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Legal issues in redundancy and retrenchment

14 December 2011


Legal issues in redundancy and retrenchment

Siobhan Andersen, Senior Associate

Present economic circumstances indicate that it is timely to revisit some topical legal issues about redundancy and retrenchment. This article is a practical examination of some key issues for employers to consider throughout the redundancy process.

Many drivers may prompt an employer to consider redundancies, such as organisational redesign, business downturn, a merger, or a restructure. This article outlines some key issues which an employer ought to consider to successfully navigate through the redundancy process.

Setting the context

Redundancy – an employer declares an employee’s position redundant because the employer no longer requires the position to be performed by anyone.

Redeployment – the process of an employee taking up acceptable alternative employment either with the employer or an associated entity of the employer.

Retrenchment – an employer has dismissed an employee because their position is redundant (and that employee was unable to be redeployed).

Review – an employer’s redundancy obligations under the Fair Work Act 2009 (Cth) (“FW Act”) and related legislation, applicable Modern Awards, enterprise agreements, policies and procedures, contracts of employment, or matters of custom and practice.

“Front-end” considerations

Any redundancy process will likely incur a certain level of cost, time and risk to implement. Accordingly, an employer should first consider its particular workplace arrangements, and whether there are any alternatives, such as retraining, encouraging employees to use up their leave balances or cost-cutting in other areas.

If an employer chooses to pursue redundancies, then some topical issues to negotiate at the outset include:

  • asserting privilege over sensitive documents;
  • managing perceptions about “de facto” performance-based exits; and
  • avoiding perceptions of pre- determined outcomes by placing “names in boxes”.

An employer may generate a high volume of documents during a redundancy process, such as organisational charts and similar, much of which it may wish to protect due to its sensitive or confidential nature. However, employees, unions, the media or other interested parties may seek access to these documents through freedom of information requests or discovery processes.

It is possible that an employer can withhold disclosing documents if it can assert that the documents are protected by legal professional privilege. This is a complex area of law (the scope of which is beyond this article). In general terms, an employer will be entitled to assert privilege if the document in question is a communication brought into existence for the sole or dominant purpose of obtaining legal advice or in contemplation of litigation. To assist an employer to assert privilege, it should obtain legal advice early. This has the added benefit of ensuring a smoother redundancy process.

Following on, it is a common misconception during the redundancy process that the employer is manipulating the process as a convenient “de facto” means of effecting performance-based exits without following established performance management processes. An employer can use performance as a selection criterion for identifying those positions which will be made redundant (discussed in more detail below). To avoid setting a questionable cultural precedent and to protect itself, an employer should carefully document the process and ensure that redundancy, rather than performance, is demonstrably the reason for any employee’s dismissal.

In addition, another matter which should be made clear to employees is that redundancies are concerned with positions rather than persons. An employer should identify which positions it will retain, rather than which individuals, and consequently ought to avoid placing particular employees’ “names in boxes”. Otherwise, the employer risks a perception that the redundancy process has a pre-determined outcome and is not genuine. To counter any suggestion of this, the options an employer could consider include “spilling and filling” all roles, by requiring all employees to reapply for their positions.

Making decisions about redundancies

At the next phase of the redundancy process, an employer must contemplate how it will make decisions about redundancies and how it will communicate about those decisions. The issues include:

  • the selection process an employer will use; and
  • how an employer will communicate with its employees, relevant unions and any other stakeholders.

Setting a selection process 

To assess which positions will be made redundant or retained, it is imperative that an employer sets a selection process that incorporates fair and objectively defensible and non-discriminatory criteria. Those criteria should take into account the employer’s required essential qualities, qualifications, training, skills, performance, and productivity levels and how those criteria will be weighted.

In setting a selection process, a topical issue is whether an employer may include performance as a selection criterion, as in a number of recent incidents employers have faced criticism for employing “rank and yank” methodologies to effect redundancies. While the answer is essentially “yes”, employers tend to face risks (including derailing the redundancy process, industrial disputation, reputational damage, or loss of staff confidence) by failing to properly raise performance issues when they first arise. To counter this, an employer should ensure that the redundancy process is not the first time at which performance issues have been put to employees.

In addition, an employer should consider what practices it will use to effect redundancies. Will it offer voluntary redundancies first, or use a “last on-first off” approach? By way of cautionary warning, a key risk in this area is to avoid practices which could be considered discriminatory to employees. For instance, in one case an employer who instituted the “last on-first off” approach to make its most recent employees redundant was found to have discriminated as the employees retrenched were largely female employees. Accordingly, an employer should examine the characteristics of those employees whose positions will be made redundant, and consider whether in so doing it would be  unlawfully discriminating against those employees.

This could also feed into an “adverse action” claim under the general protections of the FW Act. The basis of the claim would be that the employer has used the redundancy process to dismiss the employee in breach of their “workplace rights”, or for a prohibited reason such as their sex or age. These claims are a key area of risk.

A related issue to consider is what positions (if any) an employer will retain during a redundancy process. For instance, an employer may choose to “spill and fill” all roles, but then retain certain positions. In so doing, an employer should consider its motivations as regards the roles retained and whether any particular types of employees are being targeted. For example, it would be a risky strategy to institute a selection process which appears to target employees who are all union members.

Setting a communications strategy

In tandem with setting a selection process, an employer should set and implement a communications strategy about the redundancy process. That strategy should feed into an employer’s broader change management strategy and processes and any existing communications protocols. Otherwise, an employer may risk damage to its relationship with its employees and other stakeholders and its reputation. Consequently, an employer should consider what it will communicate, how, to whom, and by what means. Where possible, it should be open and transparent about the process, decisions to be made, timing, and related issues such as whether employees will be required to work out their notice periods.

