A recent Federal Court of Australia decision has confirmed that a unilateral change to contract terms and conditions, namely a reduction of hours and a change from full-time to part-time, can give rise to an obligation to make a redundancy payment under section 119 of the Fair Work Act 2009 (Cth) (the “FW Act”).

Background

The employee was employed as a full-time cleaner for a supplier of cleaning services. In July 2017, the employer entered into a new contract with a client that involved a reduction in the provision of cleaning services. As a consequence of that reduction, the employer informed the employee that her status would be changed from full-time to part-time and that her hours would be reduced from 38 hours to 20 hours.

The employee was invited to sign a form of consent to this change but refused. Despite this refusal, she commenced working the reduced hours as she believed she had no choice.

A union subsequently filed a claim in the Local Court of NSW seeking a declaration that the employer contravened section 44 of the FW Act by failing to make a redundancy payment to the employee in accordance with section 119 of the FW Act, in addition to a claim for compensation and civil penalties.

The Decision in the Local Court

In the first instance, the employer accepted that in reducing the employee’s status from full-time to part-time, it had repudiated her employment contract. The Magistrate found that this repudiation was accepted by the employee in her refusal to sign the consent form or otherwise agree to vary the terms of her employment. Consequently, the Magistrate held that the contract of employment was terminated, and the employee commenced her part-time role under a new contract of employment.

The Magistrate held that the contract of employment had been terminated at the initiative of the employer as it no longer required the full-time job to be done by anyone, and that the employee was therefore entitled to redundancy pay pursuant to section 119 of the FW Act.

The Magistrate upheld the union’s claim awarding the employee redundancy pay, interest and ordering that a civil penalty of $1500 be paid to the union.

The Appeal

The employer appealed the decision to the Federal Court of Australia. While the employer accepted that the full-time position was no longer required to be performed by anyone, the employer argued that the employee was not entitled to redundancy pay because the employment relationship continued after the termination of the contract.

The central question before the court was what was meant by the phrase “employment is terminated” as set out in section 119 of the FW Act.

The Federal Court did not find support for the proposition that employment or an employment relationship survives where the employer repudiates the contract of employment and the employee accepts the repudiation by entering into a new contract of employment on substantially inferior terms.

The Federal Court ultimately found that where the employer repudiates the contract of employment, and the employee accepts the repudiation, the employer terminates the employment relationship and the employee brings the employment contract to an end.
Consequently, the Federal Court confirmed that the employee was entitled to redundancy pay under section 119 of the FW Act and dismissed the appeal.

What this means for Employers

This case confirms that a unilateral change to contract terms and conditions of employment (without the consent or agreement of the employee) can inadvertently give rise to a “termination” in circumstances where the employee continues to be employed but on substantially inferior terms.

As employers look to make changes to their organisations and workforce to manage the adverse economic conditions that have flowed from the COVID-19 pandemic, they should be mindful that imposing a unilateral change to contract terms and conditions of employment may expose their business to redundancy and civil penalty liabilities.