Redundancy pay exception – ordinary and customary turnover of labour

Employers engaged in contracting sectors – such as providing outsourced services to third parties under contracts for specified periods (e.g. catering, cleaning or maintenance contracts) – cannot assume that they will not have to make redundancy payments if staff are let go when the customer contract ends.

Redundancy pay obligations under the Fair Work Act 2009 (Cth) (FW Act) apply unless the employer can come within one of the exceptions, which includes the ordinary and customary turnover of labour exception.  This exception has recently been given a much narrower application as a result of the decision of Justice Colvin in the Federal Court of Australia in Fair Work Ombudsman v Spotless Services Australia Ltd [2019] FCA 9) (Spotless case).  

Key takeaways

The ordinary and customary turnover of labour exception is commonly relied on by employers that have a business regularly involving the loss of contracts for services and the securing of new contracts to provide services. 

To rely on the exception when not making redundancy payments, an employer must ensure that all communications, contracts, policies and practices are consistent with the exception.

In particular, an employer must:

• be able to demonstrate that its general practice is to end employment consistent with the exception (i.e. rather than redeploying employees at the end of customer contracts);
• make it clear to the relevant employee prior to and during employment that the employment will end if the relevant customer’s contract ends;
• not otherwise represent that the employment is ongoing or that redundancy pay will be paid; and
• ensure all contractual terms and policies are consistent with the application of the exception.

When an employer fails to make redundancy payments and the exception does not apply, penalties may still be imposed even if redundancy payments are later made by the employer.  The payments may however reduce the extent of penalties imposed.

Spotless case  

In the Spotless case, the ordinary and customary turnover of labour exception in section 119 (1) of the FW Act was applied narrowly.  His Honour considered it to be a remedial provision which should be given a construction that was beneficial to employees. 

Spotless had a contract with Perth International Airport to provide catering services.  After failing to renew the contract, Spotless dismissed 34 employees in 2015, including three employees with continuous service of between 4 and 33 years.  Spotless relied on the exception in the FW Act and did not pay redundancy entitlements.

His Honour said an employer could not arbitrarily bring about its own exemption by simply stating that the exception applied because that would defeat the purposes of the provision.  To be able to rely on the exception, an employer needs to demonstrate for a particular employee that termination is so inherent in the nature of the employee's job that it cannot be described as ongoing or indefinite employment. 

This requires an employer to show that it is a common and usual outcome for anyone working in a job of that kind that employment will end with the client contract ending.  An employer must also be able to demonstrate that this was consistently communicated to the individual employee.

While Spotless had a management level policy that ‘contract requirement employees’ would come and go with each customer contract, this was not reflected in practice as such employees were generally redeployed.  Prior to this group of employees, where redeployment was not possible, redundancy entitlements had been paid at Perth International Airport. According to his Honour, it was therefore not the common or usual outcome for employees working in jobs of this kind at Spotless to cease employment in these circumstances without any payment of redundancy pay.

His Honour then considered the circumstances of the individual employees and found that there was no evidence that any of the employees had been told prior to or during their employment that their employment would end with the client contract ending, without payment of redundancy pay.  Indeed, representations had previously been made to employees that redundancy pay would be paid on the ending of the Perth International Airport contract.  Additionally, the employees’ employment contracts were not limited to a period, task or season and, consistent with ongoing employment, contained terms enabling Spotless to transfer the employees between other companies in the Spotless Group, to move the employees to other locations and to terminate employment with notice or without notice.  The communications, contracts and policies of the individual employees were therefore not consistent with the ordinary and customary turnover of labour exception.

Spotless was not entitled to rely on the exception and redundancy pay was payable to each of the three employees.

Spotless made back-payments to each of these employees in 2017 of an amount equivalent to the statutory redundancy payment without admission of liability.  However, this did not prevent his Honour from directing the matter for further consideration as to the imposition of penalty.

Read our previous analysis of the ordinary and customary turnover of labour exception in Spotless Group v Dennis Buckle [2017] WAIRC 00024.