Workforce Planning in an Unstable Economy: Legal Issues in Making Redundancies

Change management and downsizing has the potential to present a melting pot of legal issues for employers, and there are many practical traps for organisations to consider in planning and executing redundancies especially in a tough economic environment.

The legal definition of redundancy in Australia can be readily found in the Fair Work Act 2009 (Cth) (“the Act”). In order to give rise to a genuine redundancy and entitlement to severance pay under the Act, the test to be satisfied is whether 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. Redundancy is not an excuse for terminating an employee for poor performance.

However, making an employee redundant does not purely involve telling them they are no longer required. Procedurally, an employer has a number of obligations it must fulfil before it can legally end the employment relationship on the basis of redundancy.

The first stage involves careful planning, and employers ought to be aware of employee entitlements such as to notice, accrued statutory leave and other incentive payments which are derived from the National Employment Standards, industrial instruments, workplace agreements, contracts and policies. It is also pertinent to plan for contingencies in redundancy programs such as adverse media, industrial action and other forms of disputes. It is recommended that employers keep well documented records such as minutes of management meetings setting out the reasons for undertaking a restructure, downsizing or financial pressures necessitating redundancies. This will be most useful if the employee commences unfair dismissal proceedings, challenging the validity of the redundancy of their role.

Depending on modern award requirements, the second stage of the process requires employers to notify impacted employees (and representative organisations contemporaneously) about major workforce change, including redundancy as soon as a firm decision has been made. It is vital to ensure that communication is clear and all necessary information regarding the process and timing is given to impacted staff. Even if employees are not covered by an industrial instrument it is good practice to notify and consult with affected employees.

Once notification has taken place, consultation obligations should be discharged. For employees covered by a modern award or enterprise agreement, consultation is required. This includes but is not limited to talking with staff about the likely impact of the change and what mitigation strategies can be adopted to reduce adverse consequences to individuals. Consultation should not be a perfunctory advice about what is happening, rather it is an opportunity provided to impacted employees to influence the “decision-maker” through joint discussion. An employer needs to genuinely take into account any matters raised in consultation by staff. The benefits of proper consultation include a reduction in legal claims post termination, a valid defence to unfair dismissal proceedings, but most importantly it goes a long way to assist those employees who remain with the organisation to be positive and committed.

The final stage in the redundancy process, which if completed correctly can shield an employer from post-termination claims such as unfair dismissal action, is to consider redeployment opportunities, and where appropriate offer staff positions that may be suitably comparable within the organisation or an associated entity. Many employers determine or otherwise pre-empt whether a role is suitably comparable, and fail to offer the role to affected employees, because the role is a lesser paying position, requiring relocation or retraining, or even constituting a demotion. Where the employer demonstrates that a role is suitably comparable, application can be made to the Fair Work Commission under the Act to reduce an employee’s entitlement to severance pay (including to nil).

Managing legal exposures goes hand-in-hand with any change management program, employers need to prepare themselves for the possibility of opportunistic unfair dismissal claims, adverse actions or discrimination complaints. An important strategy to reduce these risks is to maintain good records of decision-making before and during the redundancy process.

Another contentious area in which recent litigation has proven costly for employers is breach of policy claims in which past employees have found grounds to assert a breach of contract on the basis that the employer failed to carefully and appropriately apply a redundancy policy. In the recent decision of James v Royal Bank of Scotland; McKeith v Royal Bank of Scotland [2015] NSWSC 243, the Court accepted than the employer’s redundancy policy was formed part of Mr James’ employment contract and awarded a senior executive more than $3 million when it found that the bank did not comply with its contractual obligations.

Although that decision is on appeal awaiting further judgment, the case serves as an important reminder in the lead up to mid-year remuneration reviews and salary negotiations that employers should consider their existing contract administration and policy framework to determine whether they offer maximum protection for the business and are consistent with best practice.

This alert is not intended to constitute legal advice. If you have an employment law issue, wish to discuss redundancy or the state of your employment documents, please do not hesitate to contact us for specialist advice or assistance.