redundancy calculation

How To Calculate Your Redundancy Payout

“You’re redundant.”

Those aren’t the nicest words you’ll ever hear. But many people face redundancy from their jobs at least once in their careers.

For some, going through the restructuring process is harrowing enough. But to actually lose your job through no fault of your own, that’s another level.

Your immediate thoughts may turn to survival.

How much time do you have until things will be really desperate if you haven’t already got a new job?

Part of the answer to that lies in what your employer will pay you as you head out the door.

That’s why it’s essential to know how to work out your entitlements if made redundant.

NO REDUNDANCY PAY UNLESS AGREED

Ever heard of someone receiving a massive payout on redundancy?

Typically, that happens because they are entitled to redundancy pay – a special payment that only gets paid to you in those circumstances.

In some countries, redundancy pay is mandatory. But under New Zealand law, there is no basic right to redundancy pay.

That means unless your employment agreement provides for redundancy pay, you don’t get any.

So when signing up to a new job, it pays to check your redundancy entitlements. If you don’t have any, that’s the time to bargain for something to see you on your way if you lose your role to restructuring.

Admittedly, redundancy pay is less common in small to medium-sized businesses. But if you don’t ask, you don’t get – right?

WHAT DOES YOUR CONTRACT SAY?

Given that redundancy entitlements are a contractual matter, to your employment contract you must go! Look for the following things to work out what you’ll get if you’re terminated for redundancy.

Notice

The one thing every employee must get when made redundant is notice.

You must have reasonable notice given to you before you get sent packing and have no further income.

Notice is not necessarily paid out to you as a lump sum. You can be asked to work out your period of notice.

Yet, where a redundancy arises, employers will often offer to pay it out rather than requiring you to work. The point is, it’s usually up to the employer to decide whether you have to work or will get paid out.

How much notice do you get?

Your redundancy clause in your employment agreement should tell you.

There have been cases where employers have had to pay double notice. That is, the Court has held that an employer must pay both the notice under the general termination clause and the notice under the redundancy clause.

That result is rare though, and many employers word their redundancy clauses carefully to avoid it. The clause may say something like:

The notice under this clause is in substitution for, and not in addition to, the notice under the general termination clause.

Also, you may not get notice if you are only technically redundant.

Compensation

If you are fortunate enough to have a right to redundancy pay (sometimes call redundancy compensation), your employment agreement will include a formula for calculating it.

There are various methods used:

  • Fixed sum: a lump sum (e.g. $5,000)
  • Fixed duration: a lump sum determined by reference to so many weeks or months of pay (e.g. three months’ pay). This has the benefit of increasing your payout in line with the various increases to your pay.
  • Scale: x weeks of pay for x years of service (sometimes you get more for the first year of service than subsequent years). This method recognises that you should get paid more redundancy pay the longer you stay in the business.
  • Maximum: a maximum threshold of pay (e.g. a maximum of 25 weeks’ pay). Employers may want to cap the total amount of the payout, particularly if they adopt a scale approach.

Each of these formulas for calculating redundancy pay have their benefits. But as already explained, if you have a redundancy entitlement at all, you are better off than many.

Just be sure to check that the calculation is correctly done by your employer.

In particular, if the calculation is a multiple of so many weeks’ pay, you need to be sure that the right amount for a “week’s pay” is used.

Other benefits

Employers can choose to also offer other benefits in connection with your redundancy. These can include:

  • Allowing you time off to attend interviews for other jobs.
  • Counselling or outplacement support to help you find other jobs or freshen up your CV.
  • Allowing you to leave work sooner than your period of notice requires if you find another job.

Each of these has a benefit, though intangible, in and of themselves. Though employers are not obliged to do any of these things, many do provide this help. It’s easy for them to give it, but it can be immensely valuable to you as you move on to the next thing.

Holiday pay and wages

Of course, you can’t forget that you are entitled to any unpaid wages and holiday pay owing at the date of termination.

CONCLUSION

When you’re faced with redundancy, it’s worthwhile calculating your entitlements. Go back to your employment agreement and read it carefully. If you don’t understand what it provides, get help working it out.

You can also ask your employer to do the calculation for you and explain the figures. Cross-check the employer’s calculation with your own calculations.

In short, you’re entitled to whatever appears in your contract. Make use of those entitlements to give yourself the best chance of moving forward to your next career move.