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17 January 2017 Calculating redundancy payments – does prior service as a casual count?

By Richard Ottley, Partner and Simon Obee, Associate

Australian law has for a long time recognised the concept of "casual" employment. It is generally understood that casual employees are engaged on an "as needed" basis. There is no obligation on the employer to offer a casual work and, equally, there is no obligation on the employee to accept work when offered.

Because of the variable nature of their employment, the Fair Work Act 2009 excludes casual employees from the benefit of certain entitlements bestowed on permanent employees under the NES. For example, under the Act, casual employees are not entitled to paid personal/carer's leave, annual leave, notice of termination or redundancy pay.

However, to compensate casual employees for the fact that they do not receive these entitlements casual employees receive a 25% "loading" (or uplift) on the minimum wages set for permanent employees. For award-covered employees the loading is mandated in the applicable modern award, and for award-free employees the entitlement is derived from the Fair Work Commission's minimum wage orders.

The Fair Work Act 2009 recognises that where a casual employee is engaged on a "regular and systematic" basis, they should be given certain additional rights – for example, the right to claim unfair dismissal if terminated unfairly after a period of "regular and systematic" employment of 6 or 12 months (depending on the size of the employer's enterprise).

On occasion an employee who is initially engaged as a casual may subsequently accept a permanent position with an employer. In fact, some modern awards mandate that certain casual employees must be offered a permanent position after a working for a set period of time (so called "casual conversion").

For casuals who become permanent employees, the question arises as to what status their period of casual service should now be given. If, for example, an employee with ten years' service as a casual and one year's service as a permanent employee is made redundant, should their redundancy pay be calculated on 11 years' service or one year's service?

You might think that if such an employee had received the benefit of the 25% casual loading for ten years then it would be logical that their period of casual employment would be disregarded for the purpose of calculating notice and redundancy pay. Otherwise, wouldn't the employee, in effect, be "double-dipping" on entitlements?

Somewhat surprisingly, in the recent decision of AMWU v Donau Pty Ltd [2016] FWCFB 3075 the majority of the Full Bench of the Fair Work Commission determined that periods of "regular and systematic" employment as a casual before an employee becomes permanent are to be counted as periods of service for the purpose of calculating notice and redundancy pay. We discuss the decision and its consequences below.

We also briefly mention a decision of the Administrative Appeals Tribunal of Australia in Reardon v Secretary, Department of Employment [2016 AATA 1027] handed down on 15 December 2016 which confirmed that redundancy payments and notice for permanent employees should not take account of prior casual service which was irregular and unsystematic.

The Facts

Newcastle shipbuilder Donau Pty Ltd faced making a large number of employees redundant after completing work on a contract with the Australian Submarine Corporation.

The relevant employees were covered by an enterprise agreement which referenced the Fair Work Act 2009 provisions including those dealing with redundancy and notice.

At first instance Commissioner Riordan found that prior service of casuals who had subsequently become permanent employees should not be taken into account when calculating redundancy pay and notice. The Australian Manufacturing Workers' Union appealed this decision to the Full Bench of the Fair Work Commission who by a two to one majority upheld the appeal and reversed Commissioner Riordan's decision.

The Full Bench Decision in Donau

The decision is based upon a detailed and technical analysis of the relevant provisions in the Fair Work Act 2009.
The entitlement to redundancy pay arises from section 119 of the Act and is calculated by reference to an employee's "period of continuous service". Section 123(1)(c) expressly excludes casual employees from an entitlement to notice and redundancy pay.

The question of how a period of casual service is to be treated for the purposes of notice and redundancy pay was analysed by the Full Bench by considering the definitions of "service" and "continuous service" in section 22 of the Act. This states as follows:
"(1) A period of service by a national system employee with his or her national system employer is a period during which the employee is employed by the employer, but does not include any period (an excluded period) that does not count as service because of subsection (2).
(2) The following periods do not count as service:
a) any period of unauthorised absence;
(b) any period of unpaid leave or unpaid authorised absence, other than:
(i) a period of absence under Division 8 of Part 2-2 (which deals with community service leave); or
(ii) a period of stand down under Part 3-5, under an enterprise agreement that applies to the employee, or under the employee’s contract of employment; or
(iii) a period of leave or absence of a kind prescribed by the regulations;
(c) any other period of a kind prescribed by the regulations.
(3) An excluded period does not break a national system employee’s continuous service with his or her national system employer, but does not count towards the length of the employee’s continuous service.
(3A) Regulations made for the purposes of paragraph (2)(c) may prescribe different kinds of periods for the purposes of different provisions of this Act (other than provisions to which subsection (4) applies). If they do so, subsection (3) applies accordingly.
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 (4) For the purposes of Divisions 4 and 5, and Subdivision A of Division 11, of Part 2-2:
(a) a period of service by a national system employee with his or her national system employer is a period during which the employee is employed by the employer, but does not include:
(i) any period of unauthorised absence; or
(ii) any other period of a kind prescribed by the regulations; and
(b) a period referred to in subparagraph (a)(i) or (ii) does not break a national system employee’s continuous service with his or her national system employer, but does not count towards the length of the employee’s continuous service; and
(c) subsections (1), (2) and (3) do not apply.”

