What is retrenchment?
The term retrenchment is used to describe a situation whereby a role within a business previously filled by an employee ceases to exist. Once the role is redundant, the employer can either redeploy the employee into another role or terminate their employment.
When an employee is terminated due to their role becoming redundant, this is also called retrenchment. Often, when a retrenched employee loses their job, it is through no fault of their own.
What are the causes of retrenchment?
The two most common causes of retrenchment are downsizing and operational changes. If a business is underperforming financially, it may need to scale back its operations and reduce overheads by retrenching some of its staff.
In some cases, a business may not downsize but will still restructure its workforce to make operational changes. For instance, if one of its services is in low demand, a business may make a strategic decision to discontinue that service and replace it with another. In this situation, it is common for roles involved in delivering that service to become retrenched.
What are examples of retrenchment?
These are some common examples of employee retrenchment:
A business notices that managing and analysing its own data is costly. After exploring alternative solutions, the company realises it is cheaper to outsource its data needs to an external company. Consequently, several data analysts are retrenched and lose their jobs.
A marketing agency is struggling to make a profit. If changes are not made, the company may face liquidation. The agency recently branched out into PR but is struggling to get a foothold in the industry. Management decides to downsize and revert to their earlier business model, which means retrenching two PR specialists.
What is a retrenchment strategy?
A retrenchment strategy is the process of aggressively cutting business costs to quickly generate an increase in profitability. Retrenchment strategies are normally put into action in the context of a failing business when management and business owners take drastic steps to save a company.
A retrenchment strategy might involve:
Selling assets – A business that urgently needs to generate cashflow might sell assets, including equipment or company buildings.
Abandoning markets – If a national or regional market is less profitable than others, a company may choose to stop operating in it
Discontinuing products and services – If a particular product or service is underperforming, a business may choose to discontinue it.
Outsourcing – Sometimes it is more financially sustainable to outsource certain business functions, rather than perform them internally.
Workforce restructuring – Businesses will often decide which roles they can operate without and retrench any unneeded workers.
Ethical retrenchment
Sometimes in struggling businesses retrenchment is unavoidable. However, if your business is forced to retrench employees, make sure you do it in an ethical way.
A socially responsible retrenchment process will follow these simple steps:
Step 1: Use fair selection criteria to decide which positions are to be retrenched. Be sure to communicate any criteria to all staff for transparency.
Step 2: Calculate how many members of staff will be retrenched.
Step 3: If the number of retrenched workers is over 15, the Fair Work Act 2009 demands that you give formal notification to Services Australia. Services Australia will contact the Department of Education, Skills and Employment to make them aware of the retrenchments. If the number of retrenched workers is less than 15, it is still advisable to contact Services Australia.
Step 4: The Department of Education, Skills and Employment has a transition support network that will provide employment assistance and financial advice to your retrenched workers. In some cases, Employment Services will organise a support services session to answer questions and give advice directly.
Redundancy pay
When an entrenched employee’s job is made redundant, the employer may need to meet redundancy pay entitlements (also known as severance pay).
In line with the National Employment Standards (NES), redundancy pay does not need to be paid in some circumstances, such as if the employer is a small business or the employee is hired on a casual basis.
The amount of redundancy pay the employee is entitled to is based on the length of their continuous service with the employer. Continuous service is the total length of time they are employed by the business and does not include periods of unpaid leave.
Some awards have industry-specific redundancy clauses, which apply instead of the NES. Industry-specific redundancy clauses can have different rules about:
Who redundancy clauses apply to
What redundancy pay an employee is entitled to
If a retrenched employee is covered by a registered enterprise agreement, the terms of their agreement will contain information about how much redundancy needs to be paid and other entitlements. To find an enterprise agreement for a specific industry, go to the Fair Work Commission website.
Retrenchment minimum notice period
Legally you must notify the retrenched employee in writing and give them the correct notice period (or payment in lieu of notice).
Employers who fail to give adequate notice might be in breach of:
An employment agreement
The National Employment Standards (NES)
A common law employment contract
Retrenchment and genuine redundancy
Terminating an employee because of retrenchment does not automatically make it a genuine redundancy. In most cases, the employer will need to have an accepted reason.
If a retrenchment is proven to not be a genuine redundancy, the employee might be able to make a claim for unfair dismissal.
To prove that a retrenchment is a genuine redundancy, an employer might have to provide evidence such as:
Restructuring plans
A new organisational chart
Financial records showing a business’s losses
Frequently Asked Questions
What is liquidation?
Liquidation is when a company ceases operations, and its assets are sold. The sales proceeds of liquidated assets are used to pay debts owed to creditors and shareholders.
What is the difference between retrenchment and redundancy?
Essentially, retrenchment refers to a role which ceases to exist and has become redundant, rather than the redundancy of an employee.
If your business is making retrenchments and you’re unsure of your obligations, call our FREE 24/7 Advice Line now on 1300 651 415.
