Important things to consider when buying a business

Important things to consider when buying a business

If you are considering buying a business there are many things you need to do from a legal, financial and general business perspective.  Getting the right advice from the start is important. The structure of and issues involved in the sale are quite different if you are buying the business assets only, compared with the shares in the company that owns the business.

Making sure you follow the right process before signing any documents is a key component of a successful business purchase.

The main things to do before signing a contract are:

  • Research
  • Get professional advice
  • Review & understand all documentation

In this article we will highlight some of the key issues to be considered.

Research

Proper research involves checking the records of the business and other information to ensure:

  • Sales are as good as the owner says they are
  • The business systems are sound and documented
  • The business does not have any problematic legal obligations or liabilities
  • All necessary information, rights and assets will be included in the sale
  • Cash flow is sustainable
  • Employees will be happy with a new owner
  • Customers will remain loyal once you take over
  • You understand the operation of and opportunities in the market/industry

Research should, where possible, be carried out before you sign any contracts.

Professional advice

You should always consider briefing and engaging legal and accounting advisers to assist you in conducting due diligence and documenting the transaction, to avoid legal and financial (including tax-related) “surprises” and arguments down the track.

You might also consider whether there are any industry specific experts that may be useful.

Review and understand the documentation

When purchasing a business there is a lot of documentation to be gathered, read and understood.

The seller may require you to sign a confidentiality agreement to stop you from using confidential information for any purpose other than buying the business. You should make sure you fully understand the agreement before you sign it.

Some of the information you should gather and review is outlined below.

Financial statements

It is sensible to obtain current and historical financial records for the business, including:

  • Profit & loss statements
  • Balance sheets to identify assets and liabilities
  • Lists of debtors and creditors
  • Copies of any BASs lodged by the business

List of plant, equipment, assets and stock

You should obtain a list of all plant, equipment, assets (including fixtures and fittings) being sold along with current valuations, proof of ownership and information on applicable warranties and guarantees.

Details of any stock sold with the business and how it will be counted and valued at settlement should be discussed and agreed with the seller.

You should also undertake thorough searches of the Personal Property Securities Register to, for example, ensure that security interests necessary for the business have been registered (such as over sale equipment leased to third parties) and to check whether any relevant security interests are held by third parties.

Lists of customers and suppliers

Customer and supplier relationships form part of the goodwill of the business and a list of all available contact details should be supplied so that you can make contact and ensure an ongoing relationship.

Employees

If the business is being purchased as a going concern and the buyer is assuming liabilities for employees then a list should be provided – setting out the employees, their job descriptions, salaries, years of service, any disciplinary issues and accrued entitlements like holidays and long service leave.

Important Contracts

Any major contracts necessary for the operation of the business should be provided and reviewed, including copies of the lease of the premises and any plant & equipment leases. Term, assignment, change of control and termination provisions, in particular, should be checked.

If any sale assets are financed the financier’s consent will be necessary.

If the business is a franchise the seller is required to provide a franchisor’s disclosure statement.

Documenting the transaction

After completing your due diligence you will need to have the transaction documented with a legally binding contract. There are many issues to consider.

Structure

You will need to decide on the structure of the transaction and it is crucial to get advice on the legal, financial and taxation consequences of the structure you adopt.

The types of things that need to be considered include:

  • Whether you are buying the assets of the business or the shares in the company that owns the assets.
  • The price to be paid and when it is to be paid.
  • Who will the buyer be – an individual, company, trust or partnership?

Deciding on whether to buy the assets or the company is a critical issue when buying a business. There is no simple or right or wrong answer to this question as it will usually depend on the business being purchased and the individual circumstances of both the buyer and the seller.

Things to consider when making a decision include:

  • The amount of flexibility and control you want over what you are buying.
  • Do you require all of the assets of the business, or all of the employees?
  • Do you want to be responsible for past liabilities (known and unknown) of the business which might relate to employees, suppliers or customers?

