Australia: Redundancy – The Minefield Still Exists

Last Updated: 14 March 2007
Article by David Thompson

A potential legal minefield still remains around decisions to make employees redundant, for those employers in the federal system with 100 or more employees.

The new Work Choices unfair dismissal provisions attempt to extinguish claims for unfair dismissal where the termination was for "genuine operational reasons or for reasons that include genuine operational reasons". However, recent case decisions confirm that successful litigation is still a significant risk in this area.

Operational reasons

Two decisions handed down by the AIRC during October 2006 involved unsuccessful applications, brought by employers to dismiss unfair dismissal claims on jurisdictional grounds (based on the new Work Choices provisions).

The Commission concluded in one case that statements made by the employer concerning the reasons for dismissal amounted to "simple unadorned assertions that costs are greater than income". Some form of enquiry into or review or assessment of the claimed operational reasons was considered to be necessary. Hence, the application to strike out the claim was unsuccessful, despite evidence suggesting that the employer had acted fairly in the dismissal process. This included offering the employee alternative employment at reduced hours, which the employee rejected (Kieselbach –v– Amity Group Pty Ltd).

In another decision, the Commission accepted that there were genuine operational reasons of an economic nature justifying the restructure of a business unit. The reasons were based on a downturn in orders and resulted in the discontinuance of the afternoon shift, resulting in 17 employees being made redundant.

In addition to this, the employer prepared a detailed skills matrix, ranking all the employees on the shift. The applicant was assessed at the lowest possible score in each of the three categories of skill, competency and experience.

Despite these issues, the AIRC was not satisfied that the reasons for dismissal of the applicant included genuine operational reasons. This was because the employer had a second business unit which was not affected by the downturn in orders. The Commission found that the employer was required to explore whether there was any possibility of redeployment into another division of the same company, before it could decide whether genuine operational reasons were at least in part behind the termination of the applicant’s employment (John Nicholson –v– Riviera Marine Pty Ltd).

Redundancy selection due to prohibited reason

On 8 November 2006, the Federal Court ordered the reinstatement of two NUW union delegates, who had been made redundant by their employer.

The order was made on the basis that their selection for redundancy was in breach of the new freedom of association provisions under Work Choices.

The delegates were two of ten employees made redundant at the employer’s Lidcombe plant in Sydney.

The Federal Court rejected evidence given by the human resources manager and other managers, that the fact the individuals were delegates or members of the NUW played no part in the decision to dismiss them.

Both were long serving employees. In recent years, the evidence was that the two delegates had become a thorn in the side of management, having organised industrial action and created difficulties in extensive new EBA negotiations, which commenced in March 2006.

The delegates worked in a division that employed 13 staff. Excluding three leading hands and other employees who were competent to operate the Coater machine, this left four employees, including the two delegates, who could have been selected for retrenchment. Three of those four, including the two delegates, were selected. The fourth person was not selected due to his skills in the use of the Off-Line Printer. It was alleged that this reason was not genuine.

Under the Freedom of Information provisions, the onus of proof is still on the employer to demonstrate that it has not acted for a reason which contravenes the Act. The Court found that this onus had not been displaced, primarily for two reasons:

  • More than a month prior to the skills matrix assessment being carried out, precise calculations as to the total employee redundancy payout were forwarded to the company’s head office in Paris. There was a striking similarity between these calculations and the final payout figures, which were calculated after employees were identified for redundancy under the skills matrix assessment. The Court was not prepared to accept the evidence of managers that this was pure coincidence.
  • "The apparently flimsy selection of the Off-Line Printer skills as a vital determinant" in the selection process may have been used, from the outset, as a convenient mechanism to achieve the selection of the two delegates for retrenchment (Seymour–v– Saint-Gobain Abrasives Pty Ltd).

These cases reinforce the importance of obtaining appropriate legal advice prior to reaching decisions to identify employees to be made redundant.

Failure of the High Court to discuss constitutional corporations

Many observers had hoped that in handing down its decision on the constitutional validity of the Federal Government’s Work Choices legislation the High Court would revisit the issue of what is a trading corporation.

Given that the majority of companies fall under the provisions of Work Choices because they are "trading corporations" (together with all employers in Victoria, the ACT and the Northern Territory), there was a general view that the High Court could have used this opportunity to clarify what proportion of trading activities is required to be undertaken by a company for it to fall within this class of corporation.

The High Court held that the relevant test was not in issue before it, and accordingly did not rule on the appropriateness of the accepted test that a trading corporation is a corporation which undertakes trading activities as a significant or substantial part of its overall activities.

Indeed, Justice Callinan specifically held that the case left unanswered the question of which corporations may be characterised as financial and trading corporations. He described this unanswered question as a "very big question indeed".

A number of corporations have struggled in applying this test to their own circumstances. The uncertainty arises when trading activities make up less than 10% of a company’s overall activities and do not raise a significant monetary sum.

It would appear that until the courts provide greater clarity on this issue, corporations that sit on the line of uncertainty will need to put in place industrial relations strategies which take into account that a state industrial system may apply.

