Redundancy obligations; when they do not apply

Employers covered by the Fair Work Act are obliged to pay redundancy pay to employees who lose jobs due to redundancy. Section 119(1) of the Act contains an exception to the obligation to pay redundancy pay in circumstances where the termination of employment is due to the “ordinary and customary turnover of labour.” What does this mean?

In Fair Work Ombudsman v Spotless Services Australia Ltd [2019] FCA 9 Justice Colvin in the Federal Court of Australia held that whether “the ordinary and customary turnover of labour” exception applies requires an analysis of the nature of the work which the employee was performing (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.

The Court held that whether the exception applies will depend on many factors including 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
  • 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.

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 seeking to rely on the 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;
  • ensure that 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 by ensuring that 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.