Price and Terms of Payment

Once the price is agreed you will need to determine how and when the price will be paid.

For additional protection you may want a portion of the price to be held back for a certain period to ensure that information given by the seller is accurate or that profit projections are achieved.

You may not want to pay the price in a lump sum and may be able to negotiate to pay in monthly or annual instalments.

You will need to take into account that the business will probably be continuing right up to the sale date, which means stock, accounts receivable and other items will need to be finalised at a certain time and in an agreed manner.

Legal Contract

The main legal document is a contract for sale of business. The sale contract sets out the various terms agreed to by the parties, including for example:

  • the rights of the parties if things go wrong;
  • the seller’s representations and warranties, which are designed to ensure that:
    • the seller remains responsible for the information given to you about the business; and
    • you get what you pay for;
  • a non-competition provision which prevents the seller from creating a competing business after the sale; and
  • (if a lease or franchise is involved) the consent of the landlord or franchisor.

Conclusion

Buying a business can be a complex transaction. You need to make sure you have done adequate research, understand the risks and have received the right advice.

If you are considering buying a business and would like some help please contact us on (02) 9963 9800 or get in touch via our contact form.

What are Defects and How Do Defects Liability Periods Work?

What are Defects and How Do Defects Liability Periods Work?

While every builder dreams of the perfect build without so much as a single fault being found with their work, the reality of most construction projects is that at some stage issue will be taken with some or all of the work and a defect complaint will arise. It is therefore important to understand exactly what is meant by the term ‘defect’, how a contractual ‘defects liability period’ works in practical terms and whether there is any right to claim damages for covering the costs of rectifying a defect.

What exactly is a ‘defect’?

Ordinarily, where the term ‘defect’ is used in a construction contract it refers to work that has not been performed in accordance with the standards and requirements of the particular contract.

Matters to take into consideration in determining if there is a defect may include:

  • the quality of any work and the standard of workmanship;
  • whether design directives have been followed and correct materials have been used; and
  • whether the works have been performed in accordance with contractual specifications and drawings.

The ‘defects liability period’ and how it works

Most experienced builders and contractors would be familiar with the term ‘defects liability period’ as the term commonly appears in construction contracts including contracts based things such as pro forma Australian Standards building and construction contracts. A defects liability period is the time period specified in the contract during which a contractor is legally required to return to a construction site or build to repair any defects which have appeared in that contractor’s work since the date of construction. Usually a defects liability period will start either at practical completion or upon reaching standard completion.

Even if you are familiar with the term, it is important to check each new contract carefully to ensure you understand how long the defects liability period is and what is expected of you during that period.

A contract will specify the length of any defects liability period. Anywhere from 12 to 24 months is a fairly common period, although longer or shorter periods are also possible.

The length of any defects liability period will depend on the nature of the build, the type of work a particular contractor carries out and whether it is likely that any inherent defects may take time to become apparent. For example, it is not uncommon for contracts involving complex builds and large government contracts to specify longer defects liability periods than a simple domestic building contract.

Why specify a defects liability period in a contract?

A defects liability period gives both a principal and contractor a degree of certainty as to the process that will be followed for making good any defects which may not be apparent at the date of practical completion.

In addition, a defects liability period can also be useful in providing a means of making good any defects that are apparent at the time of practical completion but which either do not need to be rectified prior to practical completion or perhaps cannot be easily rectified due to the presence of other contractors and trades still working on the build.

Wherever possible, it also makes practical sense to have the contractor who carried out the original work return to fix any defect as this contractor will be familiar with the site and the work in question. This is likely the most cost effective approach to any rectification work. Also, a contractor may prefer to be the sole party authorised to carry out any rectification work within a given period as the quality of the work and any subsequent repairs will potentially affect a contractor’s reputation.

Once a defect is fixed does a new the period restart?

Whether a new defects liability period applies to rectified work will depend on the terms of each particular construction contract. It is important that both the principal and contractor are clear on this point prior to entering into a contract.

