Fair Work Act 2009

s.122 - Transfer of employment situations that affect the obligation to pay redundancy pay

[1] This is an application by Datacom Systems Vic Pty Ltd (Datacom) for an order pursuant to s.120 of the Fair Work Act 2009 reducing the amount of the redundancy entitlement otherwise payable to two employees, Mr Khan and Mr Desai, whose employment by Datacom was made redundant.

[2] Section 119 of the Act is part of the National Employment Standards and sets out the NES minimum entitlement of employees to redundancy pay. Section 119 provides:

(1) An employee is entitled to be paid redundancy pay by the employer if the employee's employment is terminated:

(a) 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

(b) because of the insolvency or bankruptcy of the employer.

Note: Sections 121, 122 and 123 describe situations in which the employee does not have this entitlement.

(2) The amount of the redundancy pay equals the total amount payable to the employee for the redundancy pay period worked out using the following table at the employee's base rate of pay for his or her ordinary hours of work:

Employee's period of continuous service with the employer on termination

[3] There is no issue that the redundancies in this case were genuine and that the two employees were made redundant in accordance with s.119(1). General Electric (GE) had outsourced certain IT functions to Datacom some time ago. GE made a decision to "insource" that work back into GE. Mr Khan and Mr Desai were among the Datacom employees working on the GE account. GE gave the required contractual notice to terminate the Datacom service contract. GE advertised various positions to perform the work involved in the "insourced" functions. Mr Khan and Mr Desai were successful applicants for substantially similar to roles they had performed as employees of Datacom (in each case their roles include the functions they were performing at Datacom but also include additional duties within their skills and competence).

[4] There was no gap in their employment: Mr Khan and Mr Desai finished work for Datacom on one day and commenced work with GE on the following working day. There was close liaison and cooperation between GE and Datacom in relation to the "insourcing".

[5] Mr Desai's new position with GE was at a higher base salary than the base salary for his old Datacom position. Mr Khan's base salary was slightly less than the base salary for his old Datacom position. In addition, Mr Khan had been able to earn significant additional income as an employee of Datacom by undertaking additional project work over and above his standard duties for his base salary. Mr Khan does not have access to that additional project work at GE.

[6] Datacom seeks a reduction in the redundancy entitlement payable to Mr Khan and Mr Desai under s.119 and relies on s.120 which provides:

120 Variation of redundancy pay for other employment or incapacity to pay

(a) an employee is entitled to be paid an amount of redundancy pay by the employer because of section 119; and

(i) obtains other acceptable employment for the employee; or

(2) On application by the employer, FWA may determine that the amount of redundancy pay is reduced to a specified amount (which may be nil) that FWA considers appropriate.

(3) The amount of redundancy pay to which the employee is entitled under section 119 is the reduced amount specified in the determination.

[7] There is no doubt that the condition in s.120(1)(a) is met in this case. There is no issues about the capacity of Datacom to pay the amount. The issue is whether Mr Khan and Mr Desai's new employment with GE was "other acceptable employment" and whether it had been "obtained" by Datacom.

[8] In NUW v Tontine Fibres [2007] AIRCFB 1016 (Tontine) a Full Bench of the AIRC considered the meaning of the expression "acceptable alternative employment" in a redundancy provision in an enterprise agreement. It was common for enterprise agreements to reflect award provisions and contain redundancy entitlements that could be reduced if the employer obtained acceptable alternative employment (or some variant of that expression). The Full Bench observed:

"[23] It is well established... that the concept of acceptable alternative employment is to be determined objectively. As noted by a Full Bench in Australian Chamber of Manufacturers v Derole Nominees Pty Ltd:

"What constitutes "acceptable alternative employment" is a matter to be determined, as we have said, on an objective basis. Alternative employment accepted by the employee (and its corollary, alternative employment acceptable to the employee) cannot be an appropriate application of the words because that meaning would give an employee an unreasonable and uncontrollable opportunity to reject the new employment in order to receive redundancy pay; the exemption provision would be without practical effect.

