In a significant decision regarding the meaning of the phrase ‘employment is terminated’, the Federal Court of Australia has held that an employee will be entitled to redundancy pay where the contract of employment is terminated notwithstanding that the employment relationship continues. Unless and until the decision is successfully appealed, employers face the prospect of greater complexity in managing their obligations in redundancy situations.

Background

Broadlex Services Pty Ltd (Broadlex) employed Ms Brizitka Vrtkovski to work full time as a cleaner in May 2014. Three years later, Broadlex informed Ms Vrtkovski that it would be reducing her working hours by 18 hours (a reduction of nearly 50%). Broadlex asked Ms Vrtkovski to consent to the change. Ms Vrtkovski did not consent to the change but proceeded to work the reduced hours.

The United Workers’ Union (Union) issued proceedings seeking a declaration that Broadlex contravened section 44 of the Fair Work Act by failing to pay Ms Vrtkovski redundancy pay in accordance with section 119 of the Fair Work Act.

Decision

Section 119(1) of the Fair Work Act provides:

An employee is entitled to be paid redundancy pay by the employer if the employee’s employment is terminated:

• at the employer’s initiative because 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; or
• because of the insolvency or bankruptcy of the employer.

[emphasis added]

At first instance, the Magistrate held in favour of Ms Vrtkovski and ordered that she was entitled to redundancy pay. Broadlex accepted that its conduct amounted to a repudiation of the employment contract and the Magistrate found that by refusing to sign the consent form Ms Vrtkovski accepted this repudiation. Consequently, it was held that the contract of employment was terminated and, when Ms Vrtkovski started work on a part time basis, she did so under a new contract of employment.

On appeal, the Federal Court considered the proper construction of the phrase ‘employment is terminated’ and in particular whether this phrase referred to the termination of the employment relationship, the employment contract, or both. It was uncontroversial that Ms Vrtkovski’s full time position was no longer required to be performed by anyone. As such, for Ms Vrtkovski’s case to be successful, Broadlex’s repudiation of the full time employment contract needed to amount to Ms Vrtkovski’s employment being terminated.

The Court held that the repudiation of Ms Vrtkovski’s employment contract and her subsequent acceptance of the repudiation did amount to a termination of employment for the purposes of section 119. Additionally, the Court considered that the employment relationship did not survive the termination of the contract and that the contract and relationship that Ms Vrtkovski entered when she commenced performing reduced hours of work was a fundamentally different contract and relationship to that which she had previously enjoyed.

The Court considered that this interpretation of the phrase was consistent with other provisions of the Fair Work Act, notably section 120. Section 120 allows the Commission to reduce an employee’s redundancy pay if the employer finds other acceptable employment for the employee. The Court held that as this provision is enlivened when the employer finds the employee other employment within the employer’s organisation, it is necessarily enlivened when there is a break in the employment contract. That is, it is not necessary that the employment relationship has ended (and it may not have if the employee is employed in another acceptable role within the organisation) for the employee to be entitled to redundancy pay and the employer entitled to seek a reduction in that pay.

Some sage comments about the employment contract vs relationship

In considering the issues, the Court provided some comments on the employment framework which are useful:

The employment relationship is “inherently” a contractual one … Consequently, there can be no employment relationship without a contract of employment. …

Nevertheless, there is a difference between the employment relationship and the contract of employment. A contract of employment can come into existence before the employment relationship is formed and an employer who withdraws an offer of employment after it has been accepted or an employee who resigns before the starting date can be liable for breach of contract:…Furthermore, a contract of employment can include obligations, such as a restraint of trade covenant, which continue after the employment relationship has come to an end.

[case references omitted]

Key Take Away

The Court’s decision indicates that employees will be entitled to redundancy pay in a broader range of circumstances than was previously understood. Following this decision, it appears that:

• if the employer purports to unilaterally make significant changes to an employment contract and this change is not permitted under the terms of the contract (such as reducing hours or pay, or altering an ongoing contract to a maximum term contract), this will constitute a repudiation of the contract of employment and represents the end of the employment relationship;
• if the employee does not agree to the employer’s unilateral changes, the employment contract will come to an end and a termination of employment will occur for the purposes of s 119;
• if the employment contract has ended in these circumstances because the employer no longer requires the employee’s job to be performed by anyone, the employee will be entitled to redundancy pay regardless of whether they subsequently enter into a new contract of employment with the same employer; however
• if the contract of employment permits the change to be made or if the employee accepts the proposed variation to their contract (including redeployment into a new position), it is likely that redundancy pay will not be payable.

Of course, section 120 of the Fair Work Act may be enlivened such that the amount of redundancy pay may be reduced on application to the Commission if the employer has obtained other acceptable employment for the employee either within the employer’s organisation or elsewhere. Whether the alternative employment is acceptable or not will be determined by reference to a range of factors including the nature of the work, pay, working hours, skills, duties, seniority and location of the work.

What seems clear, though, is that, depending on the terms of the applicable contract, employers may need to apply to the Commission rather than (as has often been the case in the past) assuming that a redeployed employee is not entitled to redundancy pay. Given that this is a NES entitlement, redundancy clauses in enterprise agreements will not necessarily cure the situation either. At the very least, careful drafting of contracts is required to ensure that it is agreed from the outset that there can be a degree of flexibility in hours and duties (and other terms and conditions) so that the parties may agree to vary a contract without generating a redundancy.