Contract, communication and career - the three Cs that beat 'the ordinary and customary turnover of labour' exception to redundancy payments

In brief - In the current economic climate, many employers are having to consider redundancies as a part of repositioning their organisation for the future. There are a few exceptions to paying an employee a redundancy, and one of the main exceptions is the 'ordinary and customary turnover of labour' rule. 

In the recent Full Federal Court of Australia decision in United Workers Union v Compass Group Healthcare Hospitality Services Pty Ltd [2023] FCAFC 92 (Decision), the Court denied an employer the use of the labour turnover exception and reminded employers that they must consider the contract of employees, communication with employees and the career duration of employees when terminating employment.

Redundancy pay under the Act

Section 119 of the Fair Work Act 2009 (Cth) (Act) entitles employees to redundancy pay in circumstances where their employment is terminated due to their employer's insolvency or bankruptcy, or because their employer no longer requires the employee's job to be done by anyone.

There are very few circumstances where employees are not entitled to redundancy pay. These include if they have failed to accrue 12 months of continuous service, are employed on a fixed term contract, or if they are a casual employee.

Section 119(1)(a) of the Act is the most prominent exclusion to redundancy pay. The Act provides that where employment is terminated because the employer no longer requires the job to be done by anyone, they are not required to make redundancy payments if the termination is due to the ordinary and customary turnover of labour.

Background

Compass Group Healthcare Hospitality Services Pty Ltd (Compass Group) provided contract catering services to a variety of largescale clients. In this case, Compass Group provided services to Eldercare Inc (Eldercare), an aged care provider. Compass Group had successive contracts with Eldercare for almost 20 years.

When Compass Group's contract for catering to Eldercare ended, it dismissed 31 employees. Compass Group did not pay these employees any redundancy entitlements, claiming that the dismissals were due to the 'ordinary and customary turnover of labour'. 

The Full Court disagreed with Compass Group's approach, distinguishing it from two earlier decisions regarding the application of the same provision of the Act, and Compass Group's termination of employees was held to be outside the ordinary and customary turnover of labour, because:

• The length of some of the employee's employment - many of the employees had worked continuously with Compass Group for up to 13 years. The Full Court held that this demonstrated the employment was of a permanent and ongoing nature
• The employee's work was purported to be ongoing and indefinite in their contracts, rather than being for a fixed or finite period of time
• Compass Group's failure to give notice to employees of the termination of its long-standing contract with Eldercare.

As a result, the Full Federal Court found that Compass Group had contravened s 119(1)(a) of the Act by failing to pay the employee's redundancy payments and was ordered to do so.

Takeaways for employers

Employers should be wary of relying upon the 'ordinary and customary turnover of labour' exception to avoid making redundancy payments. Failing to understand the implications of this provision can mean employers are required to pay additional redundancy payments not otherwise budgeted and also face prosecution and penalties under the Act for failing to pay employee entitlements.

When employers are delivering a contract for services and it comes to an end, employers should consider the following:

• The wording of the relevant employment contracts and how they deal with the potential turnover of labour. Consideration must also be given to the effect of the new fixed term employment agreement provisions in the Act.
• The length of service of employees, as a Court appears unlikely to deny redundancy payments to employees who have been employed for a significant period.
• Appropriate consultation with staff regarding the termination of commercial contracts. Whilst employers need to be careful about not disclosing commercially sensitive information, employers must consult with employees where there is a significant disruption that will affect an individual's employment.