Yet, the use of the qualification "acceptable" is a clear indication that it is not any employment which complies but that which meets the relevant standard. In our opinion there are obvious elements of such a standard including the work being of like nature; the location being not unreasonably distant; the pay arrangements complying with award requirements. There will probably be others."

[24] The onus of establishing that the alternative employment in question is acceptable rests with the applicant employer. In order to establish whether the alternative employment obtained by the employer is acceptable it is necessary to have regard to such matters as pay levels, hours of work, seniority, fringe benefits, workload and speed, job security and other matters (including the location of the employment and travelling time). ..."

[9] Other employment does not cease to be "acceptable" merely because it is on terms that are less advantageous to that of the terminating position. Tontine makes it clear that there are matters of degree involved.

[11] Mr Khan in particular argued that because GE advertised the positions publically and his engagement was pursuant to an application submitted in response to that advertisement, it could not be said that Datacom 'obtained' Mr Khan's employment with GE such as to satisfy the precondition in s.122(1)(b)(i).

[12] In my view, the word "obtains" in s.122(1)(b)(i) should be given a very broad interpretation consistent with the purposive approach mandated by s.15AA of the Acts Interpretation Act 1901. Datacom worked closely with GE to facilitate the 'in-sourcing' of the relevant work. That role was, in my view, sufficient to satisfy the relevant requirement. It would be peculiar indeed if an 'in-sourcing' of the present type did not attract at least some reduction in the amount otherwise due under s.119.

[13] It is trite that the purpose of the redundancy entitlement in s.119 is relevant to assessing an appropriate reduction.

[14] In 1984 the Full Bench of the AIRC heard a test case that dealt with a claim for an entitlement to redundancy pay to be introduced into a number of federal awards. The Full Bench determined a standard redundancy clause for inclusion in those awards in Termination, Change and Redundancy Case (1984) 294 CAR 175 (TCR No. 1). The Full Bench explained the basis for the new award standard as follows:

"Having regard to the other aspects of our decision and having regard to what we have said about the existence of, and reason for, unemployment benefits we do not believe that the primary reason for the payment of severance pay relates to the requirement to search for another job and/or to tide over an employee during a period of unemployment.

We prefer the view that the payment of severance pay is justifiable as compensation for non-transferable credits and the inconvenience and hardship imposed on employees. In this respect we agree with the conclusions contained in the CITCA Report but would indicate, at this stage, that in fixing the quantum we have been prepared to take into account the standards established in recent decisions of this Commission and the State Industrial Tribunals.

We are aware that extended notice, which we have granted, will not be sufficient to ensure that all employees find alternative employment and we are aware that these provisions will not solve the problems of the chronically unemployed. However, these must remain, in our view, primarily a social rather than an industrial responsibility. Nevertheless, as we have indicated earlier, it would be misleading to assume that success in obtaining a new job indicated that an individual made redundant had managed to recover the security built up over years of service in the redundant job and we are prepared to grant severance pay, in addition to the measures we have awarded to assist employees to find alternative employment.

We are prepared to have regard to length of service in determining an appropriate quantum but, for the reasons outlined by the ACTU and because the problems of age on the evidence before us are related more towards the attempt to find alternative employment, we have decided not to provide for age related payments. Of course, indirectly, older employees will benefit from a scale of payments based on years of service."

[15] In the Redundancy Case 2004 (PR032004), the Full Bench of the AIRC expanded upon the basis for the redundancy entitlement now embodied in s.119 of the NES. The Full Bench referred to the above passage and said:

"[133] While in the passage which we have set out from the TCR No. 1 decision the Commission took the view that the "primary" reason for the payment of severance pay did not relate to the requirement to search for another job and/or to tide over an employee during a period of unemployment, it is clear that those requirements played very little if any part in the level of severance pay which was then decided upon. We have not been persuaded that in these respects the Commission's approach was wrong. Nor have we been persuaded that we should depart from that approach because circumstances have materially altered since 1984. We agree with those who submitted that the responsibility for providing income during periods of unemployment should be borne by the community through the social security system, and not by employers. The Commonwealth is able, through a range of integrated social security programs, to target income maintenance transfers more effectively than could the Commission. On the material in this case, we see no justification for altering the approach which was decided upon in 1984 and which has been followed in the federal jurisdiction since. We do not intend to take income maintenance during a period of unemployment into account in assessing the adequacy of severance pay.

