Coronavirus COVID-19 has had a big impact on Australian and international businesses with many now struggling to keep their doors open. For many, they have had no choice but to let go of some staff by way of redundancy. And for some, this has come with the added burden of affording that lump sum payment. But what happens if your business genuinely cannot meet these redundancy payment obligations?

Under the Fair Work Act employees are entitled to redundancy pay when their employment has been terminated by their employer for one of the following reasons:

  1. at the employer‘s initiative because the employer no longer requires the job done by the employee to be done by anyone, except where this is due to the ordinary and customary turnover of labour; or
  2. because of the insolvency or bankruptcy of the employer.

Section 120 provides for  an exception to the above general rule in circumstances where the employer:

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

To rely on Section 120, an employer must apply to the Fair Work Commission (FWC) for an assessment of their circumstances. The FWC may determine that the amount of redundancy pay is reduced to a specified amount (which may be nil) that the FWC considers appropriate. The amount of the redundancy will then be paid to the employee in accordance wit the amount of the determination.

In recent months, the FWC has determined the first cases of capacity to pay as result of COVID-19 financial hardship.

Mason Architectural Joinery Pty Ltd [2020] FWC 1897

On 9 April 2020, the FWC considered an application by Mason Architectural Joinery Pty Ltd (‘Mason Joinery) to vary redundancy pay for incapacity to pay an employee, Mr Grant. When Mason Joinery made Mr Grant’s role redundant, he became entitled to payment of 3 weeks notice of termination and 7 weeks redundancy pay. At the time of the application, Mr Grant’s notice of termination had been paid however, the redundancy entitlement had not.

Mason Joinery was a small business that had experienced financial difficulty over recent months. The redundancy of two employees was one of many steps they had taken to increase cash flow. Mason Joinery made submissions that it was not in a position to pay this redundancy, having received no business income for two months. However, at the time of the hearing, their financial position has slightly improved.

The FWC considered the following key facts:

  • At the time of the hearing, Mason Joinery had received one payment for a completed job and was hopeful of two (2) new contracts coming through.
  • After the termination of his employment, Mr Grant took 8 days off work before starting another job.
  • Mr Grant was only out of work and unpaid for this 8 days and the notice of termination he received equated to 15 day’s pay and, in addition to his paid annual leave entitlements, this pay was sufficient to cover this period of time and the period of self-isolation period following his leave.

The FWC was satisfied that Mason Joinery was suffering significant financial strain and was not in a position to pay Mr Grants full entitlement to redundancy pay and the redundancy pay requirement was reduced to one (1) week.

Commissioner McKinnon did not expand in detail on the reasons why the FWC felt it this hardship warranted such a significant reduction. However, having regard to the purpose of redundancy, being to compensate a worker for their loss as a result of losing their position in this manner, it is likely that the FWC considered that the loss suffered by Mr Grant was minimal as he quickly obtained gainful employment.

Worthington Industries Pty Ltd v Nael Ablahad, Paul Treloar & Rivas Subair [2020] FWC 1912

On the same date, 9 April 2020, Deputy President Clancy handed down another decision for an application to reduce redundancy entitlements from One (1) week to Two (2) in circumstances where the employer claimed it did not have the capacity to pay.

Worthington Industries Pty Ltd (‘Worthington Industries’) is a company that manufactures a variety of products that service the building, furniture, caravan and rail industries. As a result of the COVID-19 pandemic, with the rail sector, all areas of their business have been financially impacted. This prompted them to make some positions redundant and apply to the FWC with respect to three (3) of these employees.

In their application, Worthington Industries asserts that based on customer advice and public announcements they anticipate their sales will reduce by 50% over the course of the coming months. However, their actual figures recorded a 12% drop in sales in March 2020 and 31% in April 2020, compared to the same months in 2019. Worthington Industries disclosed their rental payments exceeded $300,000.00 per annum and at the time of making the application, had not yet received any rental relief from their Landlord. Worthington Industries submitted that its preference was to keep the employees on a casual basis and convert their employment back to full time once sales pick up.

During the hearing, Worthington Industries conceded that they currently had the means to pay the full amount of the redundancies. The funds were in their bank account however, were reluctant to use this as they were confident that they would shortly be dealing with a deficit and cash flow problems. Concerned about how severe this could be, Worthington Industries did not appear to want to use this money for redundancy pay, preferring to reduce as many expenses as possible immediately to be better prepared to face the future.

At the time of the Hearing the Government had just passed the Coronavirus Economic Response Package (Payments and Benefits) Act 2020. Deputy President Clancy drew Worthington Industries attention to this and suggested they may wish to consider this as an option for retaining the employees. The representative for Worthington Industries advised that they had registered however they felt that the better option was to resolve this redundancy issue instead to provide certainty to both the company and the Employees.

In making a decision, Deputy President Clancy considered the purpose of redundancy payments and the onus placed on the applicant employer to provide sufficient reasons to deviate from the importance of compensating an employee. Deputy President Clancy confirmed that the overarching purpose of redundancy pay is to compensate an employee from the impacts of termination, such as the trauma associated with termination, loss of non-transferrable credits such as sick leave, loss of security and seniority in an organisation, lower job satisfaction, diminished social status and conditions and financial hardship. Therefore an employer must provide evidence and persuade the FWC that the financial position of the company compels the FWC to make an order to reduce or remove an employee’s statutory entitlement.

As Worthington Industries admitted to having sufficient funds in the bank at the time off making the decision, and was largely basing its hardship off prospects and uncertainty, the FWC was not inclined to grant the application. Worthington Industries were therefore required to pay the requisite redundancy for each employee.

What does this mean for my business?

These decisions indicate that, for a company to successfully obtain a reduction in redundancy payments based on capacity to pay, its financial hardship must override the policy concerns underpinning an employee’s entitlement to that payment. In most cases, this will need to be an inability to make the full payment that the employee is entitled to, demonstrating a significant reduction in income such that the business is unable to meet its other financial obligations and, being able to demonstrate that the amount that could be paid, is sufficient to mitigate the loss and other trauma’s associated with that employee’s termination, for example, the employee having already found reasonable alternative employment.

If your business needs to make workers redundant or feels it is unable to meet these redundancy payment obligations, Adams & Partners Lawyers is able to review your unique situation and provide you tailored advice to suit your situation. For assistance, please contact our Employment Law Team, Amelia Hatton or Heath Adams on 02 9635 3404.

Written by Amelia Hatton.

Scroll to Top