What right to damages exists for covering the costs of rectifying a defect?

Ordinarily any defect would be a breach of contract. There have been several cases where the courts have considered whether the existence of a defects liability period in a contract alters or removes the need for a common law right to damages with individual cases appearing to turn on their particular facts and the behaviour of the parties to the contract.

Generally, damages for any defects will cover the amount needed to ensure that the work is brought up to the standard that a contractor was initially required to provide under the contract.

Help is available

It is always prudent to seek advice prior to entering into any contract to ensure that you fully understand your rights and responsibilities. If you have already entered into a contract or carried out work and a complaint has now been made that your work is defective, you may be concerned about both your professional reputation and any potential financial implications for your business.

If you find yourself in a situation where this could be an issue we recommend you seek legal advice as soon as possible. If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or send us a message via our form.

Accessing Digital Assets – Estate Planning Essentials

Accessing Digital Assets – Estate Planning Essentials

The recent death of Gerald Cotten, former Chief Executive Officer of Canadian cryptocurrency exchange company, Quadriga CX, emphasises the importance of planning your electronic after-life.

Mr Cotton’s death in India at the age of 30, has not only raised suspicion as to its authenticity (and allegations of an exit scam), but reiterated the chaos that can be created if digital assets have not been considered in an Estate plan.

Mr Cotton was the sole custodian of encrypted passwords protecting over $200 million (USD?) worth of cryptocurrency (virtual currency created and stored electronically such as Bitcoin, Litecoin and Ethereum). His untimely death has left numerous Quadriga customers unable to access their assets. Mr Cotton’s widow states that she played no role in the running of Quadriga and, despite her efforts, has been unable to unlock the laptop used by Mr Cotton nor access any of his accounts.

Regardless of how the Quadriga saga unfolds, it is a timely reminder of how important it is to consider what should happen to our digital assets when we die.

What are digital assets?

A person’s digital affairs may encompass a range of online transactions, activities and accounts such as:

  • cryptocurrency;
  • financial assets including online bank accounts and shares;
  • intellectual property attached to domain names or online literary works;
  • online sporting and gaming accounts;
  • loyalty programs such as Flybuys Rewards and Frequent Flyers;
  • online shopping accounts such as eBay and Amazon;
  • Personal/business social media accounts such as email, Facebook, Linked-In.

All should be considered, and included, in an effective estate plan.

Issues unique to certain digital assets

Traditional cash-based assets such as money deposited in a bank, shares or other paper-based investments are held by title to the owner and can be transferred to the beneficiary with the relevant documentation. Ownership of digital assets like Bitcoin, however, is anonymous with owners accessing their cryptocurrency with private keys which are used to unlock and deal with the assets. This information may be held on a computer device (via a digital wallet), on a USB, or printed separately. These assets can easily be overlooked or ‘keys’ misplaced, representing unique challenges when it comes to administering an estate.

Many digital assets are also held globally and may therefore raise jurisdictional issues from an Estate planning perspective. In most instances, there is no uniform legislation governing access to a deceased person’s online accounts, so it is imperative that these matters are dealt with specifically in an Estate plan.

There are some simple steps you can take to ensure your online life is appropriately dealt with when you are gone.

1. Identify your digital assets

You should start by making a list of your digital assets (including online accounts) and determining what you would like to happen to them when you die.

Keep records of your online accounts and subscriptions including user names and passwords and store this information in a secure place.

Remember your online accounts and login details are likely to change frequently and your list should be maintained accordingly.

2. Understand your online accounts

Understanding how various accounts are dealt with by service providers will help to determine the type of action you would like taken when you die.

For example, Facebook account holders can advise in advance whether their account is to be deleted or memorialised. A memorialised account can provide a place for family and friends to share memories after a person dies on the deceased’s profile, and any content shared by the deceased person remains visible to those with whom it was shared. Nobody can log into a memorialised account.

