Assisted by Manuela Palucci
When an employer terminates an employee's contract of employment, they are required to pay an amount for redundancy based on the employee's years of continuous service. If an employer terminates an employee's employment, how much redundancy are they obligated to pay and what exceptions might there be to paying redundancy?
When is an Employer Required to Pay Redundancy to an Employee?
Section 119 of the Fair Work Act (FW Act) sets out when an employer is liable to pay redundancy. The amount of redundancy pay under the FW Act ranges from four to 12 weeks, depending on the employee's length of service (zero weeks for small businesses (fewer than 15 employees), or employees who have worked less than 12 months).
Section 119(1) contains an exception to the obligation to pay redundancy pay. An employer is not required to pay redundancy where the termination of employment is due to the "ordinary and customary turnover of labour."
What does "Ordinary and Customary Turnover of Labour" mean?
The recent case of Fair Work Ombudsman v Spotless Services Australia Ltd  FCA 9 discussed the meaning of the phrase "ordinary and customary turnover of labour."
Spotless Services engaged employees to provide cleaning services to business customers. The service contract between Spotless Services and their customers were often for a fixed term and obtained through a tender process.
Spotless Services was not able to renew a contract with a customer, and it terminated the employment of three employees and relied upon the "ordinary and customary turnover of labour" exception as a basis for not paying redundancy.
Spotless Services argued that because its service contracts with its client were often not renewed at the end of an unsuccessful tender, losing a customer contract because of an unsuccessful tender, was a normal, and therefore an "ordinary and customary" part of their business, so they fell within the exception to redundancy obligations.
Justice Colvin in the Federal Court disagreed and held that whether "the ordinary and customary turnover of labour" exception applied required an analysis of the nature of the work which the employee was doing (in this case cleaning), and not the nature of the contractual relationship between the employer and its customers. Justice Colvin said that if Spotless Services' interpretation of the exception was correct, "an employer could simply announce to its employees "when your job is no longer required to be performed for the business your employment will be terminated without redundancy pay, that is our common and usual practice so you should expect that to occur and thereby bring about their own exemption."
Justice Colvin also observed that employers are always faced with the risk that employment of some employees may come to an end, either through "insolvency of the business, technological change, a reduction in customers of the employer's business and the restructure that may follow a takeover or amalgamation." Therefore, simply having a client contract not renewed at the end of a tender process, is insufficient to take the situation outside usual redundancy obligations.
So, when does the Exception Apply?
The Court held that whether the exception applies, will depend on many factors, in particular:
- Whether it was evident to the employee at the time of employment, that their employment would cease at the end of the customer contract (that is, there was no reasonable expectation of ongoing employment if that occurred); and
- Whether it was ordinary and customary, with regard to the nature of the work (not the nature of the contract between employer and customer) for the employment to cease at the end of the contract between employer and customer.
Key Takeaways for Employers
The Spotless Services decision has confirmed that the "ordinary and customary turnover of labour" exception only applies in a narrow set of circumstances. An employer wanting to rely on this exception should:
- ensure that at the time of offering the employment, the employee is aware that their employment is likely to cease at the end of a certain engagement, and this is particularly relevant where the employee is employed by the employer to work closely with the customer, and where there is not much scope for the employment to continue at the end of that engagement;
- make sure this expectation is clearly set out in the employment contract or other communications at the time of engagement or allocation to the particular subject of work;
- if the employment is to be fixed term, consider providing a "fixed term" contract, which more clearly allows for an exemption to redundancy obligations; and,
- take a consistent approach: make sure all employees in the same situation are treated in the same manner, rather than adopting an ad hoc approach to who is paid redundancy, and who is not; and be aware that applying this apparent exception to redundancy obligations may be difficult!
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.