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26 Mar 2009

Selection criteria for redundancy: what criteria do you apply?

by Luke Connolly, Fiona Mullins

When selecting employees to be terminated as a result of redundancy, the selection criteria must be fair, transparent and consistent. "Last on-first off": Is this practice safe for an employer to use as a criterion?

In the current economic climate, many employers are being forced to consider reducing their workforce. It is important for employers to plan all stages of the redundancy process carefully, including the time leading up to, during and after the redundancies take effect.

Employers who plan to implement redundancies need to consider a number of legal issues. These include, but are not limited to, the employer's obligations under:

  • State or Federal equal opportunity laws
  • the Workplace Relations Act 1996 (Cth) (for example, the obligation not to terminate the employment unfairly or unlawfully, and the obligation to consult with unions prior to termination in some cases)
  • State industrial laws (generally only for non-corporate employers)
  • any applicable industrial Awards or Agreements (individual or collective)
  • the terms of any relevant employment contracts; and,
  • the employer's relevant policies, procedures or practices (where they exist).

With such a wide range of obligations to be met, how do employers select employees for redundancy?

Selecting employees for redundancy

It is important to remember that termination on the basis of redundancy only occurs where the job an employee performs is no longer required to be performed by anyone. A redundancy should not be made as a way of dealing with concerns about an employee's performance or conduct.

Employers should be mindful of their legal obligations, for example under applicable industrial instruments, and consider these before starting the redundancy process.

When selecting employees for compulsory redundancy, it is important to ensure that decisions are based on operational requirements of the business and a business case is prepared (preferably on legal advice). The criteria for selecting employees for redundancy should be linked to those requirements. The criteria should be objective, non-discriminatory, and consistently and fairly applied. This minimises the risk of a redundancy decision being successfully challenged.

For example, possible selection criteria could be based on include:

  • required skills (including relevant experience, qualifications and training);
  • performance-based (but be careful, see below);
  • productivity levels of work centres (as against costs);
  • last on-first off rule (but be careful see below).

It is obviously very attractive for employers to favour retaining those employees who are high performers. However, care must be taken here. If employees are being selected for redundancy based on performance this becomes very subjective and the risk of a challenge to the redundancy decision is greater.

"Last on-first off": is this okay for an employer to use as a criterion?

A practice sometimes adopted to terminate the employment of employees on the grounds of redundancy is the "last on-first off" rule.

While length of service is an objective criterion unrelated to capacity or conduct, it may give rise to unfair and/or discriminatory behaviour by an employer.

The retrenchment policy of "last on-first off" was examined in Australian Iron & Steel Pty Ltd v Banovic (1989) 168 CLR 165. Australian Iron & Steel applied its "last on-first off" policy and the group terminated on the basis of redundancy was largely female employees.

At first glance, the policy did not appear to be problematic, however, the practice was deemed to be discriminatory because of the previous employment policies of Australian Iron & Steel. Each woman who had applied for a job with Australian Iron & Steel had been placed on a waiting list for employment - some waited more than three years to be appointed. Men who applied for roles at the same time had little or no waiting period. In regards to the "last on-first off" policy, Justices Deane and Gaudron of the High Court held "that the condition or requirement was unreasonable in that it operated to keep alive the effects of past discrimination on the ground of sex."

If you are considering using the criterion of "last on-first off" it is important to remember:

  • it can be used provided that its application does not contravene equal opportunity legislation by indirectly discriminating against an employee on the basis of their age, sex or other characteristics protected by discrimination laws;
  • whether it may give rise to unfair and/or discriminatory behaviour will depend on the characteristics of the particular pool of employees to whom this practice is applied. For example, Justice Merkel in Construction, Forestry, Mining and Energy Union v Mount Thorley Operations Pty Ltd (1997) 76 IR 364 found as the "last on-first off" policy applied generally to all employees and not only to union members, it was not discriminatory.

Final note

There are fundamental changes to the area relating to redundancy under the Fair Work Bill 2008. Employers planning to implement redundancies should be aware of the following changes:

  • there will be a general right to a redundancy payment (there are some minor exclusions)
  • there are significant changes to the unfair dismissal regime. The regime will apply a new test on what constitutes a "genuine redundancy" for the purposes of exclusions from the unfair dismissal regime. The test will include stringent consultation requirements and consideration of redeployment
  • as is the case now, an employee will have general protection from discrimination, under new "adverse action" provisions. Under this proposal, an "adverse action" against an employee includes actions where an employer dismisses the employee (including by way of redundancy) or injures the employee in his or her employment, where they are entitled to certain workplace rights (as defined).

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.