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8 August 2017 Are dismissals genuine redundancies when employees have rejected a pay cut?

By Richard Ottley, Partner and Simon Obee, Associate

Consider this situation. You run Company A. Your business involves supplying a service to Company B. You have been providing this service at a set price for a number of years and engage a team of employees to facilitate the delivery of the service. Due to reasons outside of your control Company B indicates that going forward it must reduce the amount it pays Company A for its service by, say, 10%.

This means that – as much as you would like to continue to do so – you cannot afford to keep paying your employees at 100% of their current wage. You need to reduce their wages by 10%.

You consult fully with the employees about the changes. You acknowledge that you cannot unilaterally reduce an employee's wages. Instead, you present them with the following offer: "we no longer have a job for you paying a wage at 100%, but instead we are offering you a job at 90%".

Some of the employees accept the offer and life continues much as before.

Other employees reject the new job offer. Having considered that there are no other available roles you can offer them, you regrettably consider that you have no choice but to make them redundant (their old job having ceased to exist).

You acknowledge that such an employee is entitled to redundancy pay, there being no argument that the alternative job offered to them was "acceptable alternative employment" (which otherwise might obviate the obligation to pay redundancy), as a role which pays 10% less is clearly not on equally favourable terms to their previous position.

You also consider that you are not at risk of an unfair dismissal claim from the redundant employees given that their dismissals were cases of "genuine redundancy" within the meaning of section 389 of the Fair Work Act 2009 (Cth) ie: their job was no longer required to be performed, any obligation to consult with employees in a modern award or enterprise agreement was complied with, and it was not reasonable to redeploy them elsewhere in the business.

Although what is set out above might sound like an uncontroversial interpretation of the law on redundancies, the Fair Work Commission recently dealt with a similar factual situation and found that a variation in a job's remuneration "does not equate to the employer no longer requiring 'the job' to be performed". Consequently the employees in question were held not to have been dismissed for reasons of "genuine redundancy" and it was open to them to bring a claim in unfair dismissal against the employer.

Given that the outcome of the case challenges what many thought to be fairly well-trodden legal ground, it is a case that deserves close attention. There are also a number of potential knock on effects of the case, some of which may be unexpected.

In Mr Leon Mallard and others v Parabellum International Pty Ltd T/A Parabellum International [2017] FWC 2431 the four applicants were employed as Emergency Service Officers by the employer (Parabellum).

Parabellum provided emergency response services to its major client (Chevron).

In 2016 Chevron reduced its contract prices with Parabellum.

Parabellum decided that in order to meet its financial commitments going forward, it needed to reduce the current salaries of its workforce by around 13%. All the applicants were offered variations of their positions on this basis. Having declined this offer – and there being no other alternative positions – Parabellum determined that their positions were redundant and the employees were dismissed. Where the employees were entitled to redundancy pay (because they had the requisite length of service, etc) they were paid this in full.

The employees subsequently commenced proceedings for unfair dismissal in the Fair Work Commission.

Parabellum defended the proceedings on the basis that the employees' dismissal was as result of "genuine redundancy" within the meaning of section 389 of the Fair Work Act (quoted below).  By virtue of section 385 of the Act, a person will not have been unfairly dismissed if their dismissal was a case of "genuine redundancy". In other words: if there is a genuine redundancy that is the end of the matter. The Fair Work Commission does not need to proceed to consider whether the dismissal was harsh, unjust or unreasonable if it is found to be a case of "genuine redundancy".

Section 389 states as follows:

"Meaning of genuine redundancy

(1)  A person's dismissal was a case of genuine redundancy if:

(a)  the person's employer no longer required the person's job to be performed by anyone because of changes in the operational requirements of the employer's enterprise; and

(b)  the employer has complied with any obligation in a modern award or enterprise agreement that applied to the employment to consult about the redundancy.

(2)  A person's dismissal was not a case of genuine redundancy if it would have been reasonable in all the circumstances for the person to be redeployed within:

(a)  the employer's enterprise; or
(b)  the enterprise of an associated entity of the employer." 

