Applying to reduce redundancy obligations by employers

Here is a very useful decision of the Fair Work Commission which sets out the legal principles at play when an employer makes an application to the Fair Work Commission to reduce or eliminate a statutory obligation to pay redundancy under the Fair Work Act based upon having offered the affected employees other acceptable employment or an incapacity to pay.

“Variation of redundancy pay.

[1] This decision concerns applications made by Mark Gillett T/A Teddybears Childcare Centre Pty Ltd (Applicant) pursuant to s.120 of the Fair Work Act 2009 seeking to reduce to nil the redundancy entitlements of ten employees (the Respondents) who were made redundant following the closure of one of the two childcare centres operated by the Applicant. The applications were brought on the basis that the Applicant cannot pay the amount and has obtained alternative employment for four of the Respondents.

[2] The applications were made in respect of the following:

Name Completed

years of service

Amount of Redundancy pay
Abraham Chacko Puthuseril (C2022/5425) 3 7 weeks
Dipa Bishwakarma (C2022/5426) 1 4 weeks
Erna Fider (C2022/5428) 5 10 weeks
Faiza Faraz (C2022/5431) 5 10 weeks
Krizel Tan (C2022/5432) 6 11 weeks
Passang Sherpa (C2022/5433) 1 4 weeks
Pem Choki Shepra (C2022/5434) 3 7 weeks
Wah Wah Lin (C2022/5435) 7 13 weeks
Wendy Hlaing (C2022/5436) 18 12 weeks
Zoha Jadoon (C2022/5437) 6 11 weeks

[3] Given the Respondents were all employed by the Applicant at its childcare centre located at Curtin in the ACT, and their employment ended in the same circumstances, it was appropriate to deal with the applications concurrently.

[4] Directions were issued for filing of materials by the parties and a hearing by video was conducted on 30 August 2022. At the hearing, Mr Mark Gillett appeared and gave evidence on his own behalf. All named respondents except Mr Abraham Puthuseril appeared and made oral submissions on their own behalf, with some also providing a written outline of their submissions.

Relevant legislative provisions

[5] Section 119 of the Act is relevant to the application. It provides:

119 Redundancy pay

Entitlement to redundancy pay

(1) An employee is entitled to be paid redundancy pay by the employer if the employee’s employment is terminated:

(a) 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

(b) because of the insolvency or bankruptcy of the employer.

Amount of redundancy pay

(2) The amount of the redundancy pay equals the total amount payable to the employee for the redundancy pay period worked out using the following table at the employee’s base rate of pay for his or his ordinary hours of work:

Redundancy pay period
Employee’s period of continuous service with the employer on termination Redundancy pay period
1 At least 1 year but less than 2 years 4 weeks
2 At least 2 years but less than 3 years 6 weeks
3 At least 3 years but less than 4 years 7 weeks
4 At least 4 years but less than 5 years 8 weeks
5 At least 5 years but less than 6 years 10 weeks
6 At least 6 years but less than 7 years 11 weeks
7 At least 7 years but less than 8 years 13 weeks
8 At least 8 years but less than 9 years 14 weeks
9 At least 9 years but less than 10 years 16 weeks
10 At least 10 years 12 weeks

[6] Section 120 of the Act provides for a variation of an employer’s obligation to make a redundancy payment pursuant to the preceding section in two limited circumstances (s.120(1)(b)). It reads:

120 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 FWC 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.

Background

[7] Mr Gillett owned and operated two childcare centres in the ACT, one in the suburb of Curtin and the other in Macarthur. Redundancies arose from the closure of the childcare centre at Curtin where he employed some 15 employees.

[8] The Curtin centre had been operating since 1992 and the site was leased from the ACT government. Mr Gillett was first informed in around 2011 that the ACT government intended to demolish the building in which the childcare centre operated, however he says he was assured that the government would find him an alternative location for the centre to operate from. Based on this assurance Mr Gillett said he continued to keep the centre operating even though it was barely covering costs, so that existing families continued their children’s care and existing staff kept their jobs.

[9] Mr Gillett gave evidence that many of his staff were sponsored overseas workers and he felt an obligation to keep the centre operating as long as possible as many of them had a visa that was connected to his business, and if he was unable to continue to employ them, they may be forced to return with their families to their home countries.

[10] Mr Gillett gave evidence that the effects of Covid meant it was impossible for him to cover his costs and the centre had lost approximately $10,000 per month for more than two years. He gave evidence that covering the losses for a two-year period meant exhausting his available credit and using up most of his personal superannuation.

[11] In support of his financial position, Mr Gillett tendered a bank/loan statement for the centre showing the Applicant had a debt of over $790,000.

