redundancy small

By Calum Woods and Lindsay Carroll, NRA Legal

The Fair Work Commission has set the benchmark for employers seeking to reduce the amount of redundancy pay payable to employees who were made redundant due to a downturn in business as a result of COVID-19.

Earlier this month, the FWC heard an application from Mason Architectural Joinery Pty Ltd, a small joinery and cabinet making business in Melbourne, and three applications from Worthington Industries Pty Ltd, which commercially manufactures products for the building, furniture, caravan and rail industries.

Both businesses sought to reduce the amount of redundancy pay payable to employees on the basis that COVID-19 had caused a downturn in business and they were unable to pay the full amount.

While Mason Architectural was successful in its application, with the amount of redundancy pay being reduced from 7 weeks’ pay to 1 week, Worthington Industries was unable to achieve a reduction for any of the three employees who were each entitled to 4 weeks’ redundancy pay.

The stark contrast between these two decisions highlights the complexities in seeking a reduction, and the wide range of discretion the FWC has in balancing all of the relevant factors.

What is the process of seeking a reduction?

The FWC has the power to reduce an amount of redundancy pay in two circumstances: where the employer obtains “other acceptable employment” for the employee, or where the employee does not have the capacity to pay.

Both grounds require the employer to file an application with the FWC, and commonly there is a hearing where both parties have an opportunity to speak to the application. After the conclusion of the hearing, the FWC will make an order either reducing the amount of redundancy pay or dismissing the application. There is currently no other mechanism to lawfully reduce an entitlement to receive redundancy pay.

Mason Architectural sought an order on the basis that it had no income for two months, until an invoice was paid shortly before the hearing. On the other hand, Worthington Industries provided evidence that:

  • actual sales were down 12% compared with March 2019;
  • forecast sales for April were to be down 31% compared with April 2019; and
  • rental payments were in excess of $300,000 per annum, and they had not as of yet received any rental relief.

Worthington Industries also indicated a preference to transfer all three employees to casual, and once business had improved, allow them to convert back to full-time employment. However, unlike Mason Architectural, the FWC was not inclined to order any reduction and all employees were required to be paid the full amount of redundancy pay.

What were the differences between the two cases?

In Worthington Industries a senior member of the FWC, Deputy President Clancy referred to one of the oldest cases dealing with redundancy, responsible for many of the concepts known today (referred to simply as the “Redundancy Case”).[1] The Deputy President, in reliance on the Redundancy Case, stated:

“…the purpose of redundancy pay is to compensate an employee for matters such as the trauma associated with the termination of employment, the loss of non-transferable credits such as sick leave, the loss of security and seniority, lower job satisfaction and diminished social status and conditions. In applications such as these, the onus lies on the employer company seeking the exemption from redundancy payment obligations and the discretion exists for the Commission to make an order to reduce or remove an employee’s statutory entitlement to redundancy pay to an amount, which may be nil, that it considers appropriate.”

There exists a considerable amount of discretion for the FWC to vary amounts of redundancy pay, and often times it will not be a single factor that determines whether a reduction will be made.

Indeed, despite the uncontested evidence of Worthington Industries, the Deputy President was not persuaded to order any reduction for the sole reason that Worthington Industries had sufficient assets to pay the amount of redundancy pay, in full, notwithstanding its present cashflow issues.

In that regard, Worthington Industries was not “incapable” of making payment, despite the obvious commercial implications.

However, this may be contrasted to Mason Architectural where Commissioner McKinnon substantially considered the employee’s personal circumstances in ordering a reduction. In that case, the employee commenced a new job eight days after he was made redundant, and was paid $2 per hour more compared with his previous position. The employee was also paid 15 days’ pay in lieu of notice, which effectively covered the entire period that he was unemployed.

While the Commissioner also found that Mason Architectural did not have the capacity to pay the full amount of redundancy pay, this matter was not elaborated on in any further detail.

Should I consider seeking a reduction?

The stark contrast between Mason Architectural and Worthington Industries is not out of the ordinary course for applications to reduce redundancy pay, even before the COVID-19 pandemic.

Each case turns entirely on its own circumstances, and unless a business is currently trading insolvent, there is no sure-fire way to guarantee that a reduction will be ordered where a business is incapable of paying.

However, this is only one of the grounds that a reduction may be sought. The other much more common ground is where other acceptable employment is obtained for the employee and this is declined. The more similar or preferable the alternative employment may be, the greater the reduction is likely to be.

In both cases, the role of an employer in seeking a reduction is to present all the relevant factual circumstances which the FWC may be persuaded to take into account. Whether a reduction is ultimately ordered, will turn how effective the employer is at doing so.

If your business is considering either option, for a confidential discussion call NRA Legal on 1800 738 245.

[1] (2004) 129 IR 155.