Implementing redundancies

When an employer moves to the next phase of implementing redundancies it may face a number of legal issues, especially if the process involves significant numbers of employees or levels of change, or a contentious industrial environment. To manage these issues, an employer should implement a staged and procedurally fair redundancy process, in which it:

  • consults with its employees while implementing its communications strategy; and
  • appropriately documents the implementation process.

When communicating with employees (and others which may be involved such as unions), an employer must undertake consultation, particularly if obliged to do so under its enterprise agreement or an applicable Modern Award. Consulting early and throughout the process will assist in ensuring smoother change management. However, there is a balance to be struck between complying with consultation requirements and the practical realities of consulting with those with a “need to know”. Striking this balance will assist in ensuring the integrity and fairness of the redundancy process, and in turn assists to minimise the risk of any subsequent claims.

The question also arises as to how and with whom an employer will consult. For instance, will it seek buy-in by a cascading strategy starting with senior management, and meet individually or in a group setting? An employer should at least meet with directly affected employees. Following consultation, an employer need not necessarily change its position based on the feedback it receives. However, it is entirely conceivable that an employee may make a persuasive case as to why their position should necessarily be retained.

An employer should “back up” its consultation and communication processes by providing employees with appropriate documentation such as communications packs and Q&A decks. This will afford an employer an opportunity to better inform employees, offer consistent messages, and reinforce what decisions are or will be made. An employer should assume that no matter is too trivial. For instance, a common issue arising is whether an employer will still pay an employee redundancy if they obtain another position while working out their notice period. While an employer might technically be able to defend not making a payment (especially if the notice period is lengthy), it should consider converse issues of precedent- setting and the cultural impact of refusing to pay.

Effecting terminations of employment

Following consultation, an employer will move to effect terminations of employment. At this stage, particular matters for an employer to consider include:

  • obtaining acceptable alternative employment (redeployment);
  • issues such as whether employees will work out their notice periods or be paid out and commence garden leave (if it has not done so already);
  • employees’ entitlements and their final pay;
  • other means of support for retrenched employees; and
  • appropriate exit documentation.

An employer must make reasonable efforts in all of the circumstances to redeploy affected employees to alternative acceptable employment, or risk an unfair dismissal claim that the dismissal was not a “genuine redundancy”. There is a substantial obligation on the employer to obtain for an otherwise redundant employee a directly or indirectly comparable position within the organisation or with an associated entity. To meet this obligation, an employer ought to establish clearly what vacancies are available, then inform employees of these and assist them to pursue appointment. If an employee is not appointed, then the employer should ensure that there are sound and defensible reasons for this decision.

If an employee does obtain alternative acceptable employment, then it is preferable to place that employee on a trial.

On the other hand, an employee may reject genuinely comparable employment. In some cases, an employer may consequently not be obliged to make a redundancy payment in circumstances when it would otherwise be required to do so. This contrasts with the situation where an employee takes a comparatively lower-paid position, in which case the employer may be obliged to continue to pay the employee at their previous higher rate.

Affected employees whose positions will be made redundant will commence a notice period before being retrenched. An employer should consider whether it will require those employees to work out their notice periods or seek to pay in lieu of notice, or (only if it has a contractual right to do so) whether it will place them on garden leave. This will depend on the workplace, but it may be desirable to pay out an employee, for example to minimise disruption in the workplace. It can also be very tempting to direct an employee to take garden leave; the key in this instance is to take a considered approach to doing so.

When an employee is retrenched, an employer needs to ensure that it correctly pays out all of an employee’s entitlements, including any redundancy pay. Most employees are now entitled to some form of redundancy pay pursuant to the National Employment Standards in the FW Act after 12 months’ service, unless excepted on some ground such as being a fixed-term employee. Employers should bear in mind that if an employer was already obliged to pay redundancy before the commencement of the Fair Work Act on 1 January 2010, then an employee’s entire length of service must generally be taken into account in calculating their redundancy payment. Otherwise, an employee’s entitlement will accrue from their employment from 1 January 2010 only. In addition, it is key that an employer applies the correct taxation treatment as concessional rates apply to only “genuine” redundancies (the detail of this issue is beyond the scope of this article).

In line with final payment, an employer ought to consider whether it will make other benefits available to affected employees, such as outplacement services, statements of service, time off for interviews, retraining or financial advice.

From a risk management perspective, an employer ought to provide affected employees with appropriate exit documentation, including a breakdown of entitlements. We suggest that an employer seriously consider obtaining deeds of release from affected employees to minimise the risks to the employer arising out of the redundancy. However, an employer may need to provide a more generous termination package to secure a signature.

Risks

This article has mentioned some of the risks (both legal and non-legal) associated with pursuing redundancies and potential resultant claims. An employee may make claims of unfair dismissal, adverse action, discrimination, breach of contract or policy, and trade practices legislation. The industrial responses which may flow include industrial action, assertions of breach of the FW Act , applicable Modern Awards, enterprise agreements or equivalent, or a dispute over the application of an enterprise agreement. It is possible that the Fair Work Ombudsman could be asked to investigate, with the worst-case outcomes being prosecutions and monetary penalties. As noted, there are also taxation implications.

We suggest that an employer takes a considered and structured approach when pursuing redundancies to ensure a smooth process and to minimise its risks.

Some minimum considerations

  • Explore all options (other than redundancy)
  • Review applicable legislative and workplace obligations
  • Maintain good records and documentation
  • Ensure a “fair” redundancy selection process – consult and communicate
  • Make reasonable efforts to redeploy affected employees
  • Pay retrenched employees all entitlements and offer other assistance
  • Use appropriate exit documentation – consider deeds of release
  • Appropriately manage any resultant claims
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