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Redundancy is a part of working life in many Australian businesses. It can happen when a company changes direction, cuts costs or restructures. One option often offered is voluntary redundancy, where an employee chooses to leave in return for a payout. This guide explains what it means, how it works and what employers need to know.[ez-toc]
Voluntary redundancy happens when an employer offers a payout for an employee to leave their role. The employee chooses whether to accept. It often takes place during restructures or cost cuts. This option can suit both sides and may lead to new jobs, study or retirement. Tax rules depend on how the payout is classified.
Voluntary redundancy occurs when an employer asks staff to leave their job in return for a financial package. The employee can choose to accept or reject the offer. It is not the same as being forced out of a job.This type of redundancy is often used during business changes. These might include downsizing, mergers or shifts in company direction. Employers offer this option to reduce staff numbers without forcing terminations.
It’s important to understand how voluntary redundancy is different from involuntary redundancy.
Both are legal types of termination of employment but follow different paths. Voluntary redundancy usually involves consultation and mutual agreement.
Employers use this option for several reasons:
This approach can also help employers comply with legal rules and the Fair Work Act 2009.
Employees might accept a redundancy for reasons like:
However, the decision depends on personal goals, financial needs and the job market.
Employer's viewEmployee's viewReduce costs and restructure teamsSecure payout and explore new optionsLower legal risk through voluntary exitsLeave on their own termsManage workforce changes smoothlyPlan for career change or retirementComply with obligations and avoid unfair dismissalGain compensation for years of serviceVoluntary redundancy offers benefits for both sides but requires clear planning and understanding. If you're considering offering redundancies, seek advice and review your agreement carefully.
Redundancy is a common part of working life today. Many workplaces go through changes that lead to staff cuts. This can happen for several reasons. Some roles are no longer needed due to automation, and others are lost due to budget cuts, economic changes or company restructuring.Not all redundancies are negative. While being made redundant can cause stress and uncertainty, it can also open doors. Many employees use the change or an offer of voluntary redundancy to switch careers, gain new skills or start a business.
There are two main types of redundancy: voluntary and forced.
Voluntary redundancies are more flexible and may suit both parties. Forced redundancies may trigger claims for unfair dismissal if not done correctly.
Redundancy must be handled with care. Clear communication builds trust. When managers clearly explain the reasons and steps involved, employees are more likely to feel respected and part on positive terms. This is vital during the consultation process. It helps reduce confusion and fear across the workforce.Employers should ensure they meet their obligations under the Fair Work Act 2009 and follow the National Employment Standards (NES). This includes notice periods, redundancy pay and support for affected staff.
Some reasons an employer may decide to reduce staff include:
When handled well, redundancy can lead to stronger teams and better business outcomes. Employers know that how they manage the redundancy process can affect their reputation and staff retention.
A genuine redundancy is different to a voluntary redundancy and happens when an employer no longer needs a person’s role to be done by anyone. It must follow the rules set out in the Fair Work Act 2009. These rules help protect both the employee and employer during the termination of employment.To be genuine, the redundancy must meet strict legal tests. If it doesn’t, the employee may claim unfair dismissal.
To qualify as a genuine redundancy, an employer must:
If an employer hasn’t followed these steps, the redundancy may not be considered genuine.
Employers must comply with the Fair Work Act 2009 and the National Employment Standards (NES). If they don’t, they risk legal claims and fines. The Fair Work Commission may review the case if a worker disputes the outcome.Employers also need to handle personal information lawfully during the process. They must ensure their actions are fair, consistent and well-documented.
A genuine redundancy payment may be tax-free up to a set limit. This limit depends on the employee’s years of service and age. The Australian Taxation Office (ATO) sets this cap each year. Any extra amount may be taxed at a lower rate than your normal income.
Use this checklist to help assess if a redundancy is genuine:Requirement metYes/NoThe job is no longer neededA proper consultation process was followedRedeployment was consideredNo unfair selection or discriminationEmployer has documented the decision processIf you're considering offering redundancies, make sure you follow the law closely.
Voluntary redundancy is often seen as a non-genuine redundancy under Australian tax law. This is because the employee chooses to leave rather than being forced to go. While the role may still become redundant, the voluntary agreement changes how the redundancy is treated for tax purposes. Some voluntary redundancies may still qualify as genuine redundacies depending on the circumstances of the voluntary redundancy offer.This distinction affects both the employee’s tax outcome and the employer’s reporting obligations. It’s important that both sides understand what this means before making decisions.
A genuine redundancy must meet set rules under the Fair Work Act 2009 and tax law. It must involve a job that is no longer needed. There also needs to be no option to move the employee to another role.When an employee voluntarily accepts a package to leave, the ATO often sees this as a choice. This makes it a non-genuine redundancy for tax purposes in most cases, even if the role is later removed. Voluntary redundancy payments can, however, still qualify as genuine redundancies if they meet specific criteria. Seek legal advice if you are unsure.
The key tax difference is in how the redundancy payment is taxed. A genuine redundancy payment may be tax-free up to a set cap. A non-genuine redundancy is treated as an employment termination payment (ETP). It is taxed at a lower rate than your normal income, but not tax-free.The ETP cap depends on the amount paid and the timing. If the payment is made soon after termination, employees may be able to claim a better tax rate.
Employers must:
Clear advice helps avoid mistakes. If you're considering offering an employee the option of voluntary redundancy, seek legal or tax advice if you are unsure of your legal obligations.
