Michael Byrnes, Partner and Emily Capener, Solicitor provide an overview of two recent cases that considered the payment of redundancy during the COVID-19 crisis.

Redundancies are generally driven by factors such as technological advances, company restructuring and business closures. Now, of course, employers and employees alike need to deal with the challenges posed by a pandemic. Due to the COVID-19 crisis there has been a dramatic increase in the number of employees whose positions are being made redundant by businesses who can no longer afford to keep them usefully employed. While the JobKeeper scheme has sought to alleviate the current financial burden on some Australian employers, not all businesses are eligible, and they still may need to look at other options including redundancy.

In this regard, what happens when an employer is unable to afford redundancy pay, particularly in the midst of the current pandemic? This article looks at two recent Fair Work Commission decisions which examine this question in the context of the COVID-19 crisis. These cases demonstrate that the Commission's response to relieving employers from their obligations in relation to redundancy pay largely turns on the facts.

Redundancy overview

When an employee is made redundant, in almost all cases they will be entitled to receive redundancy pay from their employer, usually in accordance with the (service based) quantum specified in the Fair Work Act 2009 (Cth) (the Act).

There are two circumstances in which an employer can apply to the Commission to have the amount of redundancy they would otherwise have to pay under the Act reduced:

  • the employer has found other acceptable employment for the employee; or
  • the employer is unable to afford the full redundancy amount.

It is ultimately for the Commission to determine whether the redundancy pay will be reduced and by how much (including to nil). The recent cases of Mason Architectural Joinery Pty Ltd [2020] FWC 1897 and Worthington Industries Pty Ltd [2020] FWC 1912, both delivered on 9 April 2020, demonstrate that the facts in each situation will play a significant role in determining the Commission's decision.

Mason Architectural Joinery Pty Ltd [2020] FWC 1897 (Mason)

In Mason, the relevant employee had been employed by Mason Architectural Joinery Pty Ltd for a period of three years. In February 2020, he and another employee had their employment terminated on the basis of redundancy after the business experienced two months without revenue and was seeking to reduce costs. Upon his redundancy, the employee became entitled to three weeks' notice of termination and seven weeks' redundancy pay.

While the employer paid out the notice period, Commissioner McKinnon considered the employer's application to the Commission to vary the quantum of redundancy due to incapacity to pay.

Commissioner McKinnon noted that the employer was a small business suffering significant financial strain. Although the business had recently received one payment for a completed job, it had lost further work due to the pandemic and was "trying to work through the current crisis".

The Commission also observed that the employee had been able to find alternative work with a higher hourly rate, and that the short period for which the employee was out of work was sufficiently covered by the paid notice period.

In these circumstances, Commission McKinnon considered it appropriate to reduce the amount of redundancy pay to which the employee was entitled to one week's pay (from the seven weeks' pay to which he would otherwise have been entitled).

Worthington Industries Pty Ltd [2020] FWC 1912 (Worthington)

By contrast, in Worthington, Deputy President Clancy dismissed Worthington Industries' application to the Commission for a reduction in redundancy pay for three employees.

Worthington Industries had requested that the amount of redundancy pay be reduced from four weeks to one week for each of the three employees. This application was made on the basis that almost all areas of the manufacturing business had been impacted due to COVID-19, and that they anticipated their sales to drop by up to 50 percent in the coming months. Furthermore, Worthington Industries indicated that it was their preference to maintain the three employees on a casual basis, with the intention of converting them back to full-time employment once sales had picked up.

In his reasoning, Deputy President Clancy considered that Worthington Industries appeared to be an eligible candidate for the Federal Government's JobKeeper scheme, as they were an employer with a turnover of less than $1 billion and predicted a fall in turnover in excess of the required 30 percent. Notably, the JobKeeper scheme had been passed by Parliament after the employees had been retrenched. As such, Deputy President Clancy suggested that Worthington Industries may want the opportunity to assess whether the JobKeeper Payment was something they could benefit from in the present situation. In this regard, Deputy President Clancy noted:

- [20] "Further, I highlighted the section of the FAQ dealing with the situation where a company might have let their workers go, which indicated that if such workers were rehired, they could immediately receive the JobKeeper Payment, even if it was necessary for the employer to immediately stand them down. I indicated that there was also a section entitled "What should I do if I want to re-hire an eligible employee who received a redundancy package?". I noted that the answer to that particular "FAQ" was that if re-hired, the employer "will need to consult with the employee and consider prevailing workplace arrangements to settle redundancy terms." I expressed a preliminary view that the applications before me might perhaps be capable of being considered part of "prevailing workplace arrangements to settle redundancy terms"."

Worthington Industries refused this offer on the basis that resolving the redundancy issue before the Commission would provide certainty to all involved. As such, the matter proceeded on the basis of further submissions in relation to reducing redundancy pay.

In their submissions Worthington Industries relevantly argued, "that while Worthington Industries currently had the means to pay the full amount and had money in the bank today to do so, they would be dealing with a deficit and cash flow problems very quickly". It argued that the business would suffer financial hardship as a result of paying the full redundancy amounts to the three employees.

In making his decision, Deputy President Clancy acknowledged the challenges faced by both employers and employees as a result of the COVID-19 crisis. Ultimately, however, as Worthington Industries had the present means to pay the full amount of the redundancy entitlements, Deputy President Clancy was not satisfied that the business should be granted a reduction in the amount of redundancy pay. As a result, the three employees were each entitled to receive the full four weeks' redundancy pay in accordance with the Fair Work Act.

Some observations

The cases of Mason and Worthington illustrate some of the factors the Commission will take into consideration when assessing applications from employers to reduce redundancy pay. Notably, even in a situation as unprecedented as the current COVID-19 crisis, employers will not be given carte blanche when it comes to a reduction in redundancy pay. The reasoning in Worthington also suggests employers should carefully consider their eligibility for any government subsidies (most notably, JobKeeper, the primary purpose of which is to keep staff employed) before effecting redundancies with the intention of then making an application for a reduction in redundancy pay.

For further information, please contact:

Michael Byrnes, Partner
Phone: +61 2 9233 5544
Email: mjb@swaab.com.au

Emily Capener, Solicitor

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.