By Kelly Godfrey

As the impact of COVID-19 hits employers and the economy, many employers need to cut costs to survive. Some are making employees’ positions redundant and attempting to finalise employment on this basis. However, in doing so, some employers are finding they cannot pay the full amount of severance pay required to be paid under the National Employment Standard.

In circumstances where an employer (that does not qualify as a small business) alleges it cannot afford to pay severance pay, it must make an application to the Fair Work Commission (FWC) to reduce the amount of severance pay payable to an employee. The FWC must weigh up the facts and circumstances to decide whether or not an employer can reduce its obligations. The FWC has had to examine this issue recently in the context of financial downturns due to COVID-19.

The Mason Case

In Mason Architectural Joinery Pty Ltd (2020), two employees were retrenched after the business experienced a severe downturn in revenue, resulting in a need to cut costs. The employer had taken a range of measures to reduce its costs, including selling a company vehicle.

One employee was entitled to 3 weeks’ notice and 7 weeks’ severance pay. The employer paid the employee their notice pay, accrued rostered days off and accrued annual leave, however, claimed it could not afford to pay the 7 weeks’ severance pay. The employer applied to the FWC to reduce the severance pay payable to this employee.

The employee had been able to secure another position, at a higher rate of pay, during the 3-week notice period. After hearing and receiving evidence about the employer’s dire financial circumstances and the employee’s new employment status, the FWC reduced the severance pay payable from 7 weeks to 1 week.

The Worthington Case

In Worthington Industries Pty Ltd (2020), the employer applied to the FWC to reduce the severance pay payable to three employees from 4 weeks to 1-week severance pays each.

The employer gave evidence that it anticipated a 50% reduction in sales in the coming months due to the impact of COVID-19. It also indicated a preference of retaining the employees as casuals and converting them back to permanent once business picked up.

The FWC suggested that the employer applies for the JobKeeper payment, as it appeared to be an eligible employer, reinstate the employees, and then immediately stand them down so they could receive JobKeeper. The FWC said it would consider that arrangement as a way of settling the present redundancy issue if the employer wished to investigate that option. The employer rejected the FWC’s suggestion and asked for a decision to be made on its application.

The employer conceded it had money in the bank to pay the redundancies but “would be dealing with a deficit and cash flow problems very quickly”. So the employer was not present in dire financial circumstances.

After considering the evidence, the FWC held that the severance payments should be paid in full and would not permit a reduction.

Lessons

To be successful in an application to reduce the amount of severance pay payable, an employer must demonstrate significant financial hardship, to the extent, it would make it impossible for full severance payments to be made. Projected possible financial hardship will not be sufficient.

If the FWC suggests an employer consider another possible and realistic option, it is a good idea to defer for a period of time to at least consider that option. Dismissing it out of hand may suggest that there are other motives for the dismissals.

Alternatives to redundancy, such as JobKeeper, should be considered prior to any decision being made to retrench employees. The Worthington case demonstrates that the FWC will want to see what steps an employer has taken to avoid redundancies in the first place.