Australia: Employees terminated due to the ordinary and customary turnover of labour – Do employers need to make redundancy payments when they lose key contracts?

In the recent decision of Fair Work Ombudsman v Spotless Services Australia Ltd [2019] FCA 9, the Federal Court found that three employees terminated after Spotless lost a key contract with Perth International Airport were owed redundancy pay, despite Spotless asserting that an exception applied.

General principles of redundancy pay

Under s 119(1)(a) of the Fair Work Act 2009 (Cth), an employee is entitled to redundancy pay if employment is terminated at the employer’s initiative because the employer no longer requires the job to be done by anyone. There is an exception where the redundancy “is due to the ordinary and customary turnover of labour”.

Ordinary and customary turnover of labour

The decision of the Court in Spotless involved a detailed examination of the meaning of the exception contained in s 119(1)(a), with reference to previous cases both before and after the enactment of the Fair Work Act.

Essentially, the terminology describes a scenario where an employer no longer requires a job to be performed because termination in that particular case is common or usual. As the termination is expected by employees, there is no loss or harm to an employee whose job is inevitably terminated.

A critical component of the exception is therefore that the employee terminated due to the “ordinary and customary turnover of labour” did not have any expectation of ongoing or indefinite employment.

The expectation that employment is not ongoing

It is not enough for the exception that there is an identifiable risk that employment may come to an end.  All ongoing employment is considered to be indefinite, despite known risks that employment may be terminated due to the employer’s insolvency, technological advances or restructures.

The question that a Court will ask is whether termination is so inherent in the nature of the job of a particular employee that it cannot be described as ongoing or indefinite employment.

An employer would need to demonstrate that, by reason of the nature of the work that they were employed to do and the circumstances in which they came to be employed, the employee had an expectation that it was the kind of job that would come to an end once the contract between the employer and the customer came to an end.

Employers cannot fabricate expectation

Section 119(1)(a) does not relate to an exception where termination for redundancy is due to the ordinary and customary practice of the employer. An employer cannot therefore create this kind of expectation by its own unique practice, bringing about their own exception by announcing to employees that “our common practice is to terminate employment without redundancy pay when your job is no longer required”.

An employer would need to prove that the nature of its contracts with customers might mean that the termination of certain employees at the end of such contracts are common or usual for a business such as theirs. The employer would also be required to show that this policy or practice was communicated to employees when they commenced employment.

In Spotless, the Court accepted that the ongoing nature of employment was contingent upon the employer securing further contracts with its customers. Despite this, it was held that the practice of the employer to redeploy its employees meant that termination was not inherent in the job. As such, termination was not ordinary and customary simply because a customer contract was lost.

Lessons for employers

It may be a normal feature of a business that the jobs of employees assigned to a particular customer will be terminated when that customer no longer requires the services of the business. The decision in Spotless narrows the scope of the exception in s 119(1)(a), meaning that redundancy pay will be owed to terminated employees in all but a very select set of circumstances.

An employer may make it known to prospective employees that the job is for the duration of a particular contract, perhaps by including a relevant clause in the employment contract. However, this position may change as the employment continues as the customer contract is renewed or the employee is allocated to another contract. The relevant employee may not realise that the customer contract was renewed, as they continue their work in what now appears to be indefinite employment.

Alternatively, an employer may seek to rigidly enforce its policy of terminating the employment of all employees at the end of a customer contract, without any opportunity to work in the same role for the purposes of another contract secured by the employer.  If this policy is not consistently applied for all employees, as some high-performers are moved on to new contracts or remain in indefinite employment with the business, mandatory termination is no longer “ordinary and customary” for the employer.

Ultimately, a business with a high turnover of labour must give careful consideration to its employment agreements, policies and practices before deciding to withhold redundancy payments from terminated employees.

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.