Some loyalty programs such as Frequent Flyers may not be transferrable or redeemable after a person dies, so it may be wise to keep tabs on these types of accounts to utilise benefits regularly.

3. Include digital assets in your Will and appoint a technology custodian

Your Will should define and identify important digital assets and provide executors and trustees with appropriate directions and powers to deal with them.

Assign your executor, or other trusted person who is familiar with technology, the role of managing your online life after you die and ensure this direction is included in your Will.

Record your after-life technology instructions with respect to each account separately and ensure these instructions are secure, but accessible to your technology custodian. Never disclose passwords in your Will.

4. Online maintenance

Online accounts contain personal information which should be protected. Technology presents a real risk of identity fraud and unmonitored accounts can be particularly vulnerable. Regular monitoring and unsubscribing or deleting unused accounts can help minimise risk and keep your technology life tidy.

Regularly downloading photos and videos from your mobile to a storage device can ensure that memories are accessible to your family when you die.

5. Consider incapacity

It is also important to consider what happens to your online life in the event that you are incapacitated. Appointing a trusted person to manage your online affairs and including specific instructions in an enduring power of attorney is a logical step to ensure the appropriate management of your digital wealth if you are incapacitated.

The instrument making the appointment should be specific to the jurisdiction in which the assets are held, and in this respect, more than one document may be required.

6. Consider trusts

It may also be beneficial to hold substantial digital assets through a trust structure, if possible, for greater protection and better taxation outcomes. In doing so, the trust must be considered and dealt with under the Will, which should nominate beneficiaries of the trust or shares in the trustee company and include provisions to ensure the trust can achieve the desired objectives.

Conclusion

It has become increasingly difficult for executors, lawyers and family members to ascertain and access online assets after a person dies, with many financial and other institutions operating in a ‘paperless’ environment. Certain digital assets such as cryptocurrency can present additional problems for a deceased’s family.

Inaccessible online accounts make it difficult to identify assets, and leaving online accounts open indefinitely raises concerns of potential identity theft.

Good online management and ensuring your digital assets are included in your estate plan will help your executors and family manage your online life after you are gone.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form.

Understanding a Commercial Lease

Understanding a Commercial Lease

When renting a property from which you intend to run a business, it is important for both Landlords and Tenants to understand the relationship they are entering into and the rights and obligations that they each have. The document that governs this relationship is usually a Commercial Lease.

So, what is a Commercial Lease?

A lease is a legally binding contract that gives you certain rights to a property for a set term. A commercial lease is used when leasing property that is used primarily for a business.

You should never sign a lease without understanding all of its terms and conditions. If you don’t understand what you are agreeing to you could experience serious financial and legal problems.

It’s important to properly investigate the property and lease document before you sign. It is a good idea to ask your lawyer to explain each clause of the lease to you. Your lawyer can give you legal advice, draft new clauses and help you negotiate the terms and conditions to suit you.

Important issues to consider when entering into a lease

A commercial lease will usually contain terms dealing with items such as:

Rent: How much is the rent and when is it due? The amount of the rent will usually be calculated based on the area of the premises. This may not always be as simple as it sounds. For example, if the shape of the property is irregular or the area includes a lift, more than one floor, outdoor area or interior walls.

Rent Increases: Rent will usually increase annually during the term of the lease, with increases determined by a fixed percentage, market based values or tied to the CPI. It is common for CPI or fixed reviews to occur during the term of a lease and for a market review to occur at the expiry of the initial term and each option period.

Security Deposit: The landlord will usually ask for some form of security from the tenant in case the tenant defaults on their obligations (eg. not paying rent). The security is usually for an amount equal to 3-6months’ rent and is by way of bank guarantee or security deposit. If the tenant is a company then personal guarantees from the company’s directors may also be required. The lease should also specify the terms regarding its return.

Term of the lease: The lease should set out the length of the lease and any options to renew the lease and any terms relating to the renewal. A landlord will generally want a longer initial lease term (typically 3, 5 or 10 years) whereas the tenant is likely to want a shorter period (1-3 years).

