Redundancy pay in the wake of COVID-19: what if businesses simply can’t pay?

By Aaron Dearden and Jessica Luker 

Surviving COVID-19 may require a restructure of operations for many Australian businesses and the implementation of cost-saving measures, including the redundancy of some staff.

Under section 119 of the Fair Work Act 2009 (Cth) (FW Act) an employee who is made redundant is entitled to redundancy pay, the quantum of which increases depending on the length of the employee’s period of continuous service with the employer.

But what happens if a business doesn’t have the cashflow to pay the redundancy entitlements? Or if they have found the redundant employee a new role? Under section 120 of the FW Act, these two situations allow an employer to apply to the Fair Work Commission (FWC) to vary an employee’s entitlement to redundancy pay.

In this article, we discuss recent cases that consider section 120 applications and the threshold employers must meet to engage these provisions.

Incapacity to pay: a poor financial position is not always enough

On application by the employer, 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.

In determining an application, the following principles (among others) apply:

• granting full or partial relief from the obligation to pay redundancy entitlements is an exercise of discretion in the circumstances of the case;
• the employer bears the onus of establishing that there are grounds justifying the exercise of the discretion;
• the employer must satisfy the FWC that it is not financially competent or possessed of the necessary funds to make the payment, and has no reasonable source of funds;
• the assessment of financial competence will include consideration of the financial standing of the business including its cash position and the assets of the business;
• the effect on the employees immediately concerned will be considered including whether making an order prevents the employee from recovering the entitlement through other means should the company be liquidated, the effect that any order may have on the status of employees as potential creditors should the company become insolvent, and the impact of any order on the employee’s rights under the Fair Entitlements Guarantee (FEG) (formerly the General Employee Entitlements and Redundancy Scheme) or similar schemes; and
• the effect on the continuation of the business, including whether reducing the entitlement of dismissed employees may have a beneficial effect on other employees, thereby enhancing their prospects of being able to remain in employment.

The application of these principles is wholly fact specific and the outcome of an application can vary greatly depending on the circumstances of the business and the employee(s) in question.

In a series of cases involving the closure of a worksite operated by the business HyperLife,[1] the FWC granted variations to the redundancy pay of four employees – including one who was 61 years old and two of whom had worked for the business for more than a decade. The FWC agreed that HyperLife was under ‘significant financial strain’ and could not pay the workers their full entitlements, including because:

• the business currently held only $38,000 cash in the bank and wages for its remaining staff were due the following week; and
• there was no other reasonable source of funds, having already borrowed $200,000 from the director’s family business to maintain financial viability during COVID-19.

The fact that the business did not qualify for the JobKeeper scheme was also influential in the FWC’s decision to grant relief.

This compares with Worthington Industries Pty Ltd[2], where a business made employees redundant when it was advised that their sales would drop by 50% in the coming months. The FWC rejected their application to vary the redundancy pay of terminated employees on the basis that future cash flow problems and financial hardship was not enough when the employer currently had the means to pay the full entitlements.

In another recent case[3] a business applying to vary the redundancy payment to a terminated employee had approximately double the amount of accounts payable as compared to accounts receivable and had no jobs coming in. Nonetheless, the application was not granted because the company had $120,000 in the bank which was sufficient to cover the full amount of the redundancy, being $5,593.60.

Further, in the event that the company became insolvent, it was relevant to consider the effect an order to reduce the amount payable would have on the status of the employee as a potential creditor, as was the impact of any order on the employee’s rights under the FEG. The diminishing of those rights weighed against the making of the order, as did the fact that the worker was a low income earner.

Ultimately, these cases demonstrate that it is not enough that it would be beneficial or convenient for the business to vary an employee’s redundancy entitlements. Even if it is clear the business is in a poor financial position, this does not mean it has ‘incapacity’ to pay and will be granted relief.

Other acceptable employment need not be identical

Employers who obtain other employment for their redundant employee may also apply to vary redundancy payments owed. An employee’s prima facie entitlement to redundancy pay may be at risk if the employee refuses that role or position that is found to be objectively ‘acceptable’.

In order to satisfy the requirement to ‘obtain’ other acceptable employment, the employer must have caused the alternative employment to become available to the redundant employee. This must occur while the employee is still employed by the first employer (that is, before the redundancy takes effect).

The assessment of whether an alternative role is ‘acceptable’ does not mean that it is an identical role, or that it is acceptable to the employee. The alternative employment may be acceptable notwithstanding inconvenience to the employee and some detrimental alteration in terms and conditions of employment. A comparison of pay levels, hours of work, seniority, fringe benefits, location and travel time, workload and job security will all be relevant.

In Tauililli,^[4] the employee’s previous role had a primarily supervisory function whereas the alternative role was primarily sales-based and involved a reduction in the possibility of earning commission. Even though the alternative role offered the same salary, hours of work and title and did involve some leadership, overall it was of a different nature to his previous supervisory role. DP Colman found this was not other acceptable employment.

Takeaways for employers

Section 120 of the FW Act is a useful mechanism where applicable. However, any such application will be subject to close scrutiny by the FWC, with the default position being to protect worker entitlements. Where the employer currently has the means to adhere to statutory entitlements, it is likely they will be required to pay the full redundancy amount.

Hall & Wilcox can advise employers on their suitability for an application under section 120 as well as best practice in carrying out the redundancy process generally.

[1] HyperLife Pty Ltd T/A Acme Preston v Kelly Brennan [2020] FWC 3080 (12 June 2020); HyperLife Pty Ltd T/A Acme Preston v Erin Black [2020] FWC 3081 (12 June 2020); HyperLife Pty Ltd T/A Acme Preston v Andrew Davis [2020] FWC 3082 (12 June 2020); HyperLife Pty Ltd T/A Acme Preston v Julie Hamshere [2020] FWC 3083 (12 June 2020).
[2] Worthington Industries Pty Ltd v Ablahad and others [2020] FWC 1912.
[3] Print Logistics Unit Trust [2020] FWC 3128.
[4] Electricity Wizard Pty Ltd v Pasilika Tauiliili [2018] FWC 4556 at [25].