“Ordinary and Customary Turnover of Labour” What Does This Really Mean?

Many labour hire and contract for service employers (such as commercial cleaning, security and maintenance companies) exist as a result of contracts they have with clients for their services, for which they engage staff. When these contracts come to an end, there is no need to retain the staff and as such their positions are redundant. It has been widely accepted that if this is the manner in which these businesses did business, and it was an ordinary and customary part of the business model, then the employer would not be liable to pay the employees redundancy pay as a result of the terminations due to loss of contracts. This idea has been enshrined in the Fair Work Act 2009 (Cth) which provides that redundancy pay is not required if the termination of employment is a result of the “ordinary and customary turnover of labour”. However, there has been much uncertainty as to when this actually applies and what these words mean. There has also been significant recent judicial scrutiny of the issue.

Employers and Unions had hoped to gain clarity around the meaning of the expression “ordinary and customary turnover of labour,” when the application for special leave to appeal was made to the High Court of Australia to appeal the Federal Court of Australia Full Court decision in Berkeley Challenge Pty Ltd v United Voice [2020] FCAFC 113 (1 July 2020) (Berkeley).  However, in December 2020, the High Court refused special leave to appeal the Federal Court of Australia Full Court appeal decision (Full Court appeal decision).

That leaves the Full Court appeal decision in Berkeley as the leading authority on the meaning of “ordinary and customary turnover of labour.” Collier and Rangiah JJ issued a joint judgment (Joint Decision) with Rares J issuing a separate decision although agreeing with Collier and Rangiah JJ that the appeal should be dismissed. The decision effectively confirmed that the termination of the employees’ employment in those cases were not due to the “ordinary and customary turnover of labour” and that redundancy pay was owed to the employees. The decision has been considered by the union movement as closing the loophole for Contract for Service Employers avoiding redundancy pay.

The Full Court appeal decision was an appeal of two separate decisions which was heard concurrently.  Although Berkeley Challenge Pty Ltd was part of the Spotless Corporate Group, it was a respondent in separate proceedings in relation to a loss of a contract which was brought by United Voice (as the United Workers’ Union then was), while Spotless Services Australia Ltd was a respondent in proceedings brought by the Fair Work Ombudsman. The evidence however showed that both Berkeley and Spotless had employed a number of employees for a particularly long period of time, including some with between 10 and 20 years service.

In the Full Court Appeal, Rares’ J held that in order to fall within the exception of “ordinary and customary turnover of labour,” the employment or job, “must be of such a nature that a reasonable person in the position of both those offering or seeking the particular job (or who were aware of all of the circumstances in which the employee had remained in the employer’s workforce for sufficient length) would be aware and expect that it would come to an end in the ordinary course. That expectation arises objectively because, in the regular or usual order of things, and the accepted custom of the industry, trade, or employment market, when the employer terminates the employee’s job and he or she is not replaced, the employee will have no right to payment of redundancy pay.”

Collier and Rangiah’s JJ reasoning and interpretation of the meaning was based on a more complex reasoning. The joint decision summarised, that “ordinary and customary turnover of labour” connotes a termination where the employer no longer requires the job to be performed because termination in the particular case is common or usual, both in the sense that it is commonly observed and in the sense that it is habitual or of longstanding practice”. The Joint Decision also outlined that there are a number of relevant factors (although not exhaustive), which would need to be considered.

The non-exhaustive list of relevant factors which the Joint Decision highlighted included:

1. The expectations of employees;
2. Whether the termination is a normal feature of the business, inherent in the nature of the particular business;
3. The size of the employer, whether the employer is part of a corporate group and the practices of that group, the manner in which the employer is managed (including within a corporate group), labour turnover frequency and practices within the employer and the group, and the manner in which an employer (and potentially the corporate group) conducts its business, are factors to be taken into account;
4. The nature of the job to be performed and whether it is self evident it comes to an end;
5. Whether the practices of the termination are “long-standing” for that particular type of business or employment;
6. Whether the event of termination is unusual;

Relevantly, the Joint Decision noted in relation to an employer’s practices the following:

“The Court should not unequivocally accept that practices claimed by the employer to be “normal” for its business are objectively normal for that kind of business. Evidence of the employer of what it understood to be “normal” could potentially inform the Court’s understanding of such practices, but as the primary Judge observed in [2019] FCA 9 at [129] an employer cannot claim that termination practices constitute “ordinary and customary turnover of labour” simply because it is the practices it adopts. Such an outcome would be contrary to the purposes of the FWA and outside the scope of “ordinary and customary turnover of labour” as traditionally understood.”

Although the list of relevant factors to be taken into account are not exhaustive, they do indicate that a range of factors will be taken into account in assessing whether an employee’s termination of employment by an employer will fit into the “ordinary and customary turnover of labour” exemption.

The decision does make it far more difficult for contract for service businesses to rely on the exemption. However, the framework put forward by the Court, particularly in the Joint Decision, leaves the door open for businesses to avoid redundancy pay if the various factors point to the termination of employment being a feature of the type of business, and employees had the expectation that they would not receive redundancy pay. However, we recommend that before any business seeks to rely on this exemption, it obtains advice as to whether it can ensure its operations fit within the parameters set by the Court. Our advice is to err on the side of caution in these circumstances.

We regularly advise clients on termination of employment and the remuneration and benefits that must be paid to employees in these circumstances.

This article should not be treated as, and is not intended to, constitute legal advice.