Redundancy can help a business adapt to change, but the redundancy process must be handled with care. Employers have a legal and ethical responsibility to treat employees fairly. Poor handling can lead to claims, lost talent or damage to trust. Here’s what employers need to get right when considering offering redundancies.
Before offering any packages, employers must review their business needs. Ask:
This step helps avoid removing critical positions or losing key staff. It also ensures that the decision matches broader business goals.
Employers must comply with the Fair Work Act 2009, awards or contracts that apply. To avoid unfair dismissal claims, they must:
Following a proper consultation process also supports fairness. In many cases, it's a requirement under modern awards or agreements.
Honest, early communication builds trust. Explain:
Compassionate delivery makes a tough message easier to hear. Managers should prepare and offer time for questions.
Redundancy can trigger other staff to leave. Employers should identify and support critical workers to stay. Offer training or new roles where possible to maintain team strength.
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When an employee accepts a voluntary redundancy, they may receive a range of payments and benefits. These are often based on their contract, the award, and the rules under the Fair Work Act 2009.
If an employee is made redundant, they may be entitled to:
It's important to note that some small businesses with less than 15 employees may not be required to pay redundancy pay. Speak with a lawyer to check what the rules are for your business.These payments form part of an employee's redundancy package. The amounts can vary depending on your employment type and how long you’ve worked with the business.
There are two types of entitlements:
Some employees may also receive extra bonuses or compensation as part of a special offer.
ItemIncludedNotesRedundancy payBased on years of serviceAnnual leave payoutPaid out in fullLong service leaveDepends on state and serviceNotice period or pay in lieuNES minimums or as per contractExtra bonuses or incentivesIf offered by employerSuperannuation on payoutMay not apply to redundancy payEach employee’s case is different and redundancy pay exceptions may apply to some small businesses. What an employee receives can depend on their contract, award or enterprise agreement. Always confirm what they are entitled to before making your next move.
Many employees choose to leave through voluntary redundancy when given the option. It can offer a fresh start or help with long-term goals. The choice is personal and depends on money, timing and an employee's future plans.
There are many reasons someone might accept a redundancy package:
For some, leaving a job means gaining the freedom to do what they’ve been wanting for years.Each person’s employment situation and life stage will affect the decision. Some may feel ready for change. Others may worry about the risk and uncertainty ahead.
Anna had worked in admin for over 15 years. Her employer offered a voluntary redundancy during a team restructure. She took the payout and used it to start a virtual assistant business. Within six months, Anna had her first five clients and more control over her work.
Voluntary redundancy doesn’t have to be the end of the road. For many people, it’s the start of something new. With the right plan, your employees can use their time and money to grow their skills, shift careers or even start a business.
David worked in a design team that was restructured. His role was made redundant. With a solid redundancy pay package and over 10 years of service, he took time to rest then set up as a freelance designer. Now, David earns more, works from home and chooses the clients he enjoys.
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If an employee's role is made redundant, their employer must follow a clear process. You must show that the employee's position is no longer needed and explore other options for the employee within the business. If you don’t follow this, the employee may have grounds to claim unfair dismissal. Employees may be entitled to severance pay and other benefits under their agreement or award.
Employees need to take time to review their offer. Check their full entitlements, including leave and any bonuses. Ask the employer questions if the terms aren’t clear. They may also want to get legal or financial advice. Once ready, employee's should submit their signed agreement as soon as possible.
Yes. If employees choose to resign under a voluntary redundancy offer, they can apply for another job right away. They can also use the time to retrain or study. It’s a good idea for employees to estimate how long they might be without work and plan their income around that.
Yes, but it depends on the type of redundancy. If a genuine redundancy payment applies, part may be tax-free. If it’s a non-genuine redundancy, it’s taxed as an employment termination payment. This is often taxed at a lower rate than an employee's normal income. The employee may still need to pay tax on any extra amounts.
For an employee to be eligible for a genuine redundancy, the employer must show that the employee's job is no longer needed. You must follow the proper process under Fair Work Australia rules and try to find the employee other work. You must also follow any award or contract rules. If you don’t satisfy these steps, it may not be a genuine redundancy.
Not all roles will include a payout. Some workers, like casuals or those with short service, may not qualify for redundancy pay. If you are unsure, check the relevant award or contract or seek legal advice.
Being made redundant doesn’t reduce an employee's career value. It often shows they have worked through change or reduction. Many people use it to grow, start another job or even introduce new skills. With the right mindset, it can be a positive experience.
Employers must follow the law. They can only terminate an employee without a payout in specific cases, such as serious misconduct or if the employee is not covered by redundancy rules. Most full-time staff with continuous service are entitled to some form of payment when their role is removed in relation to business needs. Always check the legal requirements in your state or territory before taking action.
Offering voluntary redundancy is a serious decision that affects your team, your operations and your legal standing. When planned and managed well, it can support business change and protect your brand.
A clear and fair redundancy process helps you maintain trust and stay compliant. It also reduces the chance of dispute or dismissal claims.Use Business Kitz to create, sign and manage your redundancy and employment documents in one place. This saves time, improves accuracy and helps you meet your responsibility as an employer. Sign up today!Disclaimer: This content is intended to be used for educational and informational purposes only. Business Kitz does not offer legal advice and cannot guarantee the accuracy, reliability, or suitability of its website content for a particular purpose. We encourage you to seek professional advice from a licensed professional and verify statements before relying on them. We are not responsible for any legal actions or decisions made based on the information provided on our website.Unless expressly stated otherwise, all content, materials, text, images, videos and other media on this website and its contents are the property of their respective copyright owners.
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