Staying afloat and the 'R' word

March 2009

Redundancies. Also known as lay offs, retrenchments and downsizing. Call it what you will, the current economic crisis means many businesses have had to consider cutting staff numbers as a strategy to stay afloat.

If your business has no option but to cut staff in order to stay afloat, what are your legal obligations?

Severance pay

Some employers misunderstand what severance pay is. They do not understand that where an employee is made redundant, severance pay is addition to ordinary termination payments, i.e. pay in lieu of notice and accrued leave.

There is presently no universal right to severance pay in Australia. This will change on 1 January 2010 when new National Employment Standards commence. However, in Western Australia we already have a universal right to severance pay. Under an industrial order made in 2005 every employee of a business in WA with 15 or more employees has a right to severance pay according to a scale. The scale provides for 4 weeks pay after 1 year of continuous service increasing to 16 weeks pay after 9 years. For employees who have been employed for 10 years or more, the severance payment reduces to the equivalent of 12 weeks' pay to take into account that these employees will also receive pay in lieu of pro rata long service leave. Under this instrument an employer cannot agree with employees that this will not be paid.

Severance pay can be a substantial burden particularly for smaller businesses. The temptation may to be to "dress up" the redundancy, for example, as a termination for underperformance, to avoid it. However, even if the worker has been underperforming, if that worker's job will no longer be done by anyone, it will still be a redundancy. The severance payment must still be made. In such a case if it is not paid the worker can sue for it. It would be false economy to try to avoid a severance payment by calling the redundancy something other than what it truly is.

There are nonetheless ways of sidestepping severance pay. There are a number of exceptions under the General Order. Severance payments need not be made to apprentices or trainees, fixed term, fixed task, probationary or casual employees or to employees terminated for misconduct. If staff must be cut, and the cost of severance payments is a material consideration, employers should consider laying off employees in these categories first.

Discrimination

Another important, and often overlooked, area is discrimination.

Employers will often have a pool of employees who could be made redundant. In such cases the redundancy can seem unfair to those chosen over others. One way to avoid this is to use an objective policy such as "last on first off". While this can avoid unfairness claims, such policies are inflexible and do not ensure the remaining workforce is the best for the company. Ordinarily, therefore, employers choose based upon merit and the future interests of the business. Such a policy in general terms will be legally defensible.

However, the law has the potential to catch out even employers who genuinely believe they are making the best business decision. A range of laws protect employees from discrimination on the grounds of their race, gender, impairment, sexual orientation and the like. Under these laws it is not necessary for the employer to consciously discriminate in order to breach the law. It is enough that the employer in fact treats the employee in question less favourably than a comparable employee in the same situation for a reason which includes the characteristic. Where a retrenched employee has a relevant characteristic, and others without the characteristic are retained, there is a prima facie case of discrimination. The onus will be on the employer to show why there was no discrimination.

One solution might be to reverse discriminate against those who do not have such a characteristic (i.e. by keeping all those employees who have a relevant characteristic). However this would not make business or moral sense. The best approach for employers is to develop a merit-based policy around which the selection decision will be made, apply that policy even-handedly, and document the process. In this way employers can best position themselves to answer a claim of discrimination if it emerges.

Consultation and employee assistance

In Western Australia by law employers are bound by high standards which are generally applicable. Like severance pay, these obligations cannot be contracted away. Some of the key obligations are to:

• inform the employee as soon as reasonably practicable after the decision to make them redundant has been made.
• discuss with the employee the likely effects of the redundancy and measures that may be taken to minimise or avoid those effects (the employee may not waive the right to this discussion).
• allow the affected employee up to 8 hours of paid leave to attend job interviews during the notice period.
• notify Centrelink if more than 15 employees are to be made redundant.

Helping the employee to find alternative employment is one of the ways in which an employer can meet such obligations. There is also a financial incentive for the employer to do this. Under WA law the employer can apply for relief from severance payments where the employer has assisted a redundant employee to find other work.

In summary, redundancy is emotionally fraught and legally complex. If the process is not handled well employers can damage their employee relations and potentially create legal exposures. However, the challenges are not insurmountable. If a business has no option but to cut staff, the process can be managed with careful and sensitive attention to the legal and human resources issues involved.

For further information please contact Mark Hemery, Principal, at mhemery@talbotolivier.com.au or David Paton, Solicitor, at dpaton@talbotolivier.com.au.

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