Directing an employee to take annual leave

The Work Choices legislation entitles an employer to direct an employee to take annual leave in certain circumstances.

This direction however is subject to two limitations:

  1. The direction may be for no more than two weeks annual leave.
  2. At the time the direction is given, the employee must have in excess of 8 weeks accumulated leave, which have been accumulated over a 2 year period.

The question that many employers are unsure about however is whether any limitations apply in how such a direction is to be given. Certainly the legislation does not appear to impose any restriction over and above the two limitations noted above. For example, there does not appear to be a restriction on an employer directing an employee to immediately take a further two weeks leave upon his or her return from a previous two week leave period. Employers should keep in mind however that if they act unreasonably in giving such a direction an argument exists that they have breached one of the implied duties that employers and employees owe one another, namely to act with mutual trust and confidence.

Amendments to the Workplace Relations Act

On Monday 13 November 2006, the federal government announced proposed changes to the Work Choices legislation. Passed through Parliament on 4 December 2006, once Royal Assent has been given, the changes will involve amendments to both the Workplace Relations Act 1996 (Act) and its ancillary regulations.

In summary, the amendments have resulted in the following changes:

  1. Leave accrual for work over 38 hours - an employee’s ability to accrue annual leave and personal/carer’s leave under the Australian Fair Pay and Conditions Standard (Standard), will be limited so that leave will not accrue for hours worked above 38 hours per week. This amendment addresses the concern that the Act in its’ current form may be interpreted so that employees could continue to accrue paid leave entitlements whilst they were working regular overtime in excess of 38 hours per week.
  2. Quantum payable for leave – the method for calculating payment for personal/carer’s/compassionate leave and leave for pregnant mothers for whom no safe job is available, will be refined. The Standard currently provides that an employee is entitled to be paid, based on the amount they would have reasonably expected to have been paid had they been at work. Effectively, this would have captured penalty rates, shift allowances and rostered overtime. The proposed amendment will bring such payment into line with the calculation rules that apply for payment of annual leave under the Standard, so that employees must be paid only their basic periodic rate of pay when on such leave.
  3. Cashing out personal/carer’s leave - although currently prohibited, the proposed changes will allow employees to elect to cash out their accrued personal/carer’s leave where there is agreement between the employer and the employee in writing. A proposed condition will be that a full-time employee must be left with at least 15 days of personal leave after cashing out. Those employers who have not paid out this leave in the past may not want to encourage this.
  4. 12 month protection on redundancy entitlements – redundancy entitlements contained in a workplace agreement will be protected for a period of up to 12 months if the agreement is terminated by the employer, regardless of whether 90 days has passed from the expiry date or a successful application has been made to the AIRC for an agreement to be terminated. The preserved redundancy entitlement will only apply to employees employed at the time the agreement was terminated.
  5. Standing down employees - employers will be able to stand down employees in circumstances where work is unavailable due to factors outside an employer’s control. This was previously a common award provision.
  6. Record keeping - perhaps the most practical amendment is to the current record-keeping requirements. In September 2006, the government amended this requirement to those employees earning less than $55,000 per annum. The proposed further amendment requires employers to record only those hours for which an employee is entitled to overtime or penalty rates and not all hours worked. However, employers are still required to record hours for all casual and irregular part-time employees, where they are paid on an hourly basis. This amendment simply requires an amendment to the regulations.

Work Choices Constitutionally Valid: the rise of the Corporations Power

The High Court of Australia has dismissed challenges by various State governments and unions and ruled 5 to 2 that the Commonwealth does have the power to make the new workplace laws.

The Court handed down its decision on 14 November 2006, rejecting submissions from the New South Wales, Western Australian, South Australian, Queensland and Victorian governments, the Australian Workers Union and Unions NSW that the Commonwealth had no constitutional power to enact the Workplace Relations Amendment (Work Choices) Act.

The Court upheld the Federal Government’s reliance on the corporations power of the Constitution (Section 51), which gives the Commonwealth Parliament power to make laws with respect to trading or financial corporations.

Previously, federal industrial relations laws have relied on a different section of the Constitution – the power of the Commonwealth to make laws with respect to industrial disputes extending beyond the limits of any one state.

The corporations power may open new doors for the Commonwealth in other areas, as the High Court’s decision makes it clear that any law directed to corporations, or that creates rights or immunities for corporations, is valid.

In one of the two dissenting judgements, Justice Kirby warned against the wider implications of the majority’s approach, stating its "unnuanced interpretation" of the corporations power "has the potential greatly to alter the nation’s federal balance", and risks the "destabilising intrusion of direct federal lawmaking" into areas that have been controlled by the states since Federation.

Work Choices aims to create a national industrial system that overrides industrial relations systems in the states, which currently exist in every state except Victoria. While a change of Federal Government may impact on the contents of the legislation, Federal Labor has announced that it intends to continue with a single unified industrial relations system if elected. However, state Labor leaders have rejected suggestions they abandon the remainder of the State based system in favour of a single national system of industrial relations.

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.

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