Termination pay

A job is made redundant when an employer no longer requires the job function to be performed. The person who has been performing the job is retrenched if the employer is unable to offer them alternative suitable employment.

People whose employment is terminated because of redundancy are usually entitled to receive a termination payment that may include outstanding wages, payment for unused annual and long service leave and severance pay.

The Commonwealth Government provides employees who lose their jobs in circumstances where their employer is insolvent or bankrupt with a safety net of minimum payments under the General Employee Entitlements and Redundancy Scheme (GEERS).

Transition to the National Employment Standard

Since the introduction of the Fair Work Act in July 2009, your employer is required to offer you redeployment opportunities before proceeding with retrenchment.

While there have been government guidelines on appropriate levels of pay for people being retrenched and many employers have paid their employees fairly, pages 43-47 of the new National Employment Standard set mandatory minimum redundancy payments for employees in Australian workplaces, coming into effect in January 2010.

Until the new arrangements come into effect, you’ll need to refer to the award that applies at your workplace or the employment agreement under which you are employed to work out exactly what you’re entitled to receive. Ask your manager or human resources department for more details. They will be able to provide you with a copy of your workplace agreement if you cannot locate your own copy.

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Entitlements under the Fair Work Act

The Act prescribes that employers must provide a written notice of impending retrenchment and a pro-rata minimum period of notice based on how long the employee has been working for the employer. One week of notice must be provided to employees who are in their first year of employment with the company, rising to four weeks of notice for those who’ve been with their employer for more than five years. Employees over 45 years with at least two years of continuous service receive an extra week of notice.

Employers may choose to provide payment in lieu of the minimum notice period. They must make any such payment at the full rate of pay the employee would have expected to receive, and include standard overtime and allowances.

Most employers will also provide payment for accrued annual leave and benefits including pro-rata long service leave, and a redundancy payment based on their years of service. Although this may vary between employers, minimum payments (based on ordinary hours) must be paid to all employees as follows:

  • 1-2 years in job: 4 weeks severance pay
  • 4-5 years in job: 8 weeks severance pay
  • 9-10 years in job:16 weeks severance pay.

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Exemptions to entitlement to severance payments

Under the National Employment Standard, you will not be entitled to redundancy payments if:

  • you have been working for your employer for less than 12 months; or
  • your employer has fewer than 15 staff, including casuals who work on a regular and systemic basis; or
  • your employment is transferred to a new employer who recognises your period of service with the old employer; or
  • you reject an offer of new employment with equivalent overall terms and conditions to your old position, where your service would have been recognised by the new employer.

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Negotiate the terms of your retrenchment

If possible you should try to negotiate the terms of your retrenchment to put you in the best position for:

  • the amount your receive
  • taxation
  • new job opportunities.

Obtain as much advice about your redundancy payment and arrangements as possible, both when you know redundancy is impending and when it happens.

Decide on what you consider to be reasonable compensation and seek advice about how to negotiate the terms of your retrenchment.

It’s possible losing your job might mean you also lose other entitlements that you can’t readily walk away from without compensation. Mobile phones, income protection insurance, company cars and membership of professional bodies are just some salary packaged entitlements you may now have to fund independently. Work out their value and negotiate for compensation for their loss.

If you require assistance understanding any employment documents you’re asked to sign, contact Job Watch, an employment rights legal centre that provides assistance to Victorian workers about their rights at work. You should do this prior to signing your employment release and you may also wish to seek advice or speak to your union or superannuation fund.

Find out more about how your termination payment affects your eligibility to Centrelink payments.

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You’ve received a termination payment

If you’re retrenched and have a termination payment, you probably won’t know how long the money will have to last, or how to put it to the best use. A termination payment may seem like a lot of money in a lump sum. It will probably include your annual leave and pro-rata long service leave entitlements and a redundancy payment that is based on the number of years you’ve been in your job.

Don’t be in a hurry to spend or invest this payment as soon as you receive it. It’s important that you work out how much money you need to live each week so you know how long your termination payment will cover your living expenses.

Contact Centrelink to get a clear understanding about how your termination pay affects your eligibility for payments and concessions. Remember redundancy payouts usually delay the start of Centrelink payments. You’ll have to keep aside sufficient money to cover your household and personal expenses and your debts until you have satisfied the Centrelink waiting periods.

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Deciding what to do with your payment

You’ll need to have a lot of flexibility with your finances unless you have another job lined up. So think through your income and expenses and take at least a medium-term view about how you are going to manage.

If you temporarily deposit your payment in a cash-management or online savings account, it can safely earn 4-5% interest while you take some breathing space to consider your options about how to best use your money. If you have a mortgage off-set account, you could deposit the money there and receive the benefit of reduced interest, but still have access to the funds.

You need to bear in mind that some debts are more important than others. Work out how to maintain these payments when you have no or low income.

For most people, their mortgage will be their biggest debt and their highest priority. However, this does not mean you should pay all additional money you receive off this debt and not pay attention to smaller loans and credit for everyday expenses.

If you pay your termination payment off your housing loan this may leave you strapped for cash. You still need to pay your other debts even if you’re not able to find another job quickly.

One of the top priorities to help you regain control of your finances is to reduce or get rid of high-interest credit-card debt.

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Adapting to a change of income

If you leave work with a redundancy package equivalent to 12 weeks pay, you won’t be eligible for Centrelink payments for at least 12 weeks. In ideal circumstances, you will be up to date with all your payments at this time – that is, keeping up with your bills and incurring essential and manageable debts only.

You need to continue to manage your bills and debts even if you are not able to find another job quickly and have no extra income. Plan to make the money last over the period for which it applies and cut back on non-essential spending.

When you do start receiving Centrelink payments, your income will be considerably less than you’ve been used to if you earned around average earnings in your job.

With this knowledge at the outset, you should immediately reduce your spending when you lose your job or have your hours cut, and look for alternative sources of income. Other steps you should commence immediately include:

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Summary of how your earnings may change

Single income Single income family
Average fortnightly earnings (public and private sector at May 2009*) $2,395 (gross income) $2,395 (gross income)
Newstart allowance $486.80 (19% of average fortnightly earnings) $439.40 (for each of a couple)
Rent assistance* (maximum) $119.40  $140.14 (couple with children)
Newstart plus rent assistance (maximum) $564.50 (24% of average fortnightly earnings $948.48 (couple with children)
(40% of average fortnightly earnings)

* The amount of rent assistance received depends on the rent you pay in the private rental market. Each application is assessed on the circumstances of the individual applicant.

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Tax arrangements for redundancy payments

Your ‘eligible termination payment’ is the part of your redundancy payment that includes the severance payment, any bonus for long or distinguished service, and payment in lieu of notice.

Eligible termination payments up to certain limits are exempt from tax. The tax-free component for the 2008-09 financial year was $8,435 plus $4,218 for each year of completed service. The amount of the tax-free component is indexed each year.

Amounts over these tax-free levels and payments for unused leave and leave loadings are treated as normal taxable income.

More information about tax arrangements for eligible termination payments.

Since July 2007 termination payments have had to be taken as cash, however, people working under some workplace agreements still have the option of rolling their payment into superannuation. Check your workplace agreement or contact your human resources department to check if you can roll some of your termination payment into superannuation.

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