Redundancy Calculator

Checking Your Business Size and Employee Coverage

Before you calculate any redundancy pay, you must determine if your business is classified as a small business under the Fair Work Act 2009. You also need to check the specific industrial instruments that apply to your workers. Getting this wrong can lead to underpayment claims.

Is Your Business a Small Business?

Under the Fair Work Act 2009, a business is a small business if it employs fewer than 15 employees. This count is calculated on a simple headcount. It includes all casual employees employed on a regular and systematic basis. It also includes full-time and part-time staff employed by the business at the time the redundancy takes place. You do not need to include inactive casuals or employees of associated entities.

If you operate a small business with fewer than 15 employees, you are generally exempt from paying redundancy pay under the National Employment Standards (NES). However, you must still follow the proper consultation process and provide the required notice period. Even if the NES does not require you to pay redundancy, a modern award or enterprise agreement might still require it.

Checking for Awards and Agreements

The NES sets the minimum safety net for all Australian workers. However, modern awards and registered enterprise agreements often contain specific clauses that override the NES. To verify this, you must locate the exact industrial instrument covering your employee.

Start by using the Find My Award tool on the Fair Work Ombudsman website. Search by the job title and the industry description. Once you identify the relevant modern award, look for a section titled "Redundancy" or "Termination of Employment". Some awards specify different entitlements than the NES. For example, certain construction or manufacturing awards have specific redundancy schedules that might apply regardless of your business size.

You must also check if you have an enterprise agreement in place. If a registered agreement applies to your employee, the terms of that agreement take precedence over the NES. You need to read the redundancy clause within that agreement carefully to ensure you meet all obligations.

Record Keeping

Keep a record of how you determined your employee count and which award or agreement you used. These records are essential for compliance. If you are unsure about the specific award coverage, seek advice from a workplace relations professional.

Working out the exact length of service is the first step in paying a redundancy entitlement correctly. You must calculate the total time an employee has worked for your business to determine their notice period and severance pay. Under the Fair Work Act 2009, an employee’s period of service starts on their first day of work and ends on their last day.

You must look at continuous service, not just their time with you. If the employee had a break in service, you generally cannot count the time they were not working. For example, if a labourer left for two years and then came back, their service clock resets to zero when they return. The two years away do not count towards the total. However, gaps caused by authorised leave like annual leave, parental leave, or workers’ compensation do not break the continuity of service. The clock keeps ticking during these periods.

A common issue for tradespeople and small business owners involves transferred service. This happens when a business is sold or transferred, and the employee keeps working for the new owner. Under the Fair Work Act 2009, the service period with the old owner transfers to the new owner. This means the employee does not lose their accrued years of service when the business changes hands. For redundancy pay, you must treat the employee as if they had been working for you the entire time. If a painter has worked for the same shop for ten years under three different owners, and the current owner makes them redundant, the redundancy payment must be calculated on ten years of service, not just the time under the current owner.

To calculate the final figure, take the start date of the continuous service and count forward to the termination date. Partial years count towards the total. This calculation forms the basis for the severance pay found in the National Employment Standards or the relevant modern award. You should always check the specific award or enterprise agreement, as some contain different rules for calculating service or specific exclusions for small business employers. Keeping accurate employment records is essential to prove these dates if a dispute arises.

Base Rate Determination

For redundancy payouts in Australia, the base rate is not simply the hourly rate on the timesheet. The law requires you to calculate an employee's Ordinary Time Earnings. This is the rate an employee earns for their standard hours of work, excluding any overtime amounts. Getting this figure right is critical for small business owners to avoid underpayment claims, and it is essential for tradespeople to ensure they receive their full legal entitlements.

Under the Fair Work Act 2009, redundancy pay is calculated based on the employee's base rate of pay at the time of termination. You must determine the weekly rate or the hourly rate multiplied by the ordinary hours of work.

What to Include

You must include payments that relate to the ordinary hours of work. Common inclusions for tradespeople and hourly workers are:

• Shift loadings: Any penalty rates paid for working regular afternoon or night shifts must be included in the base rate. These are considered part of the ordinary earnings for those specific hours.
• Allowances: Include industry-specific allowances that are payable for the qualifications or duties of the employee. This often includes trade allowances, leading hand allowances, or tool allowances. You should reference the relevant Modern Award to identify which allowances are classified as part of the wage rate rather than reimbursements.
• Commission: If an employee earns a regular commission as part of their standard pay packet, include the average amount over the previous 12 months.

What to Exclude

Legislation specifically directs employers to exclude certain payments from the base rate for redundancy calculations:

• Overtime: This is the most common exclusion. Any payment for hours worked above the ordinary hours, including penalty rates for overtime shifts, must be removed.
• Bonuses: Performance-based bonuses or annual bonuses that are not guaranteed and tied to specific outcomes are generally excluded.
• Reimbursements: Money paid back to an employee for work-related expenses, such as travel or uniform costs, is not income and must be excluded.
• Leave Loading: While superannuation calculations may differ, leave loading is typically excluded from the base rate of pay for redundancy calculations under many Modern Awards, though you should check your specific Award terms.

