Redundancy Pay Clause Template: What To Include

Jess runs a small software company in Auckland. When she hired her first few employees, she used a simple employment agreement that said the business could make a role redundant if it needed to. A few years later, the team has grown, costs have tightened, and she's wondering whether her contracts should also say what redundancy pay would be.

That's a very normal question. In New Zealand, redundancy can be legally and emotionally tricky, and the wording in your employment agreement can make a big difference to what you owe later.

If you're drafting or updating employment agreements, the goal is to be clear from the start: will you offer redundancy compensation, how will it be calculated, and what happens if circumstances change?

Do You Have To Include Redundancy Pay In An Employment Agreement?

No, New Zealand law generally doesn't require you to include redundancy compensation in an employment agreement.

Under the Employment Relations Act 2000, you do need a written employment agreement for every employee, and you need to follow a fair redundancy process if you're proposing redundancy. But there isn't a general statutory redundancy pay amount that applies to all New Zealand employees.

That means redundancy pay usually comes from one of these places:

• The employment agreement, if it includes a redundancy compensation clause.
• A workplace policy, especially if the employment agreement says that policy is contractual or forms part of the agreement.
• A collective agreement, if one applies to your workplace.
• A specific promise or custom, if you've clearly committed to paying redundancy compensation in a consistent way.

The key point is that if you put redundancy pay in the contract, it usually becomes a legal obligation. That's not a bad thing, but you need to mean it and understand the cost.

You can also choose not to offer redundancy compensation and simply say that redundancy payments will only be made if required by law or expressly agreed in writing. Even then, you still need to pay final wages, holiday pay and any other contractual entitlements.

Clarity helps everyone. A vague clause can create the worst of both worlds: your employee expects a payment, but you're not sure what the contract actually requires.

What Should A Redundancy Pay Clause Say?

A redundancy pay clause should say whether compensation is payable, who is eligible, how it's calculated, and how it interacts with notice and final pay.

Think of the clause as a set of instructions for a difficult day. If the wording is precise, you won't be trying to interpret it while also managing consultation, team morale and business pressure.

A well-drafted employment agreement redundancy clause will usually cover:

• What counts as redundancy, such as your business no longer needing the role to be performed by anyone.
• Whether compensation is payable, and whether it's guaranteed or discretionary.
• Eligibility rules, including any minimum service period.
• The payment formula, such as a set number of weeks' pay per completed year of service.
• Any cap, so the total payment doesn't grow beyond what your business can manage.
• What pay rate is used, such as base salary only, ordinary weekly pay, or another defined amount.
• Exclusions, such as resignation, dismissal for misconduct, the end of a genuine fixed-term agreement, or refusal of a suitable redeployment role.
• How notice works, including whether redundancy compensation is separate from notice or includes it.
• When payment will be made, often with the employee's final pay or the next payroll cycle.

You should also make sure the clause doesn't suggest you can skip a fair process. Even with a clear redundancy pay clause, you still need to consult with the employee, consider their feedback, and act in good faith under the Employment Relations Act 2000.

Redundancy Pay Clause Template Outline

This outline is a starting point only, not a finished legal document. A lawyer should tailor it before you use it, because small wording choices can change the amount you owe.

If you're building a redundancy compensation clause for a New Zealand employment agreement, you might structure it like this:

1. Definition Of Redundancy: State that redundancy means the role is no longer required to be performed by anyone because of genuine business reasons, such as restructuring, closure, technology changes or reduced demand.
2. No Automatic Statutory Entitlement: Confirm that redundancy compensation is only payable if the clause says so, or if another binding agreement applies.
3. Eligibility: Set out who qualifies, including any minimum continuous service period and whether full-time, part-time, fixed-term or casual employees are covered.
4. Compensation Formula: Insert the exact formula, such as a number of weeks' base salary for each completed year of continuous service.
5. Cap On Payment: Add any maximum number of weeks or dollar limit, so the business can budget for the exposure.
6. Pay Rate: Define whether the calculation uses base salary, ordinary weekly pay, average weekly earnings, or another measure.
7. Notice: Say whether redundancy compensation is separate from notice, and whether notice can be worked or paid in lieu.
8. Final Pay: Confirm that final wages, outstanding holiday pay under the Holidays Act 2003, and other accrued entitlements will still be paid.
9. Redeployment: Explain what happens if you offer a suitable alternative role and the employee accepts or unreasonably declines it.
10. Exclusions: List situations where redundancy compensation won't be payable, such as resignation, misconduct, poor performance dismissal, abandonment of employment, or the natural end of a genuine fixed-term role.
11. Tax And Deductions: Say that payments are gross amounts and will be subject to required payroll deductions. Get accounting advice on payroll treatment if needed.
12. Policy Interaction: Clarify whether any redundancy policy is contractual or non-contractual, and what happens if the policy changes.

The biggest drafting tip is to avoid words that sound fair but don't tell you what to do. For example, "reasonable redundancy compensation" may seem flexible, but it can lead to arguments about what reasonable means.

How Much Redundancy Compensation Should You Offer?

It depends on your budget, industry expectations, retention goals and how much certainty you want in your contracts.

Because New Zealand doesn't have a general statutory redundancy pay scale, you have room to choose a formula that suits your business. Common options include:

• No redundancy compensation: The agreement says no extra redundancy payment is owed unless the law or another agreement requires it.
• A fixed payment: For example, a set number of weeks' pay if the employee is made redundant after a minimum service period.
• Service-based compensation: For example, a set number of weeks' pay for each completed year of continuous service.
• A capped formula: For example, service-based compensation up to a maximum number of weeks.
• Discretionary support: For example, you may choose to offer an ex gratia payment, but the agreement doesn't promise one.

Here's a worked example.

