Article by Lyndsay Balch
Under section 120 of the Fair Work Act 2009
September’s edition of QHA Review provided owners and managers forced to consider workforce restructuring with an overview of the genuine redundancy provisions contained in section 389 of the Fair Work Act 2009 (‘FW Act’). Since the first stage of the government’s JobKeeper payment program came to an end on 27 September, even more employers are reviewing their labour costs on the basis that they either:
1. Are not eligible to participate in JobKeeper 2.0 at all (for example because the business fails to satisfy the additional decline in turnover test); these employers have either been obliged to return staff to their pre-COVID employment conditions, or, as ‘legacy employers’, are restricted in their ability to modify employees’ conditions with JobKeeper Enabling Directions, or;
2. Are eligible to participate in JobKeeper 2.0, however are now being reimbursed at a lower rate for each eligible employee, with payments set to decrease further from January 2020.
Redundancy pay entitlements and associated conditions for permanent award, agreement free and most modern-award covered employees are set out in section 119 of the FW Act.
Generally, unless the section 121(1)(b) exclusion for small businesses (being those with fewer than 15 employees) applies, an employee who has attained at least 12 months’ service has a prima facie entitlement to between 4 and 16 weeks’ redundancy pay should their role no longer be required. Consequently, and in the context of the extremely difficult economic conditions businesses continue to face, it is reasonable to question:
What happens if a business simply can’t afford to pay redundancy entitlements?
APPLYING TO VARY REDUNDANCY PAY UNDER SECTION 120 OF THE FW ACT
Section 120 of the FW Act provides as follows:
Variation of redundancy pay for other employment or incapacity to pay
(1) This section applies if:
(a) an employee is entitled to be paid an amount of redundancy pay by the employer because of section 119; and
(b) the employer:
(i) obtains other acceptable employment for the employee; or
(ii) cannot pay the amount.
(2) On application by the employer, FWC may determine that the amount of redundancy pay is reduced to a specified amount (which may be nil) that FWA considers appropriate.
(3) The amount of redundancy pay to which the employee is entitled under section 119 is the reduced amount specified in the determination.
(Emphasis added)
This article will focus solely on applications made under section 120(1)(b)(ii).
SECTION 120 AND INCAPACITY TO PAY
As the FW Act does not elaborate on the concept of monetary incapacity for the purpose of section 120, the employer (‘Applicant’) bears the onus of persuading a Fair Work Commission Member to exercise their discretionary power and vary the redundancy owed to an employee because they cannot afford to pay the full amount. While applications are assessed by the FWC on a case-by-case basis and outcomes vary subject to individual circumstances, recent decisions provide an indication of the considerations that are relevant to making a determination in the context of the current economic climate.
HyperLife Pty Ltd T/A Acme Preston v Kelly Brennan [2020] FWC 3080; Erin Black [2020] FWC 3081; Andrew Davis [2020] FWC 3082; Julie Hamshere [2020] FWC 3083 (‘Hyperlife’)
Background:
- In April 2020, four positions were made redundant in connection with the permanent closure of a NSW worksite. One of the effected employees was aged in her sixties and two had attained more than ten years’ service. Cumulatively, the redundancy entitlements owed to the employees totalled 43 weeks’ pay (equivalent to approximately $43,000).
- The employer lodged an application to have the redundancy pay for each of the effected employees reduced to either one or two weeks, claiming incapacity to pay the full amount to which each of them was entitled.
- The business did not appear to qualify for the JobKeeper scheme, had recently borrowed $200,000 from another family business and had subsequently been declined further credit from lending institutions, leaving management with no means of sourcing additional funds.
- Evidence submitted in support of the application included:
-Bank records confirming a current available cash balance of $38,000; barely enough to cover wage payments the following week;
-Balance sheets showing current assets valued at $1,219,837 against liabilities totaling $827,351;
-A letter from the business’ accountant confirming that COVID-19 had caused a sharp drop in sales and delayed receipt of debtors’ payment for completed work.
Decision:
- Guided by principles established in similar prior decisions of the tribunal, FWC Deputy President Dean determined that the business had made out a case proving severe financial hardship and justifying the exercise of discretion pursuant to section 1201.
- Orders were granted in relation to each of the four employees, reducing the cumulative total of redundancy payable by 29 weeks’ (equivalent to a saving of approximately $30,000).
Worthington Industries Pty Ltd v Ablahad and others [2020] FWC 1912 (‘Worthington Industries’)
Background:
- Acting on projections estimating a 50% downturn in sales related to the COVID-19 pandemic in the months following April 2020, the manufacturing business terminated a number of full-time employees, citing redundancy of their roles.
- The business subsequently made applied under section 120 of the FW Act to vary the redundancy entitlements payable to three of these employees from four to one weeks’ pay each, claiming incapacity to pay the full amount.
- During a telephone mention on 9 April, FWC Deputy President Clancy referred the Applicant to information regarding the newly announced JobKeeper payment scheme, highlighting that on the basis of submissions made, it appeared the business would be eligible to participate and would further be able to claim the subsidy for the terminated employees, provided they were re-employed.
- In declining Deputy President Clancy’s offer to hold the matter open for the purpose of determining whether the JobKeeper program offered an avenue to resolve the matter, the Applicant cited commercial uncertainty associated with the COVID-19 pandemic, expressing that redundancy of the roles offered parties’ some degree of certainty.
- The Applicant went on to submit that while it currently had sufficient monies on hand to satisfy its full redundancy pay obligations, the business would quickly become insolvent unless outgoing expenses were substantially and immediately reduced.
Decision:
- FWC Deputy President Clancy asserted that even if predictions of further downturn could be accepted, the application could not be entertained on the basis of section 120(1)(b)(ii) by virtue of the Applicant’s own admission that it did, in fact, currently have the financial capacity to pay the employees’ redundancy entitlements in full.
- The Deputy President further noted that as the pandemic had caused a sharp increase in unemployment, it may be more difficult or take longer for the terminated workers to secure new employment.
- The application was dismissed.
The above decisions demonstrate that the FWC will only exercise its discretionary power to order a variation on the basis of an employer’s incapacity to pay redundancy entitlements if the Applicant can establish (through the provision of evidence) that such grounds do in fact exist.
HyperLi2e Pty Ltd T/A Acme Preston v Kelly Brennan [2020] FWC 3080 21.
