Small business redundancy exemption: fewer than 15 employees
About a third of Australian workers are employed by small businesses. For them, redundancy pay is usually zero, but not always.
Updated on · Mottalib Radif · Editorial policy
The rule
A “small business employer” is one with fewer than 15 employees at the relevant time. Section 121 of the Fair Work Act excludes such employers from the obligation to pay redundancy pay under the NES. The count includes associated entities, so a franchise or subsidiary is not automatically small.
The exemption dates from the introduction of the Fair Work Act in 2009 and reflects a compromise: small employers were seen as less able to absorb lump-sum redundancy costs, and many had never been covered by award redundancy clauses. Its effect is large. An employee with ten years of service in a business of 14 people receives no redundancy pay; the same employee in a business of 15 receives 12 weeks. Because the threshold is a head count rather than a full-time-equivalent measure, a café with 16 part-time staff is not a small business, while a consultancy with 12 full-time employees is.
How to count
- Count every employee of the employer on the day notice of the redundancy is given: full-time, part-time and casuals employed on a regular and systematic basis.
- Include the employee being made redundant and any other employees being dismissed at the same time.
- Include employees of associated entities: companies under common control, parent and subsidiary companies, and partnerships or trusts that control or are controlled by the employer.
- Exclude casuals who are not regular and systematic, independent contractors, labour hire workers supplied by an agency, and volunteers.
Regular and systematic casuals are those with a recurring pattern of work, such as fixed shifts each week or ongoing rostering, even if hours vary. A casual who has worked one weekend in the last three months is not counted; one who has worked every Saturday for a year is. The associated entity rule catches groups that split a workforce across several companies: a restaurant group with three venues each employing eight people through separate companies under one owner is one employer of 24 for this purpose.
| Worker | Counted? |
|---|---|
| Full-time employee | Yes |
| Part-time employee, 10 hours a week | Yes |
| Casual rostered every week | Yes |
| Casual who worked twice in six months | No |
| Employee of a related company under the same owner | Yes |
| Labour hire worker | No (employed by the agency) |
| Contractor with an ABN | No |
| The employee being made redundant | Yes |
| Director who is also an employee | Yes |
Exceptions
- Awards with industry-specific redundancy schemes.
- Enterprise agreements or contracts that provide redundancy pay.
- Employers that ceased to be small only because of the redundancies themselves (the count is taken before dismissals).
The award exceptions are significant in construction and manufacturing. The Building and Construction General On-site Award requires all employers, whatever their size, to pay redundancy at 2.4 weeks per year of service or to contribute to an industry redundancy fund such as Incolink or ACIRT. The Joinery and Building Trades Award, the Plumbing Award and some clauses of the Manufacturing Award for employers previously covered by the old Metal Industry Award have similar provisions. Enterprise agreements bind the employer regardless of size, and so does a contract of employment that promises severance. The Fair Work Ombudsman pay tool identifies whether an award has an industry-specific scheme.
The insolvency rule since 2023
A change effective from 15 December 2023 closed a gap that appeared when a larger business collapsed. Under section 121 as amended, an employer that becomes a small business employer only because of insolvency, bankruptcy or the winding down of the business in the six months before the dismissal cannot rely on the exemption. Employees dismissed by a liquidator after the workforce had already shrunk below 15 therefore keep their NES redundancy entitlement, which they can claim from the Fair Entitlements Guarantee if the employer cannot pay. The guarantee covers up to four weeks of redundancy pay per year of service, unpaid wages for 13 weeks, annual leave, long service leave and up to five weeks of notice.
What you keep
Notice (or pay in lieu), unused annual leave with loading, long service leave under state law, and any contractual entitlements. The tax-free limit for genuine redundancy still applies to whatever redundancy or ex gratia amount the employer chooses to pay.
| Entitlement | Small business employee | Larger employer |
|---|---|---|
| NES redundancy pay | No (unless award scheme) | 4 to 16 weeks |
| Notice or payment in lieu | Yes, same scale | Yes |
| Unused annual leave and loading | Yes | Yes |
| Long service leave | Yes, state law | Yes |
| Tax-free limit on any voluntary severance | Yes | Yes |
| Unfair dismissal claim | After 12 months, subject to the Code | After 6 months |
| Fair Entitlements Guarantee on insolvency | Yes, if the exemption is lost | Yes |
Checking whether your employer is small
Employees rarely know the exact head count, and employers sometimes assert the exemption without checking associated entities. Ask for the number of employees, including regular casuals, across all related companies on the day notice was given; the employer must keep records that show it. The Fair Work Ombudsman can require the information in an underpayment inquiry, and in an unfair dismissal application the employer bears the burden of proving it was a small business employer.
Negotiating a payment anyway
Many small employers pay something on a redundancy despite the exemption, either from goodwill or because a contract or past practice created an expectation. Any such payment made in consequence of a genuine redundancy is a genuine redundancy payment for tax purposes and benefits from the tax-free limit, base plus per-year amount, exactly as an NES entitlement would. An employee negotiating an exit from a small business should therefore ask for the payment to be documented as a redundancy payment rather than as a bonus or ex gratia sum unrelated to the redundancy, and should make sure the income statement codes it correctly. Notice, leave and long service leave remain payable in full and can be checked with the final pay calculator by ticking the small business option.
