Australia: Warning for employers: redundancy pay calculations must take into account periods of regular casual service

Last Updated: 24 August 2016
Article by Libby Radjenovic
Services: People & Workplace
Industry Focus: Agribusiness, Energy, Financial Services, Insurance, Life Sciences & Healthcare, Property

What you need to know

  • In an important decision last week, the Fair Work Commission found that periods of regular and systematic casual employment must be taken into account when calculating redundancy pay entitlements for employees who have transitioned from casual to permanent employment.
  • As the FWC's decision was based on its interpretation of 'service' and 'continuous service' in the Fair Work Act 2009, it has the potential to bring about far-reaching implications for the accrual of service-related benefits under the National Employment Standards.
  • In light of the decision, employers should carefully consider the implications of converting employees from casual to permanent employment and ensure they are calculating redundancy payments accurately.

The conversion of employees from casual to permanent employment without a break in service is fairly common. But when those employees are made redundant, how must their redundancy pay be calculated? There is a new answer to this question, following a recent decision of the Fair Work Commission (FWC).

In Australian Manufacturing Workers Union (AMWU) v Donau Pty Ltd [2016] FWCFB 3075, the FWC ruled that periods of regular and systematic casual employment must be taken into account when calculating redundancy pay for employees in these circumstances.

The FWC's decision was not unanimous and is controversial, so it may be appealed or lead to legislative reform. For now, employers must approach redundancy pay calculations with care.

The dispute

Donau, an engineering and ship-building company, had been forced to make a large proportion of its workforce based at the Tomago Shipyard redundant after completing its contract for the Australian Submarine Corporation.

A dispute arose between Donau and the AMWU about the application of Donau's enterprise agreement when calculating service for the purposes of determining redundancy pay entitlements. While the dispute arose in relation to the terms of Donau's enterprise agreement, the FWC's determination involved a question of statutory interpretation - specifically, what is the correct construction to be given to the meaning of 'service' and 'continuous service' in section 22 of Fair Work Act 2009 (FW Act).

The meaning of 'service' and 'continuous service'

At first instance, Commissioner Riordan decided that Donau's casual employees appointed to permanent positions were not entitled to redundancy pay taking into account prior continuous periods of casual service because they had been paid a loading in lieu of notice and redundancy pay entitlements.

The AMWU appealed, and a majority of the full bench of the FWC overturned, Commissioner Riordan's decision. The majority found that the definition of 'service' and 'continuous service' under section 22 of the FW Act includes a period of regular and systematic casual employment because there are no words in the FW Act which exclude any such period of employment from the calculation of 'service' for the purposes of redundancy pay.

The FWC's decision only affects employees who transition from regular casual employment, without any break in service, to permanent part-time or full-time employment. It does not change the position in relation to genuine casual employees, as they are expressly precluded by section 123 of the FW Act from accruing any entitlement to redundancy pay.

The dissenting view – 'folly' of the majority's interpretation

Commissioner Cambridge took a different view of the proper construction of section 22 of the FW Act. He branded the majority's approach as 'erroneous' because it relied upon the absence of particular words, rather than the adoption of a proper characterisation of the concept of 'service' taking into account the overall context of the FW Act.

In support of this argument, Commissioner Cambridge maintained that if the majority's interpretation of 'service' is correct, there would be much wider implications for the FW Act. In particular, service-related entitlements which have until now been clearly unavailable to a casual employee (such as annual leave) would be retrospectively bestowed upon a permanent employee for a period during which the employee had been excluded from accruing such an entitlement. This would be inconsistent with a number of express provisions of the FW Act.

Key takeaways

Where the meaning of 'service' includes a period of casual employment prior to permanent employment, there are significant implications for the calculation of service-related benefits under the National Employment Standards as well as for labour costs. Given the majority's controversial interpretation of the meaning of 'service' and its far reaching consequences for employers, the decision may be appealed or lead to legislative reform.

In the meantime:

  1. Employers must ensure that the calculation of redundancy pay for employees who have converted from casual to permanent employment takes into account any period of service as a regular and systematic casual employee.
  2. Where an organisation is undertaking an acquisition by way of a transfer of assets, employers should consider whether the terms of sale accurately reflect any increased redundancy liability.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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Libby Radjenovic
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