[134] We think it is important, however, to identify what we intend in using the term "income maintenance". We use that term to refer specifically to compensation for periods of unemployment. In excluding income maintenance from our consideration of the appropriate level of severance pay, we do not intend to exclude all income related loss experienced by redundant employees. We think that the Commission's reference in the TCR No. 1 decision to "the inconvenience and hardship imposed on employees" by redundancy should not be given an artificially narrow reading. The term "hardship" should be given its ordinary and natural meaning. That meaning is broad enough to cover areas such as loss of seniority, loss of security of employment and other kinds of losses which were identified in the evidence.

[135] The question remains whether an increase in severance pay is justified having regard to the basis upon which the Commission introduced severance pay in 1984. The ACTU submitted that it is. It relied upon a number of areas of loss and hardship which it submitted were not fully taken into account in 1984. Leaving aside income maintenance issues, those areas include trauma associated with the termination itself, loss of non-transferable credits such as sick leave, and the potential costs associated with loss of employment security, inferior conditions, loss of seniority, lower job satisfaction or diminished social status.

[136] Dealing first with the trauma associated with termination of employment for redundancy, the evidence indicates that the effects can be very severe. For example, the work of Webber and Campbell identifies the emotional and other effects which can accompany retrenchment - shock, anger, a sense of powerlessness, changes in household relations, change in the structure of everyday life and loss of social interaction. ACCI contended that these effects may be less severe because employees' expectations of job duration have declined. But there is little evidence before us of an actual decline in job duration. While trauma was an element which the Commission no doubt took into account in 1984, it may be that the relationship between length of service and trauma was not fully appreciated and not reflected in the scale which was adopted. We shall return to this issue.

[137] We turn now to the issue of loss of non-transferable credits. By non-transferable credits we mean primarily accrued untaken personal leave and contingent long service leave accruals. While those are clearly the most important non-transferable credits, there are others such as pro rata annual leave loading and unpaid parental leave which might also have an impact in the case of a particular termination. We shall deal with seniority separately. This area is not amenable to precise calculations, although long service leave is one area in which some quantification is possible. Under the standard federal long service leave provision, where pro rata leave is payable on termination of employment for redundancy, after 10 years' service a redundant employee receives 8.7 weeks' pay. An employee made redundant with less than 10 years of service is not entitled to anything on account of long service leave. A pro rata loss can be calculated for shorter periods of service. It must always be borne in mind, however, that until the entitlement to long service leave is vested it remains a contingency. It may be lost if the employment is terminated by the employer for cause or by some other means. In the same way all other non-transferable credits are contingent also. With respect to personal leave, we note the submissions by various parties that the Commission has always refused to award payout of sick leave credits on termination and that consistent with that approach we should not take personal leave into account in assessing the loss of non-transferable credits. While we do not intend to depart from the authorities relied upon, we think it is permissible to take into account in a general way that a loss of personal leave entitlements on termination for redundancy may lead to subsequent hardship when personal leave is needed but no credit is available. As we have with parental leave and annual leave loading, however, we place only limited weight on this factor.

[138] It is not appropriate, even if it were mathematically possible to do so, to establish severance pay at levels which fully compensate redundant employees for loss of non-transferable credits. We have already mentioned the contingent nature of credits. To that consideration must be added the high cost to employers of such an approach and the fact that we are concerned with the fixation of award provisions which are to operate as a safety net. Nevertheless, the loss of non-transferable credits is a significant factor to be taken into account.

[139] In relation to loss of security, the ACTU has demonstrated that many employees who are made redundant experience a significant loss of employment security. This is evident from the incidence of part-time and casual employment among employees made redundant from full-time jobs. We accept that this change in status is largely involuntary and that looked at overall, part-time and casual employment may be less secure than full-time employment. Furthermore, depending on their length of service, employees may go from an environment of relative security based on the duration of their employment to an environment in which, having no or short service with their new employer, they are vulnerable to retrenchment in the event of further rationalisation.

