Australia: Redundant or not? A reminder to companies to carefully check the wording of executive contracts

Last Updated: 5 February 2015
Article by Stephen Trew

Most Read Contributor in Australia, September 2016

The definition of redundancy has been put under the spotlight thanks to a recent case where a senior executive alleged that he had effectively, if not officially, been made redundant.

This case also serves as a timely reminder to all companies to carefully check the wording of their contracts and policies regarding redundancy and when it will occur.

In the recent decision of UGL Rail Services Pty Limited v Janik, the NSW Court of Appeal had to consider whether Mr Janik had been made redundant from his position at UGL Rail. Mr Janik claimed he had a contractual entitlement to redundancy compensation and also damages arising from a failure to grant him share options.

Redundancy claim

Mr Janik alleged that his position of GM Strategic Projects had been made redundant because it had effectively been emptied of its duties and "in reality abolished". UGL Rail denied this and asserted that another employee had filled the position, albeit with a change of title to GM Passenger Services.

Mr Janik succeeded on this point in the District Court and UGL Rail appealed to the NSW Court of Appeal.

The Court of Appeal reviewed a number of decisions dealing with the definition of redundancy and emphasised that it was not a "one size fits all" when it comes to defining what constitutes a redundancy.

It emphasised that the actual wording of the relevant document, as well as the context of the employment, must be taken into account in determining the meaning of redundancy as used in the particular document.

The Court of Appeal reviewed the position description for GM Strategic Projects and compared this to the duties performed by the employee who UGL Rail alleged had replaced Mr Janik as GM Passenger Services. It found that the replacement employee performed approximately 70% of the duties contained in the position description. On this basis, it held that the position had not been abolished and continued to exist. As such, the Court of Appeal found that there had been no redundancy.

A number of other observations made by the Court of Appeal on the question of redundancy are worth noting:

The reallocation of some duties from a position does not necessarily result in a redundancy, even if the incumbent is not appointed to that position. It is a question of fact as to whether the duties are still being performed and therefore the position remains in existence. It is necessary for the employee claiming to have been made redundant to show that the changes in the duties and responsibilities are so substantial that for practical purposes the position no longer exists.

A title change does not necessarily result in a change of position as was the position in the current case. So long as many of the duties and responsibilities attached to the previous title are retained, there may well be no redundancy.

A reduction in remuneration attaching to a newly titled position is a reason to examine closely whether the old position has in truth been retained. However, it is not determinative of the issue. It is the substance of the functions and responsibilities that is the key question and the extent to which there are any differences.

Options Claim

Mr Janik also brought a claim in relation to options which he alleged should have been granted to him but were not. He failed in this claim in the District Court and appealed to the Court of Appeal. The Court of Appeal also dismissed the claim.

Mr Janik's Executive Services Agreement provided that he was entitled to participate in the annual share options scheme within the UGL group and then specified the following:

"...The Chief Executive shall make an initial recommendation of 40,000 options, to be vested over three (3) years. This recommendation must be approved by the United Group Board and is therefore not guaranteed..."

The Court of Appeal considered Mr Janik's claim that UGL Rail breached the above clause when the options were not issued to him. The Court of Appeal made the following findings:

The language of the options clause plainly contemplated that the recommendation from UGL Rail would be transmitted to and received by the Board. Since the recommendation could not be effective unless approved by the Board, it would be "commercial nonsense" for the options clause to be interpreted merely as a promise by UGL Rail to make the recommendation unless it actually reached the only decision maker capable of approving it;

There was some evidence described as being "slight" suggesting that the recommendation was transmitted to the CEO of UGL Limited as the Board's delegate; and

Because ESOP rules conferred an "absolute and unfettered discretion" on the CEO, there was no scope for implying a term that UGL Rail promised that the United Group Board would act "reasonably having regard to Mr Janik's particular circumstances and would take into account" the UGL Rail CEO's rationale for making the recommendation. That said, there was an implied promise that the United Group Board would consider the recommendation honestly and not arbitrarily or capriciously.

In the circumstances, the Court of Appeal found that there was no breach of the options clause as the recommendation was transmitted to the CEO of UGL Group who in turn did not act arbitrarily or capriciously when exercising his discretion not to grant the 40,000 share options.

Therefore, Mr Janik's claim for breach of the options clause failed.

Key lessons for employers

This decision highlights that employers:

Should review carefully what their policies and/or contracts say about redundancy and when this will occur. It should not be assumed that the standard definitions of redundancy referred to in previous decisions and/or in the Fair Work Act 2009 (Cth) will apply in the face of the language used in the relevant document. In particular, sometimes the language set out in a policy may give rise to an argument that it is not the position but the person who becomes redundant. That is obviously a different scenario than what is contemplated under the Fair Work Act 2009 (Cth).

Where agreements provide for employers to do certain acts and for discretions to be exercised, it is important that what the employer must do and how it must exercise its discretion is clear. Unless the discretion is described as being "absolute and unfettered", a Court is likely to imply a duty that the discretion is not to be exercised capriciously or arbitrarily as well as that it must be exercised reasonably and in conformity with the purpose for the relevant entitlement.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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