Option to Renew: An option allows the tenant to continue leasing the property on similar terms at the end of the period of the lease for a further defined period and rent (subject to any review). An option gives the landlord potential greater security of income and the tenant the ability to make longer term plans for their business.

Knowing the procedure for exercising the option, especially when the option can be exercised, is critically important

Improvements: A lease should address what improvements or modifications can be made to the property, who will pay for the improvements and whether the tenant is responsible for returning the property to its original condition at the end of the lease.

Description of the property: The lease should clearly describe all of the property being leased, including bathrooms, common areas, kitchen area and parking spots. A plan of the property should also be included.

Signage: Any restrictions on putting up signs, say that are visible from the street, will be included in the lease. Also, check local zoning regulations to determine what other limitations may apply.

Use of the property: Most leases will include a clause defining what the tenant can do on the property (eg. What type of business). A tenant should ask for a broad usage clause just in case the business expands into other activities. Ask your local council if your business can operate in your desired location. Also consider the council’s development plans for the area.

Outgoings: The lease will set out who is responsible for costs like utilities, property rates & taxes, insurance, and repairs.

Insurance: You should contact your insurance company and discuss the clauses referring to insurance so you fully understand what is covered by the lease.

Exclusivity clause: This is an important clause for retail businesses renting space in a commercial complex. An exclusivity clause will prevent a landlord from renting space to a competitor.

Assignment and subletting: A tenant should maintain the right to assign the lease or sublet the space to another tenant. Usually the tenant is still ultimately responsible for paying the rent if the business fails or relocates, but with an assignment or sublet clause in place, the business can find someone else to cover the rent.

Maintenance & Repair: The lease should clearly set out who is responsible for maintaining or repairing the property and the fixtures and fittings during the term of the lease.

Make Good: A tenant should carefully review the make good obligations in the lease.  Often these can be onerous and involve considerable expense on the tenant having to reinstate the premises to their original condition when the lease commenced.

Termination: The circumstances under which the lease will be terminated should be set out in detail in the lease.

Costs: The landlord may want the tenant to pay the costs of preparing the lease, this should be clearly set out in the lease.

Retail lease or general commercial lease?

The Retail Leases Act 1994 has specific legislation relating to retail leases. This legislation is designed to promote fair leasing arrangements, improve communication and provide access to low cost dispute resolution for the retail industry.

For a new retail lease the landlord is legally required to give the tenant:

  • a written lease with matters agreed to and signed off by both parties.
  • a disclosure statement.
  • the NSW Retail Tenants Guide, which gives notice of some of the tenants’ rights and obligations and some commercial matters that the tenant should be aware of.

The disclosure statement outlines important information about the lease, it must be in the prescribed form and contain a statement notifying the tenant that independent legal advice should be obtained. It would also normally include details about:

  • the term of the lease
  • whether there are options for further terms
  • the occupancy costs for leasing the premises (including rent and any outgoings)
  • specific information for shopping centre leases
  • tenant’s fit out requirements
  • if there are any relocation or demolition clauses

Conclusion

Although many of the terms of a commercial lease are fairly standard it is important that you fully understand your rights and obligations, especially the provisions which relate to retail leasing.

It is a good idea to ask your lawyer to explain what each clause in the lease means and to get their assistance in negotiating the terms and conditions that suit you.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form here.

Does your privacy policy comply with the privacy laws?

Does your privacy policy comply with the privacy laws?

Privacy laws in Australia are governed by the Privacy Act 1988 (Cth) (the ‘Act’) and the Australian Privacy Principles which affect the handling of personal information.

The principles were introduced in 2014 to bring Australia’s privacy laws (first introduced in 2001) in line with advancing technology trends and to provide more transparency around the capture and use of personal information.

The principles make it difficult for businesses to collect information about consumers without their knowledge and prescribes how businesses handle, use and store personal information and engage in direct marketing.