[140] Loss of employment security is not the only area in which employees who are made redundant may experience a reduction in conditions in their later working life. There is a real likelihood that, for some, employment post-redundancy will be of a lesser quality, that the remuneration will be lower and that job satisfaction and social status will be reduced. Whether this type of employment is in fact a stepping stone to employment of equivalent quality and remuneration, the deprivation is real.

[141] In relation to seniority, we have concluded that loss of seniority should be taken into account. It is obvious that to the extent that loss of seniority is a component in the hardship suffered by redundant employees, the loss varies dependent upon length of service. Loss of seniority is more significant for longer serving employees.

[142] It is also legitimate to take into account that the hardship associated with retrenchment is likely to vary relative to length of service with a particular employer. This is likely to be so in relation to the emotional trauma associated with retrenchment. It is also true in relation to loss of non-transferable credits and the other elements of hardship that we have discussed. Research cited by the ACTU and apparently accepted by ACCI shows that employees with long tenure experience more significant adjustment costs after being made redundant. Even taking into account that part of those adjustment costs arise through unemployment, this finding reinforces the conclusion that length of service should be a significant factor in the assessment of the hardship resulting from redundancy.

[143] The existing severance pay scale reaches a maximum of eight weeks' pay after four years of service. There is no disclosed reason why that should be so. The hardship associated with retrenchment is likely to be greater after five years service than after four and greater after nine years service than after five, to take some illustrative examples."

[16] The Full Bench added a further level of redundancy benefit for employees with 10 years or more of service that provided 4 weeks less than the benefit for 9 years of service (12 weeks vs. 16 weeks). The Full Bench gave the following explanation and rationale based on the presence of an entitlement in the standard federal award clause to pro rata payment of long service leave after 10 years - the benefit was reduced to prevent double counting.

"[154] Our decision to increase severance payments for employees whose employment is terminated by reason of redundancy after five or more years of service is based, to a significant extent, on the loss of non-transferable credits. The largest non-transferable credit is long service leave which accrues at the rate of 13 weeks' leave for 15 years of service. The amount of 12 weeks' severance pay for 10 or more years of service, while still greater than the current maximum, has been fixed having regard to the fact that under the standard long service leave provision in federal awards employees with 10 or more years of service whose employment is terminated on account of redundancy are entitled to pro rata payment of long service leave. It would be double counting not to make an allowance for that fact in fixing the amount of severance pay to apply after 10 years of service.

[155] It should be clear that our decision in relation to the new severance pay scale is based on the standard federal long service leave provision. Not all employees under federal awards are covered by the standard federal long service leave provision. In some cases employees under federal awards whose employment is terminated by reason of redundancy may be entitled to a pro rata payment for long service leave even though they have less than 10 years' service. While the Commonwealth provided material illustrating the position in relation to the standard long service leave provision, insufficient material was advanced to enable us to form a conclusion about the extent to which employees covered by federal awards accrue a right to pro rata long service leave on being made redundant with less than 10 years of service. For that reason we shall provide for applications to be made to vary the severance pay amounts to take such situations into account. Whether an adjustment should be made in the scale, and if so of what kind, are matters which could only be decided in the circumstances of the particular case.

[156] We have decided not to accede to the ACTU claim for an additional 25 per cent loading on severance pay for employees over the age of 45 years whose employment is terminated on account of redundancy. There are a number of reasons. The first is that we have decided that the approach to severance pay adopted in the 1984 decision is fundamentally correct. We do not think it is appropriate to depart from that decision by introducing an additional criterion into the scale based on the age of the employee. To the contrary we have built on the approach adopted in the 1984 decision by extending the severance pay scale to 10 years of service. Furthermore, as the Commission pointed out in the TCR No. 1 decision, a scale based on years of service indirectly takes age into account. Our second reason for rejecting the claim is that it appears to be based to a large degree on empirical evidence of the difficulty experienced by older workers in obtaining employment after termination for redundancy. We have made it clear that it is not appropriate to take income maintenance considerations into account in fixing the level of severance pay. Finally, even if the other objections could be somehow overcome, there is no particular reason why 45 years of age should be selected among the range of ages which might be selected for special treatment. In other words, there is an arbitrary aspect to the claim which weighs against it."

