Australia: Federal Court revisits exemption from obligation to make redundancy payment

Last Updated: 5 March 2019
Article by Michael Selinger and Natasha Jones
Most Read Contributor in Australia, February 2019

In a recent Federal Court decision, Fair Work Ombudsman v Spotless Services Australia Ltd  [2019] FCA 9 (Spotless), Spotless was found to be in breach of the Fair Work Act 2009 (Cth) (FW Act) for failing to pay redundancy pay to three employees after Spotless failed to convince the Federal Court that the redundancies fell within the "ordinary and customary turnover of labour" exemption. 

The "ordinary and customary turnover of labour" exemption, where satisfied, enables an employer to terminate employment on the grounds of redundancy without being required to make a redundancy payment to employees. 

This decision is a further recent example of an employer being unable to satisfy the exemption in circumstances where the termination of employment arises from the termination of a client service contract. It follows last years' Federal Court decision United Voice v Berkeley Challenge Pty Ltd [2018] FCA 224 (Berkley) (see our coverage of this earlier decision here). This case is important for employers as the Federal Court reasoning in Spotless further illustrates the difficulties that employers will face in seeking to rely upon the exemption. 

The facts of the Spotless case

In June 2015, Spotless terminated the employment of several employees who had worked for Spotless for several years providing services to its client, Perth International Airport (the Airport), after the contract between Spotless and the Airport was not renewed. Spotless terminated their employment without making a redundancy payment.

Spotless claimed that it was exempt for the obligation to pay redundancy pay on the basis that the employment terminated "due to the ordinary and customary turnover of labour" exemption. In particular, Spotless argued that the "ordinary and customary turnover of labour" exception applied on the basis that:

  • Spotless's contracts with its customers are for a fixed term
  • the loss of contracts with customers was a regular and ordinary part of its business
  • from Spotless's point of view, employees are engaged to fulfil those customer contracts (and internally refers to those employees as 'contract requirement employees')
  • the employment of 'contract requirement employees' comes to an end when those contracts terminate. However, Spotless will redeploy 'contract requirement employees' to provide services to other client contracts, where possible.

Why the Court found that the "ordinary and customary turnover of labour" exemption did not apply

Firstly, Colvin J considered the meaning of the phrase "ordinary and customary turnover of labour" in the context of section 119(1)(a) the FW Act. 

Under section 119(1)(a) of the FW Act an employer is required to pay redundancy pay to an employee in circumstances where an employee's employment is terminated "at the employer's initiative because the employer no longer requires the job done by the employee to be done by anyone", with the exception of where the redundancy is "due to the ordinary and customary turnover of labour". 

In the earlier Berkeley decision, Reeves J held that the phrase "ordinary and customary turnover of labour" required that the turnover of labour was "common, or usual (ordinary), and a matter of long continued practice" for the particular employer. In those circumstances, Reeves J held that an employer would be able to rely upon the exemption and would not be require to make a payment for redundancy. 

However in Spotless, after considering a broader range of cases, Colvin J took a different view. Colvin J held that the relevant enquiry is not what is "ordinary and customary" for the particular employer. Instead, he held that the attention of the enquiry into what is ordinary and customary should be focussed on what is "ordinary and customary" in respect of the turnover of a particular role. According to Colvin J, the "ordinary and customary turnover of labour exception" will apply:

"where the termination is because it is common and usual for the type of job to be brought to an end rather than for it to be ongoing."

He ultimately concluded that: 

"it will be a question of fact in each case whether termination is so inherent in the nature of the job for a particular employee that it cannot be described as ongoing or indefinite employment. In such a case when the termination occurs it will be an outcome that is part of the ordinary and customary turnover of labour."

Colvin J was of the view that Spotless failed to demonstrate that the terminations fell within the "ordinary and customary turnover of labour exception". In particular, Colvin J found that Spotless's case was unsuccessful because: 

"Spotless did not seek to demonstrate that, by reason of the nature of the work they were employed to do, the circumstances in which they came to be employed or the circumstances in which their employment continued, each employee had, or ought to have had, an expectation that it was the kind of job that would come to an end when the contract that Spotless had with its customer came to an end."

"Spotless sought to rely upon its own policy and practices. It contended that it was enough that the practice of Spotless was such that it viewed all 'contract requirement employees' as coming and going with each customer contract. It did not seek to demonstrate that those policies and practices were known to the employees when they undertook their employment. It did not seek to demonstrate that the termination of the employees occurred because the nature of their employment was such that it was common or usual for their employment to be terminated when the contract came to an end."

Lessons for employers

This decision has important lessons for employers who engage employees to service particular client contracts. 

For businesses that wish to rely upon the "ordinary and customary turnover of labour" exemption, they should, prior to relying on the exemption, consider the nature of the employment of their 'contract requirement employees' and whether that there is something inherent in the position that would make it common and usual for that position to no longer be required by the business. 

In particular, employers who wish to rely upon the "ordinary and customary turnover of labour" exemption should ensure that: 

  • at the commencement of employment, 'contract requirement employees' are made aware that their employment is fixed to, and conditional upon, a particular client service contract and that the employment will terminate upon the termination of the client contract
  • the employment contract contains terms which indicate that the employment is fixed to, and conditional upon, a particular service contract, and that the employment will terminate upon the termination of the client contract
  • if, during the employment, there are changes to the nature of the engagement (such as a renewal or extension of a client contract, a change to the employee's position, or transfer of the employee to a new client contract) and the business still wishes to rely upon the "ordinary and customary turnover" exemption,  then the employment contract should be updated to reflect this change and to indicate that the continued employment is fixed to, and conditional upon, a particular service contract, and that the employment will terminate upon the termination of the relevant client contract
  • throughout the employment, their businesses' dealings with 'contract requirement employees' are consistent with the approach that it is common and usual for the position to turnover because it is no longer required on the termination of the client contract. 

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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