Nina runs a Wellington design studio. Her employment agreements say that, if a permanent employee's role is made redundant, the employee will receive two weeks' base salary for each completed year of continuous service, capped at eight weeks.

One employee earns $78,000 per year. Their weekly base salary is $1,500. They've worked for Nina for three years and six months.

Because the clause says completed year, the calculation is based on three completed years, not 3.5 years. The redundancy compensation is:

• 2 weeks x 3 completed years = 6 weeks
• 6 weeks x $1,500 = $9,000 gross redundancy compensation

If the contract also requires four weeks' notice, Nina must deal with that separately unless the clause clearly says otherwise. If the employee works the notice period, they receive their normal pay during notice. If Nina pays notice in lieu, that's another $6,000 gross, plus final holiday pay and other accrued entitlements.

If Nina's clause simply said "two weeks' pay per year of service", the employee might argue for a pro-rated payment for the extra six months. That one wording choice could change the result.

How Do Notice, Final Pay And Redundancy Compensation Work Together?

Notice, final pay and redundancy compensation are different payments, so your agreement should treat them separately.

Your employment agreement should already state the notice period for ending employment. In New Zealand, there isn't one universal statutory notice period for redundancy that applies to every employee. The notice period usually comes from the employment agreement, and it must be reasonable in the circumstances.

When redundancy happens, you usually need to consider:

• Notice: The employee may work through the notice period, or you may pay notice in lieu if the agreement allows it.
• Final wages: You need to pay wages or salary owed up to the employment end date.
• Holiday pay: You need to pay annual holiday entitlements and holiday pay required under the Holidays Act 2003.
• Other contractual entitlements: This could include commission under a commission plan, bonuses, allowances or agreed reimbursements, depending on the contract wording.
• Redundancy compensation: This is the extra amount, if your agreement, policy or collective agreement provides for it.

Your clause should say whether redundancy compensation is paid on top of notice, or whether it includes notice. If you don't say this clearly, you may end up paying both when you expected one payment to cover everything.

Be careful with final pay timing too. If your payroll system usually pays fortnightly, say whether redundancy compensation will be paid in the final pay run or the next scheduled payroll after the employment end date.

For higher-paid staff, sales roles or variable hours employees, define the pay rate carefully. "Weekly pay" can be unclear if someone earns commission, overtime or allowances. If you mean base salary only, say that.

Can A Redundancy Policy Replace A Contract Clause?

Yes, a redundancy policy can help, but it shouldn't replace a clear employment agreement clause unless you've thought carefully about whether the policy is contractual.

A redundancy policy is useful because it can explain your process in more detail than the employment agreement. For example, your redundancy policy might cover:

• how you identify roles that may be affected
• how you consult with employees
• what information you may provide during consultation
• how you consider redeployment options
• who approves redundancy decisions
• what support you may offer, such as time off to attend interviews

The risk is that policies can accidentally become enforceable if your employment agreement says they form part of the agreement, or if the policy itself uses binding language like "will pay" and "entitled to".

If you want flexibility, your agreement can say that workplace policies are guidelines and don't form part of the employment agreement, unless a policy expressly says otherwise. But don't use that approach to avoid promises you've already made. If employees have agreed to a contractual redundancy entitlement, you generally can't remove it unilaterally.

When updating a redundancy policy, check existing employment agreements first. You may need written agreement from employees if you're changing their contractual entitlements.

Also remember that redundancy clauses are for employees. If you engage independent contractors under a contractor agreement, redundancy pay usually won't apply. Recent Employment Relations Amendment Act 2026 changes, including the contractor gateway test, are relevant when you're checking whether a worker is genuinely a contractor or may actually be an employee. If the status is unclear, get tailored advice before relying on a contractor label.

Common Mistakes To Avoid When Drafting A Redundancy Clause

Yes, small drafting mistakes can create big payroll surprises later, so it's worth slowing down before you insert a template clause.

Watch out for these common issues:

• Using vague formulas: Words like "reasonable compensation" or "industry standard redundancy pay" don't tell you what to calculate.
• Forgetting to define pay: If you mean base salary, don't say ordinary pay unless you're comfortable including other payments that may fall within that phrase.
• Leaving out a cap: A service-based formula with no cap can become expensive for long-serving employees.
• Mixing up notice and compensation: Say clearly whether redundancy compensation is in addition to notice or includes notice.
• Promising compensation in a policy by accident: Check whether your policy wording creates an entitlement you didn't intend.
• Using the same clause for every role: Senior employees, commission-based roles and part-time staff may need different employment contract drafting.
• Ignoring process: A payment clause doesn't fix an unfair redundancy process. You still need a genuine business reason, consultation and good faith.
• Changing clauses without agreement: If an employee already has a contractual redundancy entitlement, you normally need their agreement to change it.

Templates can be helpful for spotting what to think about, but they often miss the details that matter to your business. Your clause should fit your payroll, your workforce, your budgets and the way your employment agreements are already drafted.

A good practical step is to review your employment agreement and redundancy policy together. If they say different things, fix the inconsistency before you're under pressure to make a role redundant.

Key Takeaways

• New Zealand law generally doesn't require employers to pay redundancy compensation, but you can create an obligation through an employment agreement, policy or collective agreement.
• A clear redundancy pay clause should cover eligibility, calculation, caps, exclusions, notice, final pay and policy interaction.
• Be specific about the pay rate and formula. "Completed years", "base salary" and caps can all change the final amount.
• Redundancy compensation is separate from wages, notice and holiday pay unless your contract clearly says otherwise.
• A redundancy policy can support your process, but be careful not to accidentally create a contractual entitlement.
• You still need to follow a fair redundancy process under the Employment Relations Act 2000, even if your compensation clause is clear.

If you'd like help with your employment agreements, redundancy pay clauses, workplace policies or contractor status checks, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.