[17] Section 119 is a statutory enactment of the TCR principles and the Parliament must be taken to have endorsed the rationale and purposes explained by the Full Bench in enacting s.119. That rationale and purpose ought inform the proper construction of the expression "other acceptable employment" in s.120(1)(b)(i)" and the exercise of the ultimate discretion as to the appropriate reduction in the redundancy entitlement conferred by s.120(2).

[18] Section 122(1) is part of the broader statutory context in which the construction of s.120(1)(b)(i) must be considered:

122 Transfer of employment situations that affect the obligation to pay redundancy pay

Transfer of employment situation in which employer may decide not to recognise employee's service with first employer

(1) Subsection 22(5) does not apply (for the purpose of this Subdivision) to a transfer of employment between non-associated entities in relation to an employee if the second employer decides not to recognise the employee's service with the first employer (for the purpose of this Subdivision).

Employee is not entitled to redundancy pay if service with first employer counts as service with second employer

(2) If subsection 22(5) applies (for the purpose of this Subdivision) to a transfer of employment in relation to an employee, the employee is not entitled to redundancy pay under section 119 in relation to the termination of his or her employment with the first employer.

Note: Subsection 22(5) provides that, generally, if there is a transfer of employment, service with the first employer counts as service with the second employer.

Employee not entitled to redundancy pay if refuses employment in certain circumstances

(3) An employee is not entitled to redundancy pay under section 119 in relation to the termination of his or her employment with an employer (the first employer) if:

(a) the employee rejects an offer of employment made by another employer (the second employer) that:

(i) is on terms and conditions substantially similar to, and, considered on an overall basis, no less favourable than, the employee's terms and conditions of employment with the first employer immediately before the termination; and

(ii) recognises the employee's service with the first employer, for the purpose of this Subdivision; and

(b) had the employee accepted the offer, there would have been a transfer of employment in relation to the employee.

(4) If FWA is satisfied that subsection (3) operates unfairly to the employee, FWA may order the first employer to pay the employee a specified amount of redundancy pay (not exceeding the amount that would be payable but for subsection (3)) that FWA considers appropriate. The first employer must pay the employee that amount of redundancy pay.

[19] The exception created by s.122(2) is not operative in this case because s.22(5) does not apply in this case. Section 22 deals with the meaning of "service" and "continuous service". Section 22(5) provides:

When service with one employer counts as service with another employer

(5) If there is a transfer of employment (see subsection (7)) in relation to a national system employee:

(a) any period of service of the employee with the first employer counts as service of the employee with the second employer; and

(b) the period between the termination of the employment with the first employer and the start of the employment with the second employer does not break the employee's continuous service with the second employer (taking account of the effect of paragraph (a)), but does not count towards the length of the employee's continuous service with the second employer.

Note: This subsection does not apply to a transfer of employment between non-associated entities, for the purpose of Division 6 of Part 2-2 (which deals with annual leave) or Subdivision B of Division 11 of Part 2-2 (which deals with redundancy pay), if the second employer decides not to recognise the employee's service with the first employer for the purpose of that Division or Subdivision (see subsections 91(1) and 122(1)).

(6) If the national system employee has already had the benefit of an entitlement the amount of which was calculated by reference to a period of service with the first employer, subsection (5) does not result in that period of service with the first employer being counted again when calculating the employee's entitlements of that kind as an employee of the second employer.

(a) the accrued paid annual leave to which the employee is entitled as an employee of the second employer does not include any period of paid annual leave that the employee has already taken as an employee of the first employer; and

(b) if an employee receives notice of termination or payment in lieu of notice in relation to a period of service with the first employer, that period of service is not counted again in calculating the amount of notice of termination, or payment in lieu, to which the employee is entitled as an employee of the second employer.

