Termination vs redundancy: why you should never confuse the two

Showing a staff member the door is rarely easy.  It can be awkward and difficult to address poor work standards or a bad attitude and fire a staff member. It also can feel awful to have to tell someone their role is no longer required.  While both involve letting staff go, termination and redundancy should never be used interchangeably. We asked a legal expert to explain the difference.Termination and redundancy are legally very different and as a business it’s important to understand what these differences are. Wrongly opting for one of these procedures over another can lead to dire consequences. So how do you choose the right process when you have to let a staff member go?

When redundancy is wrong

In either situation, it’s vital to make sure you follow the correct procedures. Failing to do so can lead to stiff penalties, says Charles Power, Partner with law firm Holding Redlich. Power says it’s not uncommon for organisations to use redundancy as an excuse to get rid of a staff member if their work is not up to scratch or they are causing other problems. “Employers often try to make someone redundant because they see it as an easier way to get rid of a troublesome individual,” he explains.

If this happens, it is possible that the employee might suspect foul play and lodge an unfair dismissal claim with the Fair Work Commission. If the commission finds you’ve contrived the redundancy simply to dismiss that person, you may have to:

  • reinstate the employee
  • pay them compensation of up to six months’ salary
  • pay higher compensation if you’ve made them redundant because of things like their race, gender, union membership or because they’ve made a work-related complaint.

When termination is wrong

Equally, stiff penalties apply if you don’t make someone redundant but instead terminate their employment by other means explains Power. That’s because redundancy settlements are often higher than other payouts and are subject to better tax arrangements for the employee. “A genuine redundancy payout is tax-free up to a certain limit, whereas employee termination payments are tax concessional but not tax-free,” Power says. This is “to compensate for the fact that the dismissal had nothing to do with the employee’s performance and they may face a period of unemployment”, he adds.

If you’re found to have terminated someone’s employment when you should have made them redundant, Power explains that you’ll have to pay:

  • the employee’s redundancy pay with interest
  • a penalty of up to $63,000 for a corporation
  • a penalty of up to $12,600 for individuals—this could include managers, accountants, lawyers and others who knew of the contravention, or small-business owners.

How to get it right

Power says you can make someone’s role redundant when their position can no longer be performed by anyone—not because the person isn’t fit to perform that job. “That means an enterprise has gone through such changes that it no longer requires the role,” he explains. “This could be because of restructuring, downsizing, closing down or outsourcing.”

However, if the problem lies with the person themselves, that’s when you’ll need to terminate their employment by other means. And you’ll need to be really clear what those reasons are – you can’t simply do it to avoid paying the higher redundancy amount. “A dismissal for reasons other than redundancy should be for a valid reason such as poor performance or misconduct,” Power says.

When things change

Problems may arise if you’re mid-way through performance managing someone out of the company, but then their role becomes redundant anyway. It may be tempting to avoid the higher redundancy payout, but are you legally obliged to tell the employee and turn it into a redundancy instead of a termination?  “This can be a difficult situation for employers and they may need to seek legal advice about what the circumstances require,” Power says. “However, the answer to that question is ‘yes’ if an employee’s role becomes genuinely redundant. If an employer does not provide the required redundancy payout, the employee may sue for their entitlement.”

On the other hand, if you follow the rules and tell the staff member their role has been made redundant, they may think you’re simply using reorganisation as an excuse to get rid of them quickly. “They might feel the redundancy is not genuine and bring a claim for unfair dismissal or unlawful termination,” Power says. “The employer should select the option that is the most legally defensible in the circumstances, depending on the genuineness of the redundancy or the strength of the grounds for dismissal.”

Information provided in this article is general only and it does not constitute legal advice and should not be relied upon as such. SEEK provides no warranty as to its accuracy, reliability or completeness. Before taking any course of action related to this article you should make your own inquiries and seek independent advice (including the appropriate legal advice) on whether it is suitable for your circumstances.