These principles have been further strengthened by the Privacy Amendment (Notifiable Data Breaches) Act 2017 (Cth) which imposes mandatory reporting requirements on entities subject to existing obligations under the Act, for an ‘eligible data breach’.

If your business is affected, you may need to update your privacy policies and your procedures and systems to comply with the law.

Which businesses are affected by the privacy laws?

The Act applies to Australian Government agencies, businesses with an annual turnover of $3 million or greater, credit reporting bodies, and smaller entities ‘trading in personal information’.

What does ‘trading in personal information’ mean?

Personal information is information that identifies, or could reasonably identify, an individual. This includes names, addresses, dates of birth and bank account details.

Trading in personal information includes collecting or providing personal information to a third party for a benefit, service or advantage. If you collect personal information and then provide it to a business to manage your direct marketing, you may be trading in personal information.

What are the key obligations?

Businesses subject to the Act must:

  • Ensure they have a privacy policy that addresses specific topics;
  • Have procedures and systems in place to ensure they comply with the Act and the privacy principles;
  • Understand what an ‘eligible data breach’ is and implement policies to deal with such breaches.

Entities affected by the Act may face significant fines for serious or repeated breaches.

How do I ensure my business complies?

Businesses affected by the Act should review and identify how they deal with personal information. The following elements need to be addressed:

Privacy Notice

When you collect personal information, inform individuals of your organisation’s name, contact details, the purpose of collection and to whom it will be disclosed.

Privacy Policy

Your privacy policy must address the required topics. These include:

  • What personal information you collect.
  • How you collect the personal information.
  • The purposes for which you use and disclose it.
  • If you provide personal information to parties overseas you need to disclose that and, if practicable, specify the countries where those parties are located.
  • Setting out how you secure and store personal information.

Systems

Establish a system to ensure that:

  • Staff who handle personal information comply with the new privacy laws.
  • Individuals can access their personal information and correct out of date or incorrect information.
  • You have a process to deal with complaints about your compliance with the laws.
  • Enables recipients of direct marketing material to unsubscribe.

Understanding eligible data breaches

An eligible data breach happens if:

  • There is unauthorised access to, unauthorised disclosure of, or loss of, personal information held by an entity; and
  • The access, disclosure or loss is likely to result in serious harm to any of the individuals to whom the information relates.

An entity must give notification of an eligible data breach:

  • If it has reasonable grounds to believe that a breach has occurred; or
  • If information has been lost and unauthorised access or disclosure of that information is likely to occur;

and, in either case,

  • The breach would likely result in serious harm to the individuals to whom the information relates.

Dealing with eligible data breaches

If a breach occurs, an entity must notify any affected individual and the Office of the Australian Information Commissioner (OAIC).

If an entity suspects a breach has occurred, it must investigate the circumstances of the possible breach within 30 days of becoming aware of it, to determine whether it is an eligible data breach.

Notification must include:

  • The entity’s identity;
  • Details of the data breach – i.e. how the breach occurred;
  • The information that is the subject of the breach;
  • The recommended actions that individuals should take in response to the breach.

Notification is not required if an entity is able to quickly remedy a data breach so that it is unlikely to result in serious harm.

Entities that fail to carry out the investigation and notification processes prescribed by the reforms will breach their obligations under the Act and may face civil penalties.

Conclusion

Business entities that handle personal information must understand and comply with privacy laws. Staff should be trained, and policies implemented on how to collect, store and manage personal information. Policies should identify systemic problems when collecting and handling information and set out appropriate solutions.

Staying one step ahead of your privacy obligations, and minimising the potential for data breaches to occur, is essential to safeguard against fines and loss of reputation.

If you need more information or if you need assistance or advice on how to proceed please call us on (02) 9963 9800 or via our contact form, here.