[12] At the time the Curtin centre closed in 2022, there were 15 staff. Of these, five were transferred to the Macarthur centre. Mr Gillett gave evidence that he did so because they were in Australia on a visa and the loss of their employment would mean that they and their families would likely be forced to return to their home countries. The five were excess to the staffing requirements at Macarthur but Mr Gillett felt a moral obligation to provide them with employment given their visa status. Mr Gillett said the continued employment of these 5 persons further exacerbated the financial difficulties faced by the Applicant and further reduced his capacity to make redundancy payments to the ten employees who are the Respondents to these applications.

[13] Mr Gillett confirmed that all other statutory entitlements had been paid to the Respondents, and this was not disputed by any of the Respondents.

[14] Mr Gillett gave evidence that when he knew the Curtin centre would need to close, he arranged for the Executive Director Children’s Services of Southside Community Services to attend and talk to staff about employment opportunities with that organisation. As a result, 4 employees were offered alternative employment with Southside Community Services. Some took up the offer and others decided not to accept the offer for various reasons.

Alternative employment

[15] The Respondents who received an offer of employment from Southside Community Services were:

(a) Mr Abraham Puthuseril (C2022/5425)
(b) Ms Dipa Bishwakarma (C2022/5426)
(c) Ms Passang Sherpa (C2022/5433)
(d) Ms Pem Choki Sherpa (C2022/5434)

[16] I am satisfied that it is appropriate in the circumstances to reduce the redundancy pay to nil for these Respondents. There is no evidence to suggest that the positions offered were anything other than ‘acceptable alternative employment’, and in the case of Mr Puthuseril was a higher hourly rate than he had been receiving.

Incapacity to pay

[17] None of the Respondents took issue with Mr Gillett’s evidence that he could not pay the redundancy payments, however some of the Respondents opposed the applications because of the financial impact on them.

[18] While the applications made by Mr Gillett sought that the redundancy payments be reduced to nil, he did state during the hearing that a small redundancy payment would be manageable.

[19] The general approach taken by the Commission for a variation in relation to an employer’s obligation for redundancy pay due to incapacity to pay is summarised by Hampton C in Mildren Automotive Pty Ltd 1 as follows:

“•  The provision means that the Commission “may” determine to reduce the amount of redundancy pay up to an amount of nil, indicating that the granting of full or partial relief from the obligation 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 upon 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 General Employee Entitlements and Redundancy Scheme (GEERS) or similar schemes.
  • The effect upon 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, are also relevant considerations.” (citations omitted)

Consideration as to incapacity to pay

[20] Based on Mr Gillett’s unchallenged evidence set out earlier, and in consideration of the matters outlined above, I have concluded that the Applicant has made out a case justifying the exercise of the discretion pursuant to s.120.

[21] I am satisfied that the Applicant was incurring losses of approximately $10,000 per month for the last two years and that it is carrying a debt of over $790,000. It has paid all other statutory entitlements of the Respondents.

[22] Mr Gillett provided a bank statement showing not only the debt the Applicant had, but that there was only $10,000 available credit on the loan remaining. He confirmed the Applicant did not have another credit account. While Mr Gillett did not produce audited financial reports, I have no basis to doubt the accuracy of the evidence he gave as to the Applicant’s financial position. The Commission has previously found that while a bank statement does not provide a complete picture of the financial circumstances of an employer, other evidence (in this case of Mr Gillett) can provide more information on which to make a decision 2.

[23] Of particular significance in this case is the effect that the requirement to pay the full redundancy payments will have on the five staff that Mr Gillett moved to the Macarthur centre who are excess to requirements there. Mr Gillett’s evidence was that the requirement to pay the redundancy payments would jeopardise his ability to continue their employment given the strain this would place on the Applicant financially. This is clearly a case where reducing the payments to some will enhance the prospects of other employees being able to remain in employment. I accept his evidence in this regard.

[24] I further accept he has attempted to “do the right thing” by his employees in the circumstances. While not directly relevant to the matters the Commission needs to consider in these applications, I note that many of the Respondents expressed their gratitude to Mr Gillett during the hearing for the opportunity he had provided them (as many had been sponsored by him) in terms of both their employment and the support provided to them to obtain relevant childcare qualifications while employed.

[25] In the circumstances, I consider it appropriate to reduce the amount of redundancy pay to which each of the remaining Respondents 3 is entitled, to six (6) weeks’ pay each under s.119 of the Act.

[26] An order reflecting this decision will be issued separately for each application.”

Mark Gillett T/A Teddybears Childcare Centre Pty Ltd (2022) FWC 2302 delivered 5 September 2022  Dean DP