(7) There is a transfer of employment of a national system employee from one national system employer (the first employer) to another national system employer (the second employer) if:

(i) the employee becomes employed by the second employer not more than 3 months after the termination of the employee's employment with the first employer;

(ii) the first employer and the second employer are associated entities when the employee becomes employed by the second employer; or

(i) the employee is a transferring employee in relation to a transfer of business from the first employer to the second employer;

(ii) the first employer and the second employer are not associated entities when the employee becomes employed by the second employer.

Note: Paragraph (a) applies whether or not there is a transfer of business from the first employer to the second employer.

(a) is a transfer of employment between associated entities if paragraph (7)(a) applies; and

(b) is a transfer of employment between non-associated entities if paragraph (7)(b) applies.

[21] The expression associated entity is defined in s.9 and "has the meaning given by section 50AAA of the Corporations Act 2001." That provision is complicated. However, it is clear that Datacom and GE and not "associated entities".

[22] Subsections 22(6) and (7) reinforce the notion that where there is a "transfer of employment" - a concept defined broadly in s.22(7) and present in this case -recognition of service with the outgoing employer by the incoming employer should disentitle the employee to the NES redundancy payment. That is consistent with the rational in the TCR No 1 Case and the Redundancy Case 2004 because where there is such recognition, there is no "loss of non-transferrable credits" of the sort that is one of the principal, if not primary, matters to which the redundancy entitlement in s.119 is directed.

• The purpose of the redundancy entitlement conferred by s.119 is primarily to compensate the employee for loss of non-transferrable credits, especially long service leave.

• It is not the intention of s.119 to fully compensate the employee in all or even most cases. The specified amounts are manifestly inadequate for that purpose.

• The redundancy entitlement in s.119 has no "income maintenance" purpose and is not intended to address the requirement to search for another job and/or to tide over an employee during a period of unemployment albeit that the it should be regarded as having a minor component referable to the inconvenience and hardship associated with redundancy.

• To the extent that alternative employment is "obtained" by the outgoing employer, matters referred to Tontine (obvious including elements such as the work being of like nature; the location being not unreasonably distant; the pay arrangements complying with award requirements) are relevant in assessing whether that employment is "acceptable" which is in turn relevant in assessing what, if any, reduction is appropriate. [Note that in Tontine, the alternative employment was with the same employer and there was no loss of continuity or non-transferrable credits. Nevertheless, the alternative employment, while assessed as "acceptable" still had material disadvantages that rendered it appropriate to award a portion of the entitlement.]

• Where there is no continuity of employment or recognition of long service and other non-transferrable credits that were not paid out by the outgoing employer then the employer should be entitled to the majority of the s.119 entitlement. To the extent that the alternative employment is disadvantageous when compared to the previous employment that will also sound in lesser reduction than might otherwise have been the case.

[24] In this case there was no continuity of employment and no recognition by GE of service with Datacom for the purposes of long service leave and other non-transferable credits. Accordingly, the employees should be entitled to a substantial portion of the entitlement notwithstanding the fact that Datacom had relevant hand in facilitating their employment with GE. The hardship factor does not weight heavily because each of the two moved directly into their new jobs. The disadvantage suffered by Mr Khan in terms of a slightly lower salary and the loss of the possibility (but not the right) of additional project work cannot justify a substantial reduction but I have still make a modest allowance for that factor. I also consider that there should be some minor allowance made for the retention payment made by GE to each of the employees. Although that payment was made by GE for its own purposes (ensuring that it retained its capacity to perform the contract with GE through to its conclusion by retaining relevant staff until that time), it was nevertheless a payment associated with the in-sourcing transition that benefited Mr Khan and Mr Desai.

[25] In all the circumstances I determine that the amount due to Mr Khan under s.119 should be reduced by the equivalent of 1.5 weeks and the amount due to Mr Desai should be reduced by the equivalent of 2 weeks. This will leave them each with the majority of entitlement of 6 weeks specified in s.119 for employees with their duration of service.

[26] A Determination reflecting this decision will issue.

R Paule and N Ashton-Smith on behalf of the Applicant.

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