Being made redundant comes with two major financial questions: where will the next source of income come from, and what’s the best thing to do with a redundancy payment?
Yahoo Finance spoke to financial planner and principal of On Your Own Two Feet Helen Baker to answer some common questions.
How much will I get?
This will vary depending on your job, your contract and how long you’ve been there.
“It can be something like a week’s pay for every year that you worked or two weeks for every week that you worked,” Baker said.
“It will change depending on the industry and type of work you did. The hope is that you have a significant amount in payout at this particular time more than ever because the risk is that it’s going to take possibly a much longer time to get another job than it may have taken you in the past.”
Can I negotiate it?
That will be difficult, but there might be room for some changes.
Generally speaking, if a company is making staff redundant it’s because they’re going through really difficult times, or are looking to restructure in a big way, in which case the decision to lay workers off is due to them becoming genuinely redundant, rather than cost-cutting measures.
“Usually if it’s that kind of way they can often be quite generous.”
But, Baker added, it’s still tricky to get a bigger payout over the line as businesses may think that if they do it for one worker, they’ll need to do it for others.
“If you’re in a small business they may be more generous but if you’re in a big business, they’re going to stick to the wording in the contract.”
Can my company break my employment contract?
Baker said this was a “big problem” and that it’s worth talking to an HR expert about your rights if your employer looks set to break your contract.
“This is the big risk for a lot of people who have accumulated long-service leave,” she said.
“We’re talking to clients where we’re saying, ‘Maybe you’re better off taking one or two days a week and start getting that paid out, because we can have plans around that kind of money… rather than run the risk that you get none because they’ve gone bust.’”
What does it mean for my tax?
If you received a normal payout and you received your long-service leave and you left, that payment will be taxed at your normal marginal tax rates. This will occur if you were dismissed as you reached retirement age, you left voluntarily, had your contract terminated or were dismissed for efficiency measures or as a disciplinary action.
However, when it’s considered a genuine redundancy - that is, that role no longer exists within the business - then you fall into different tax brackets.
This won’t be taxed up to a certain amount, beyond which it will be taxed at your marginal tax rate.
“This is where the accountants can come in and break all of that and break down what rate is for what aspect of the payout,” Baker said.
“It should actually be less tax overall than you would normally be paid out a large amount of money.”
Baker said you should check with your accountant to make sure it’s been done properly, as this is usually done by the payroll team inside the business.
“This is probably fine and correct and they know what’s right, but it’s always good to double check that everything is right so you’re not being over-taxed.”
What does it mean for my super?
Baker said the benefit of putting the cash into super is that it’s one of the most tax-effective places to put it.
However, there is another side of it to consider.
“That money is locked away, so you need to be very careful about putting a lot of money into superannuation.”
She said you need to be aware of breaching the superannuation contributions cap, especially during the beginning of the financial year as you may find another job and then exceed the amount that you can put into your super before it is taxed at the higher rate.
The second factor is ensuring you have enough liquidity, or cash to see you through however long it is until you have another job.
“You can make that decision about putting that money into your super if and when you get that next job,” Baker said.
“The risk is that if you go too hard and put a lot of money in the wrong places at the front end of the year and then you can’t get the money out, then you’ll find yourself in deep trouble.”
It’s something Baker said she sees a lot among older workers.
“What used to be a month or maybe three months before you got another job, that’s really stretching out to six months or even a year.”
What should I do with the cash?
Clients often ask Baker about the best thing to do with their redundancy payment.
The first step is to build up your emergency fund, and the second is to construct your spending and investment plan.
“What they need to look at is having a really basic plan around their spending,” she said.
Holidays are largely off the table and going out isn’t as much fun, so Baker suggested finding ways to preserve some of those savings.
“You want to understand the difference between your basic spending, your absolute minimal combined with your ‘nice to have’ and your ‘living the dream’, which will probably come later when you’re working again and you feel a bit more secure about your finances and the world has changed a little bit as well.”
Naturally, if you’re in a really strong position, the redundancy payment could help you launch your business or return to study.
What should I be looking for in future contracts?
You want to look at the redundancy clause and the timeframe in which the clause applies, Baker said.
“They’re all different depending on how much notice they give, the generosity of how many weeks they will give you, whether they will pay out sick leave or not – that’s rare these days – and how long you need to be there for before you qualify for anything beyond,” Baker said.
And something that’s become even more critical during Covid-19 is the redundancy rules during a probationary period.
“If something gets worse or changes significantly and you’ve only just come onboard, what does that mean for you? Is there some provision for you?”
She said it’s worth looking at what the finer details say and it can even be worth seeking advice from an HR specialist on what entitlements are reasonable and what’s the norm.