How to make an employee redundant

Analysis

How to make an employee redundant

Implementing redundancies can be unpleasant and stressful. Use this checklist to ensure the process is fair, legal and transparent.

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Many employers regard making an employee redundant as the most unpleasant and stressful task they have to perform. You are ending another person’s employment, and possibly causing them financial strain, when it is in no way the employee’s fault.
 
A redundant employee has various legal entitlements. These may include the requirement of the employer to consult with the employee, notice periods (or pay in lieu of notice), redundancy pay, and a provision of a reference or certificate of service. You need to study the employee’s award, agreement or employment contract to identify any entitlements that may apply in addition to the basic legal ones.
 
Some important considerations include:
    1. The redundancy has to be genuine, not a contrived situation to get rid of an employee you don’t want; 
    2. Failure to comply with the legal requirements may result in a claim by the employee of discrimination, unfair dismissal or dismissal for a prohibited reason;
    3. Failure to comply with legal provisions relating to consultation, notice periods, severance pay, and payment of all accrued entitlements can lead to legal proceedings that result in payment of compensation to the employee and financial penalties for the employer. This is time-consuming and costly;
    4. There may be long-term implications to the business including losing valuable skills, knowledge, experience and manpower. Redundancy decisions need to plan for the ongoing survival of the business and ensure that it is positioned to be able to take advantage of opportunities that will arise when conditions recover or situations change; and
    5. This may be a stressful and demeaning experience for the redundant employee, and may have a serious financial impact on them. It may also affect the productivity and morale of your remaining employees who may feel guilty, angry, or fearful that they will be next.
What to do

1.  First examine other options
 
Redundancy should be a last resort. You should first evaluate other 'coping' strategies that may retain employees whose skills, knowledge and experience you will need when the business and economic climate changes or recovers. These options may include:
  • Part-time work
  • Reducing overtime
  • Job redesign
  • Retraining
  • Encouraging employees to take all their accrued leave entitlements
  • Temporary shutdowns (with the agreement of your employees)
  • Cost reductions in other areas
  • Less use of casual staff and contractors.
2.  Calculate how many employees to retrench
 
There are two ways to do this:
  • Achieving a particular cost-saving target amount, or
  • Function-based – look at the current and future work requirements of the business and make the jobs that are least important, or those that can be managed some other way, redundant.
Of the two methods, the cost-based method is simpler and easier to justify to others (including employees), but the function-based method looks more closely at the actual work that has to be done. However, neither method takes account of the attributes of individual employees that may be valuable to the business.
 
3.  Decision must be objective and fair
 
Whatever method of selecting employees you choose, it must be fair, non-discriminatory and easily justified to other parties, otherwise you run the risk of litigation.
 
Some of the most common selection methods are:
  • Newest employees are first to go
  • Poorest performers are first to go
  • The incumbent of a job that becomes redundant is retrenched
  • Ask for volunteers
Before making this decision, you need to check the redundancy legal provisions that apply to each employee. Federal legislation set minimum requirements, mainly relating to notice periods, but there may also be extra provisions in an award, agreement or individual contract that covers the employee. Some of these set out the procedure to follow when selecting employees to be made redundant.
Modern awards contain a ‘standard’ provision that places an obligation on an employer to consult with employees regarding major workplace change. The award requires an employer to notify affected employees when a definite decision has been made to introduce major changes that are likely to have significant effects on employees. ‘Significant effects’ include termination of employment.
 
If no consultation takes place, this may be viewed by the Fair Work Commission to be a serious defect in the process and may mean the dismissal is not a case of ‘genuine redundancy’.
 
4.  Implementing the redundancy
 
Once you are aware of all the legal provisions that apply, the next two steps are to decide on the timing of the redundancies and prepare a redundancy package for each employee.
 
Timing
 
Timing will be influenced by the minimum notice period required (or providing pay in lieu of notice), but should, if possible, be when you can meet the employee face-to-face.
 
If the employee is away on a business trip, wait for them to return to the office. If the employee is on leave, either wait until they returns or contact them and arrange a meeting.
 
Contents of redundancy package
 
Contents of a redundancy package may include the following:
  • Compliance with minimum notice periods and severance pay requirements;
  • Pay in lieu of notice — may often suit either party better than working through a notice period, but consider the individual circumstances of each case;
  • Extra notice period and/or severance pay;
  • Written references or certificates of service;
  • Counselling for employees who are NOT retrenched, but may be affected by the departure of work colleagues;
  • Counselling for retrenched employees and 'survivors', as well as references/certificates and other assistance, are highly recommended practices, and in some cases award/agreement/contractual provisions will make them mandatory.
Implementing the redundancy: a checklist
  • Prepare individual letters for each retrenched employee. The letter should set out the date of redundancy, detailed calculation of all monetary entitlements, list of other entitlements to be provided (such as outplacement counselling, references) and other procedural issues (such as return of any company property, confidentiality requirements);
  • Double-check that all calculations are correct and all legal requirements are complied with, before issuing the letters.
  • Seek legal advice if unsure.
  • Where multiple redundancies will occur, consider holding an initial group meeting with all affected employees to make the announcement.
  • Also hold a meeting with other employees to explain the reasons for the decision, how it will be implemented, and how the business plans to move forward afterwards.
  • Interview all redundant employees individually, handing over each letter as described above and answering all questions.
  • If the employee is to be retrenched immediately with pay in lieu of notice, ensure this payment is made promptly. If a notice period is involved, advise employee of the timetable of events from now on.
  • On their final day of work, interview all employees individually again, hand over a written statement of all their entitlements, ensure all payments have been made (eg into bank accounts), hand over other documents such as references, employment separation certificate; collect any employer’s property held by the employee such as security passes, tools, uniforms, vehicles, etc (use a checklist of items for this).
  • Notify other affected parties, such as superannuation funds, workers compensation and other insurers, important customers and suppliers. The only advice you need to provide is that the employee has left, there is no need to explain why.
  • Update employment records to record the redundancies.
  • Change passwords and other security precautions to ensure ex-employees no longer have access to business information.
  • Issue group certificates to employees within the required time period.
Source: This article can be found on the NSW Business Chamber’s member website Ask Us How. Members can access an extensive library of specialist articles, written by industry experts, to help them better manage and operate their business. Visit Ask Us How to access the latest articles.
 
19 June 2014: This article has been revised since publication to include more discussion of legal provisions, in particular the requirement to consult with employees. – Ed.
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