21 Feb 2019

When are employers not required to pay redundancy payments?

By Abraham Ash, Timothy Grellman

If employers rely on the statutory exemption that a redundancy was "due to the ordinary and customary turnover of labour", they bear the evidentiary burden of proving that their practices fall within the exemption.

Under the Fair Work Act 2009 (Cth) (FW Act), an employee must be paid redundancy pay if their job becomes redundant and their employment is terminated. However, there are exceptions, including if employees' period of continuous service is less than 12 months; the employee is engaged for a stated period of time, an identified project or task, or a particular season; or the employee's employment is terminated for serious misconduct. One less frequently used exception is provided by section 119(1)(a) of the FW Act, which provides that an employer is not required to pay redundancy pay when the redundancy is "due to the ordinary and customary turnover of labour".

This exception is rarely relied on by employers  and courts have seldom been required to interpret section 119(1)(a) of the FW Act. Given this, it is somewhat uncertain in what circumstances an employer can rely on this particular exception to the requirement to pay redundancy pay. In the recent case of Fair Work Ombudsman v Spotless Services Australia Ltd [2019] FCA 9, the Federal Court of Australia provides some clarity as to when this exception to the requirement to pay redundancy pay is available to employers.

Spotless terminated jobs after customer contracts terminated

In June 2015, Spotless Services Australia Ltd terminated the employment of employees who had been working at Perth International Airport for a number of years. The employees were not paid redundancy pay when their employment was terminated.

Spotless relied on the exception to pay redundancy pay in section 119(1)(a) of the FW Act, claiming that its contracts with customers were for fixed terms and that the employees whose employment was terminated were engaged merely to provide the necessary services to be performed under such contracts. Spotless asserted that, as such, these employees were "contract requirement employees", termination of their employment was due to the ordinary and customary turnover of labour", and they were not entitled to redundancy payments.

The Fair Work Ombudsmen contended that the practices and policies of Spotless were such that it was not a normal feature of the company to terminate such employees if a customer contract was not renewed. The Ombudsman asserted that in these circumstances, the employees whose employment was terminated were entitled to redundancy payments.

Employees must know their jobs will end when customer contracts terminate

Justice Colvin ruled that the exemption to make redundancy payments under section 119(1)(a) of the FW Act will apply if termination of employment "was a likely and foreseeable characteristic of employment by such business", so that redundancy was "inherent in the nature of the employment and in that sense ordinary and customary". He outlined that it was for Spotless to establish matters that would bring it within the words of the exception recorded in section 119(1)(a) of the FW Act.

Before examining the facts of the matter, Justice Colvin sought to extinguish uncertainty regarding whether the case law that interpreted the expression "ordinary and customary turnover of labour" before the FW Act was introduced was relevant in construing section 119(1)(a) of the FW Act. Justice Colvin rejected the view expressed by Justice Reeves in United Voice v Berkeley Challenge Pty Ltd [2018] FCA 224, which was that the pre-existing law was of "limited value" and that the words provided in section 119(1)(a) of the FW Act could only be relied on where such terminations were a long continuing practice of the employer. Justice Colvin ruled that section 119(1)(a) is not limited to such a narrow field of operation.

Next, in applying the appropriate formulation of the law (set out above), Justice Colvin noted that Spotless failed to demonstrate that each employee had, or ought to have had, an expectation that their jobs would come to an end when customer contracts ended. His Honour had regard to a number of factors:

  • Spotless' redeployment practices and policies used when customer contracts came to an end demonstrated that the company wanted to keep its employees where possible;
  • Spotless did pay redundancy payments prior to its announcement of a change in redundancy pay policy; and
  • Spotless never communicated to its "contract requirement employees" that their employment was fixed or linked to a specific customer contract.

Justice Colvin ultimately declared that Spotless breached section 119(1)(a) of the Act by failing to pay redundancy payments and ordered that a subsequent hearing date be scheduled for the determination of pecuniary penalties.

Will you be required to pay redundancy payments? 

First, if employers rely on the statutory exemption that a redundancy was "due to the ordinary and customary turnover of labour", they bear the evidentiary burden of proving that their practices fall within the exemption. To rely on the exemption, employees should have a clear expectation that the nature of their role is such that termination of their employment for redundancy reasons is a likely and foreseeable characteristic of the business.

Justice Colvin noted that in some circumstances, it will not be enough for an employer to simply outline that there is an inherent risk that employment depends upon securing new contracts to continue to offer employment to employees. This exception may only be relied on if the practices of the employer actually are such that terminations for redundancies are actually due to the ordinary and customary turnover of labour.

Second, however, the FWO v Spotless decision clarifies that new businesses are not precluded from relying on this exception. In FWO v Spotless, Justice Colvin stated that new businesses may establish from the outset that the nature of their customer contracts, combined with the significant changes in required employees, may be enough to establish that turnover is customary and ordinary such that section 119(1)(a) applies.

Third, if an employee's employment genuinely relies on identifiable customer contracts, in some circumstances, the best way to avoid paying redundancy pay may be to engage employees on fixed term contracts or contracts for identified tasks of projects, and rely on specific exceptions applying to employees on these contracts.

On 6 February 2019, Spotless filed an appeal with respect to Justice Colvin's judgment.

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