Avoiding Redundancy Traps

Avoiding Redundancy Traps

Employers can easily fall into dispute with their employees by failing to properly handle redundancies. There is often uncertainty surrounding redundancy, in terms of handling it within the law, as well as cost.

Redundancy commonly occurs when a business is sold and a new owner offers jobs to the vendor’s existing workforce. Some employees decline the offer of employment by the new owner. In this context, an issue can arise as to whether or not redundancy payments need to be made to an employee who rejects an offer of employment by the new owner.

Notice and Severance distinguished

Notice and severance payments should not be confused. The period of notice provides the employee with a chance to seek other employment while a severance payment is intended as compensation for the loss of future entitlements to long service leave and accrued sick leave.

Redundancy

Let’s examine what redundancy means. The best way to define redundancy is that the employer no longer wishes the duties the employee has been performing to be undertaken by anyone. Termination of the employee on this ground has therefore nothing to do with poor performance or misconduct. Essentially the work or role is no longer required to be performed by any employee. Redundancy can also happen when an employer becomes insolvent or bankrupt, or following a re-structure, in order to increase the competitiveness or profitability of a business.

The employer must meet any requirements under a relevant award or enterprise agreement regarding redundancy. This includes discussions with the employee about the prospect of redundancy in view of operational changes or restructuring.

Employers need to be aware that a redundancy which does not meet the above criteria may expose them to an unfair dismissal claim. It should also be appreciated that a redundancy does not remove the need for notice or payment in lieu of notice.

Some employers fall into the trap of going through a ‘redundancy’ and then immediately afterwards advertising the same position. From an employer’s perspective it is prudent to assume the former employee will check your advertised positions.

It is not uncommon for an employer to seek to portray what may in fact be, a wrongful termination of an employee, as a “redundancy”.

The employer needs to ensure that, on examination of the facts, whilst the employee may have no legal claim to a severance payment, there is no basis for a common law claim.

What is a ‘genuine redundancy’?

If an employee has been made redundant and that redundancy is a “genuine redundancy” as defined by the Act, then the employer will be able to defend a claim for unfair dismissal.

Under the Act, it is a “genuine redundancy” if:

  • the person’s employer no longer requires the person’s job to be performed by anyone because of changes in the operational requirements of the employer’s enterprise; and
  • the employer has complied with any obligation in a modern award or enterprise agreement that applied to the employment regarding the redundancy; and
  • it is not reasonable for the employer to redeploy the person in the employer’s enterprise or an associated entity of the employer’s enterprise.

It is important that the employer who is making an employee redundant not only complies with the consultation provisions of any applicable award or enterprise agreement, but also makes enquiries to make sure that there is not a suitable alternative position available within the employer’s business or any other “associated entity” of the employer.

When should a redundancy payment be made?

When an employee is made redundant then usually a redundancy payment will be required by the employer and this is often called severance pay.

However, the employee is not entitled to redundancy pay under the Fair Work Act if the employee:

  • resigns;
  • is terminated other than due to redundancy, e.g. misconduct or performance issues;
  • has been employed for less than 12 months;
  • is employed in a small business with less than 15 employees;
  • was employed for a fixed term and that term has ended;
  • is a casual employee.

The amount of any redundancy payment is calculated by reference to the employee’s years of service. For example if the employee has worked for a period greater than one year but less than two the redundancy period payable would be 4 weeks. If the term was between 9 to 10 years the period would be 16 weeks.

However, an employer may not be required to pay the redundancy for the full length of service if the employee did not have any redundancy entitlements with the employer in question, prior to 1 January 2010. In those circumstances the period from which redundancy payments are calculated is 1 January 2010 rather than the full length of service.

In conclusion – take care

It is easy to fall into one of these employment law traps and employers should be satisfied as to the circumstances that constitute a redundancy, carefully review payments to be made and comply with the Act’s requirements in relation to a “genuine redundancy”.

Regardless if you are an employer or employee, if you feel you need assistance call us on (02) 9963 9800 or connect with us via our contact form.