In the Parabellum case Deputy President Bull rejected the employer's arguments that replacing a job at one salary level with a job at a lower salary meant that the employer "no longer required the person's job to be performed by anyone" within the meaning of section 389 of the Fair Work Act. In doing so he said this:

" [41] It is clear that the circumstances said by the respondent to equate to a redundancy, that is, that the roles are to be remunerated at a lesser rate, are not those that are provided in the Explanatory Memorandum or given as examples in any judicial consideration of the term redundancy. I note also that the Australian Taxation Office Ruling TR 2009/2 Income Tax Genuine Redundancy Payments provides numerous examples of what is considered a genuine redundancy, none of which involve an employee’s dismissal due to a failure to accept a reduction in remuneration with the same work performed by a new employee at a lower rate.
[42] There has been no reduction in the responsibility or tasks allocated to the position of Emergency Services Officer, the positions have not been abolished, the functions have not been split among other staff or some of them given to other staff. The positions are not in excess of the requirements of the respondent.
[43] While the respondent submits that the term ‘job’ in the Act must be read to include the remuneration of the particular job, no authority has been provided to support this ‘wide’ view.
                [….]
[45] In my view the ‘person’s job to be performed’ as stated in the Act, are the functions, duties and responsibilities associated with the job. The remuneration is the value placed on performing the job by the employer. A significant variation of the remuneration to be paid either by way of a salary increase, which is a common variation, or decrease, does not equate to the employer no longer requiring ‘the job’ to be performed.
[46] A job is redundant when the functions, duties and responsibilities formally attached to the job are determined by the employer to be superfluous to the current needs and purposes of the employer.
[47] The positions of Emergency Services Officer have not been reduced in number requiring the tasks of one or more Officers to be undertaken by existing staff, nor have the roles been altered such that the functions, duties or responsibilities no longer reflect the roles occupied by the applicants. While a position may be redundant where the role is still being undertaken by others, this is not the same as advertising the positions with identical duties on a lower wage to new prospective employees.
[48] This conclusion does not address the validity or otherwise of the economic imperatives the respondent said it faced in terminating the applicants’ employment and whether such action amounted to a case of unfair dismissal as per the Act in respect of each of the applicants. "

Consequently the Deputy President dismissed Parabellum's argument on genuine redundancy and ordered that the matter be listed to consider the merits of the unfair dismissal claim. In other words, to consider whether the dismissals were – not being cases of genuine redundancy – unfair dismissals within the meaning of the Fair Work Act (ie harsh, unjust or unfair).

What happens next in the case will be noted with interest. If it is the case that the Fair Work Commission deems the dismissals to have been unfair it will put employers in Parabellum's (and Company A's) position in a difficult situation: what are they to do when there is a need to cut staff costs, but still require a workforce of the same size to deliver results?

 

If the Fair Work Commission determines that the dismissals were not unfair (even though they were not cases of redundancy) then the wider consequences of the decision could be detrimental to employees. For if the employees' positions in the Parabellum case were not considered to have been made redundant (in the context of the unfair dismissal provisions) then it is arguable that the employees would not have been entitled to redundancy pay under section 119 of the Fair Work Act.
Although unclear at present, a perhaps unforeseen outcome of the decision might therefore be, that when an employer is faced with reducing staff wages due to economic reasons (with possible consequential staff losses), it may be able to avoid paying statutory redundancy pay, a benefit which (to date) has been regarded as something of a protection for employees in these situations. At the moment it would wise to await clarification on this question from the Commission before considering basing any decision on the Parabellum case.

 

Although on the face of it, the decision appears to be "pro-employee" (given that it appears to open a new door to employees to claim unfair dismissal in such a scenario), the consequences of the case for employees may be established to be far from favourable.

Employers are therefore well advised to tread carefully when dealing with such a scenario. It may be prudent to consider effecting any such dismissals using a Deed of Release.

 


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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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