To ensure accuracy, check the specific classification in the relevant Modern Award, such as the Building and Construction General On-site Award or the Manufacturing and Associated Industries and Occupations Award. These instruments provide specific definitions for the base rate of pay. Always calculate the final figure based on the employee's regular pattern of earnings immediately before the employment ended.

NES Redundancy Entitlement

When you make a position redundant, you must follow the National Employment Standards (NES) set out in the Fair Work Act 2009. The NES provides a minimum safety net for redundancy pay based on how long the employee has worked for your business. This applies to most employees under the national workplace relations system.

Base Rate of Pay To calculate the payout, you first need the employees base rate of pay. This is the rate they receive for their ordinary hours of work. You must include any over-award payments, allowances, and penalties that are part of their ordinary pay. Do not include overtime, bonuses, or commissions.

Redundancy Pay Periods The amount of redundancy pay is calculated based on the employee's continuous service. The Fair Work Act 2009 specifies the number of weeks pay required for each year of service.

Calculation Steps

1. Confirm the total years of continuous service.
2. Locate the corresponding weeks of pay in the table above.
3. Multiply the employees base rate of pay by the total number of weeks.

Example A tradesperson has worked for your business for 4 years and 6 months. Their ordinary hourly rate is $40 for a 38-hour week. Base Rate equals $40 times 38 hours, which is $1520. Entitlement equals 8 weeks (for the 4 years service) times $1520. Total redundancy pay is $12,160.

Important Exemptions Small business employers may not have to pay redundancy. If you employ fewer than 15 employees calculated on a full-time equivalent basis, the Small Business Redundancy Exemption may apply. Also, you do not pay the redundancy amount for years of service over 10 years. Always check your Modern Award or Enterprise Agreement, as they might contain different redundancy entitlements that override the NES.

Notice and leave payouts are two critical parts of a redundancy. You must follow the rules set out in the Fair Work Act 2009 and the National Employment Standards (NES). Getting these payments wrong can lead to personal claims against the business or fines from the Fair Work Ombudsman.

When you make an employee redundant, you must give them notice of termination. The length of notice depends on how long the person has worked for you. The NES sets a minimum scale. If they have worked for one year or less, you give one week’s notice. For one to three years of service, you give two weeks. For three to five years, it is three weeks. For five years or more, you must give four weeks’ notice.

You have two choices for how you handle this notice. You can let the employee work through the notice period. Or, you can tell them to leave immediately. If you tell them to leave immediately, you must pay them the amount they would have earned if they had worked those days. This payment is called payment in lieu of notice. If your employee is over 45 years old and has worked for you for at least two years, you must add one extra week to their notice period or pay.

Aside from the redundancy payment itself, you must cash out all accrued leave. Under the NES, you must pay out the employee’s unused annual leave. You pay this at their full rate of pay. This rate includes their base wage plus any loadings or allowances they would have been paid if they took the leave as time off.

Long service leave is another area where you must be careful. The rules for long service leave differ depending on which state or territory your business operates in. You need to check the specific Long Service Leave Act for your state. In most cases, when employment ends due to redundancy, you must pay out the employee’s unused long service leave entitlement. This applies if the employee has worked long enough to qualify for leave under the state law. Some state laws also allow for a pro-rata payment if the employee has worked for a substantial period but has not yet reached the full qualifying years. Do not rely on a general rule for this. Check the state legislation to ensure you pay the correct amount.

When you process the final pay, group these amounts clearly on the pay slip. List the payment in lieu of notice, the annual leave payout, and the long service leave payout as separate line items. This ensures the employee understands exactly what you have paid them and protects you if there is a dispute later on.

Understanding the tax rules for redundancy payments helps you calculate the correct net pay for your employees. Under the Income Tax Assessment Act 1997 (ITAA 1997), a genuine redundancy payment is split into two parts. The first part is tax free. The second part is called an Employment Termination Payment (ETP) and is taxed differently.

The tax free component is not included in your employee's taxable income. To calculate this amount, check the Fair Work Act 2009 or the relevant modern award for the base limit. At the time of writing, the base limit changes annually. Multiply the employee's total years of continuous service by the base limit. Add one additional pro rata amount for every full year of service they would have completed if they had worked until their normal retirement age.

Any redundancy amount paid above this calculated tax free limit counts as an ETP. You must withhold tax from this portion based on the employee's preservation age and their total ETP cap.

If the employee is under their preservation age, the withholding rate for the taxable part of the ETP is 32 percent. If they have reached their preservation age, the rate drops to 17 percent. These rates come from the Taxation Administration Act 1953 and schedule five of the Income Tax Rates Act 1986.

You must report these payments correctly to the Australian Taxation Office (ATO). On the Single Touch Payroll report, separate the tax free component from the taxable ETP component. This ensures the employee receives the tax benefit they are owed and ensures you meet your withholding obligations.

Always check the ATO website for the current financial year base limit before you process final pays. The distinction between the tax free part and the ETP is essential. It determines how much tax you take out and how you report the income. Mistakes here can lead to incorrect tax for your employee and compliance issues for your business. Use the latest ATO tax tables to verify the exact dollar amount to withhold.