Unilaterally reducing an employee's hours may create a redundancy pay liability

In brief 3 min read

In a recent decision of the Federal Court, an employee became entitled to a redundancy payment under the National Employment Standards after the employer significantly reduced the employee's hours of work.

How does it affect you?

If you propose to significantly reduce an employee's hours of work, you should carefully take this decision into account. If the same circumstances exist, the employee may be entitled to a redundancy payment, even though the employee remains employed by the same employer.

Background

An employer reduced a cleaner's hours of work from 38 hours per week to 20. The employer had negotiated a new contract at the cleaner's site, under which the number of cleaning hours at that site was reduced.

The employer argued it had not terminated the employee's employment and, therefore, the employee was not entitled to a redundancy payment under section 119 of the Fair Work Act 2009 (Cth) (FW Act) (which provides for a redundancy payment if an employee's employment is 'terminated'). The employer argued that there was no termination because the employee remained employed by the employer and the employment relationship survived the change (even though the change ended the employment contract).

Decision

The Federal Court did not accept the employer's argument. It found that the employment relationship did not survive the change, describing the relationship after the change as a 'fundamentally different relationship'. Justice Katzmann decided that the employee was entitled to a redundancy payment for the following reasons:

• The repudiation and the acceptance of the repudiation brought both the employment relationship and employment contract to an end: By reducing the employee's hours, the employer repudiated the employee's employment contract. This terminated the employment relationship. The employee accepted the repudiation by refusing to sign the consent form or agreeing to a variation in terms. This brought the employment contract to an end;
• The full-time position was redundant: The full-time position was redundant because it was surplus to the employer's requirements. The employee's employment in that position was terminated for that reason. The employer no longer required the full-time job to be done by anyone and there was no evidence that the termination was due to the ordinary and customary turnover of labour.
• Other provisions in the FW Act support the conclusion that an employee can remain employed by the same employer, yet still be 'redundant' or have their employment 'terminated':
  • The FW Act contains a provision which allows for the amount of redundancy pay to be reduced when the employer obtains 'other acceptable employment for the employee'. Justice Katzmann took the view that this provision was not limited to circumstances where the employer obtains other acceptable employment with another employer. This provision can apply where the employee remains in employment with the same employer. Therefore, it is possible that an employee may be entitled to a redundancy payment even if they remain employed by the same employer.
  • The unfair dismissal provisions in the FW Act provide that a person's employment is 'terminated' if the employee is re-employed in a significantly diminished or inferior position.

If this decision is appealed, we will provide a further update.