The majority of the Full Bench (Senior Deputy President Drake and the Deputy President Lawrence) noted that nowhere in the exclusions from what constitutes "continuous service" is it stated that a period of service as a regular and systematic casual is excluded. In their view this meant that such periods of service should be included in the period of continuous service used to calculate redundancy pay (and notice) under the Act.

The Senior Deputy President and the Deputy President acknowledged that "Industrial justice might suggest that it is unfair for an employee who has received a casual loading for a period of employment to have that period of employment also count towards the accrual of severance payments" but found that they were constrained by the wording of the Act.

A dissenting view

In his dissenting judgment, Commissioner Cambridge noted that the majority had determined that a period of regular and systematic service was not expressly excluded from the definition of "continuous service" in section 22 of the Act. In the majority's view that meant that such service must be taken into account when calculating the period of continuous service for redundancy pay.

Commissioner Cambridge noted that by that reasoning, because no period of casual service in any form was excluded from the definition of "continuous service", this would mean that any period of casual employment – whether "regular and systematic" or not – should be counted for the purpose of continuous service for redundancy pay. It would therefore follow that a casual, even doing work of a very occasional and transient nature, could if subsequently made a permanent employee, rely on this prior period of casual service for the purpose of calculating redundancy entitlements.

In Commissioner Cambridge's view this could not be the intention of the Act. He pointed out that the definition of "service" in section 22 (1) of the Act being "[a] period during which the employee is employed by the employer" must be logically be confined to mean a period of permanent employment.

As the Commissioner went on to discuss, if the majority's decision represented a correct interpretation of the Act then, because the definition of "service" in section 22 applies throughout the Act, it would mean that a casual employee who was then engaged as a permanent employee would also be entitled to annual leave and personal leave accrued over the period of casual service. In Commissioner Cambridge's view this illustrated the "folly" of an interpretation of the meaning of service in s 22 which included a period of casual employment.

Decision of the AATA in Reardon v Secretary, Department of Employment

In Reardon v Secretary, Department of Health, the applicant who had lost her job following her employer's insolvency, made a claim for 4 weeks' pay in lieu of notice, and 11 weeks of redundancy on the basis that her years of casual employment were considered to contribute to "continuous service" giving her a total of over 6 years employment with her former employer. 
Ms EA Shanahan, Presiding Member who heard the matter, noted that the decision of the Full Bench in Donau had been handed down in August 2016 and invited submissions on the impact of that decision on the applicant's claim. 
Submissions of the respondent included reference to the dissenting decision of Commissioner Cambridge in Donau and his view that if "continuous service" included the casual service of an employee it results, amongst other things, in an entitlement to paid annual leave already catered for in the casual pay loading. 

The Presiding Member noted that the Fair Work Act does not provide a definition of "continuous service" other than in section 12 of the Act which states that section 12 has a meaning "affected by" section 22.  As noted above, section 22 does not exclude service as a casual from continuous service. 

The Presiding Member noted that in relation to "unfair dismissal" under s 384 of the Act, there was reference to casual employment which included employment on a "regular and systematic basis". 

The evidence was that Ms Reardon's employment as a casual was irregular and variable ranging from a minimum of 6 to a maximum of 27 hours per week.  Additionally the nights she worked varied considerably over the five years of her employment as a casual.  This did not in the Presiding Member's view amount to a "regular and systematic pattern" of casual employment sufficient to satisfy such a "definition" of casual employment. 

She noted that neither the NES nor the award applicable to Ms Reardon's employment (General Retail Industry Award 2010) negated the general common law interpretation of what is a casual and therefore the applicant's prior service as a casual did not meet the definition of "continuous service". 

In the circumstances, the Presiding Member considered that as the applicant had not been engaged in "continuous service" as a casual, that period should not be taken into account for the purpose of notice and redundancy. Therefore the original decision under which she was paid 1 weeks' pay in lieu of notice and no redundancy, should not be disturbed. 

The future

Reading between the lines, the majority's comments in Donau on "industrial justice" suggest that they may have preferred to arrive at a different view but the wording of the Fair Work Act 2009 prevented them from doing so. Enquiries made do not indicate that an appeal was lodged with the Federal Court against this decision, and assuming this is the case it may be some time before we see any challenge to it.

The decision in Reardon supports the principle that the attribution of prior casual service for notice and redundancy calculations for permanent employees, is limited to casual employment which was "regular and systematic". 

Implications for employers

For the sake of clarity, the decision in Donau does not mean that a casual employee who is made redundant will be entitled to notice or redundancy pay. It is clear that casuals do not receive notice or redundancy pay on termination.  

What this decision does mean – absent any subsequent decisions – is that where an employer offers a casual employee a permanent position, the employer will need to bear in mind a future need to include a period of "regular and systematic" past casual service, if and when calculating notice and redundancy pay under the Fair Work Act 2009. It may be challenging task in itself in some instances, to arrive at a view as to whether prior service as a casual was "regular and systematic". Payroll records may also require review in this context.

Prospective purchasers of businesses should bear in mind a potential need to check the employment records of permanent staff to see if allowance should be made for a prior period of casual service which might need to be taken account of for the above purposes.

Uncertainty will likely continue as to whether the decision in Donau potentially affects calculations regarding annual leave and personal leave of permanent staff with past service as a casual.   

Richard Ottley, Partner  |  Phone: +61 2 9233 5544  |  Email: rbo@swaab.com.au
Simon Obee, Associate  |  Phone: +61 2 9233 5544  |  Email: sro@swaab.com.au

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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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