopholes legislation, any redundancies or downsizing that causes an employer to become a small business will no longer result in employees losing their right to redundancy pay. Under the changes employers who are not initially small business employers but gradually become one due to redundancies or downsizing over a six-month period prior to a bankruptcy or liquidation process cannot access the small business exemption.

 

Scenario 2:

At the time this change came into effect, Jane’s Jeans had 30 employees when the business entered bankruptcy. Where a business with 30 employees is closing due to bankruptcy and staggers redundancies over three months, the fact that they were not a small business in the six months prior to the final redundancies means that Jane’s Jeans will still need to pay the last 14 employees (where eligible) a redundancy amount upon termination. This is because the business’s size is determined by their size six months prior to the termination of employment, not just at the time of termination as a result the business no longer has access to the small business exemption and will still be required to pay redundancies to the final 14 employees.

Image of employer in an office reading information on desktop computer about redundancy

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By Lorna Reid
Workplace Relations Consultant

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