United States: Managing Redundancy Entitlements In Loss Of Contract Situations

Last Updated: September 14 2015
Article by Michael Tamvakologos

Employers who lose contracts to a competitor or outsource work can lessen the impact of redundancies if they plan ahead and engage with incoming contractors.

Under current legislation, an employer may apply to the Fair Work Commission to reduce the amount it owes to staff that have been made redundant in two situations, either, where the employer:

  1. "cannot pay"; or
  2. "obtains other acceptable employment for the employee".

If satisfied that either situation applies, the Commission may in its discretion determine that the amount of redundancy pay is reduced to a specified amount that it considers appropriate.

Recent decisions have highlighted the issues for employers that seek to reduce their redundancy liabilities on the basis that they have "obtained other acceptable employment" for an employee.

In January, Serco Sodexo failed to persuade the Fair Work Commission that it should not have to make redundancy payments under the National Employment Standards (NES) to hundreds of employees apparently at a cost of $12 million after it lost defence contracts as reported by Workplace Express. Around five months later, the Full Court of the Federal Court of Australia upheld a decision by the Commission ordering FBIS to make NES redundancy payments to about 50 employees.

Why did the employers have to pay redundancy in these cases?

In both cases, evidence was put before the tribunal to show that the outgoing contractor had taken steps to help staff get jobs with the incoming contractors, including passing information between employees and incoming contractors. However, these steps were not sufficient to show that they had "obtained" the jobs for employees. This was so, even where the employer had spent "considerable resources" to assist employees.

In FBIS, the Full Court held that:

"to obtain employment for an individual means to procure another employer to make an offer of employment, which the individual may or may not accept as a matter of his or her choice".

If the employee chooses not to accept the offer of employment, the question becomes whether that employment was an "acceptable" alternative or not.

What could these outgoing contractors have done differently to show that they had "obtained" the employment?

Understandably, the decisions contain some clues but not complete answers. In our view, additional steps that could show that an outgoing contractor has "obtained" alternative employment for employees include putting an arrangement or agreement in place with the incoming contractor to employ them; negotiating appropriate terms and conditions of employment so that employees don't have to fend for themselves; ensuring that employees have preference in employment rather than having to compete on the open job market; seeing that employees' service with the outgoing contractor is recognised; and providing employees with exclusive information about the job opportunity which gives them some advantage over other job seekers.

But of course, it's not quite that easy. Why is that?

Outgoing contractors can sometimes be in a bind. It is to their commercial benefit to engage with the incoming contractor and to take steps to obtain employment for redundant staff. But what happens if the incoming contractor doesn't want to engage with the outgoing contractor? This is something the outgoing contractor may have little or no control over.

But why wouldn't an incoming contractor want to hire the outgoing contractors employees?

There can be a few reasons. If the incoming contractor doesn't want to recognise the service of the outgoing contractor's employees or otherwise hire all or most of them, it will distance itself from this workforce. Sometimes the logic is that to recognise service and engage with them would carry an adverse consequence: any enterprise agreement covering these employees would also transmit to the incoming contractor. If the incoming contractor doesn't want that, they will do their best to avoid it. Also, the outgoing contractor's employees may be seen as being underperformers (particularly in loss of contract situations) and the incoming contractor might want to make a fresh start by selecting candidates from the open job market. On the other hand, the incoming contractor may be keen to pick up a ready workforce with relevant skills and experience in the job.

These situations highlight the tension between the transfer of business provisions and the redundancy provisions in the legislation.

Doesn't the legislation work a bit unfairly against outgoing contractors?

Arguably, yes. The reason is that an outgoing contractor can do everything in their power to ensure that redundant employees are hired by the incoming contractor, but if the incoming contractor doesn't want to play ball (for example, by not agreeing to give the employees preference in employment or to hire them on comparable terms and conditions) then the outgoing contractor's options to reduce redundancy payments are limited. The decisions in this area set a high bar for the outgoing contractor to jump in terms of it obtaining employment for redundant employees.

So how could the legislation be changed to rectify these issues?

There are a few ways to reward the efforts of the outgoing contractor in helping its redundant employees get jobs. One option would be to change the wording of the exemption to recognise efforts to "facilitate" (rather than obtain) the alternative employment. This may lower the bar that an employer has to clear before the Commission can consider adjusting the redundancy entitlement downwards.

A second option would be to give the Fair Work Commission power to consider the efforts to "obtain" the employment and also give the Commission a general discretion to reduce redundancy entitlements where the threshold of "obtain" has not been met, but where the employer has made genuine efforts to secure acceptable alternative employment for its staff. At present, the Commission has no power to reduce redundancy payments unless it first makes a finding that the outgoing contractor has satisfied the "obtain" threshold. This second option is broadly how this process worked under previous legislation when industrial awards generally regulated redundancy entitlements.

This has all been about NES redundancy entitlements. What about redundancy entitlements that arise from other sources?

In restructure and change of contractor situations, it is essential to consider any redundancy provisions in an applicable enterprise agreement, contract, or policy. In some industries, side letters, memoranda of understanding or other less formal or public arrangements govern the redundancy position and these often provide very generous entitlements.

The precise drafting of the instrument governing redundancy entitlements will be critical. When is a redundancy payment required to be made? What exemptions apply to this obligation? The answers to these questions need to be thought through at the time of drafting the relevant instrument. The aim will generally be to provide for eligibility to redundancy subject to sensible exemptions so that employees are treated fairly and commercial business outcomes are achieved.

Is there anything else that outgoing contractors can do to maximise commercial outcomes for the business?

With forward planning, there is plenty that can be done to ensure that employees are treated fairly and do not suffer needless dislocation whilst producing commercial business outcomes. For example, an outgoing contractor, with the co-operation of the incoming contractor could give employees incentive to resign from their employment and take up suitable employment with the incoming contractor. This would make it difficult for employees to claim redundancy payments from the outgoing contractor, as their employment has not been terminated at the employer's initiative. Generally speaking, the more planning that has been done in advance of the transition, the more sophisticated the strategy that can be put in place.

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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Michael Tamvakologos
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