When businesses face financial difficulties, reducing employment costs can be an obvious area to look for savings. If an employee refuses to accept a lower salary to keep doing the same work, is that a genuine redundancy?
A recent Fair Work Commission (“FWC”) Full Bench decision considers when a genuine redundancy occurs and highlights the important distinction between reducing the salary attached to a position and eliminating the position itself.
Financial difficulties and a $45,000 salary reduction
In this recent decision, an employer experiencing financial difficulties determined that it could no longer afford an employee’s $110,000 annual salary.
The employer offered the employee the opportunity to continue performing the same role for $65,000 per annum, representing a $45,000 salary reduction. The employee did not accept the proposed reduction, and the employer subsequently terminated the employee’s employment on the basis of redundancy.
When the employee made an unfair dismissal application, the employer opposed the claim, contending that the termination was a genuine redundancy because the $110,000 role no longer existed and the employee had refused a “new” $65,000 role, which involved the same duties but at a lower salary. At first instance, the FWC found that the dismissal was a genuine redundancy. The employee appealed.
The job remained, despite the salary reduction
On appeal the Full Bench of the FWC found that there had not been a genuine redundancy and that the focus had incorrectly been on the employer’s financial position rather than whether the employee’s job was still required.
A genuine redundancy will only occur where an employer no longer requires the employee’s job to be performed by anyone because of changes in the operational requirements of the enterprise.
In practical terms, this means an employer cannot establish a genuine redundancy simply by showing that it can no longer afford an employee’s salary. The employer must identify a genuine operational change that means the employee’s job, or the work they perform, is no longer required.
In this case, the employer still needed the employee’s role to be performed so it offered the employee the opportunity to continue performing the same duties for $65,000 per annum.
The Full Bench considered this an important distinction. The employer had not eliminated the need for the role; it had reduced the amount it was prepared to pay for the role.
The Full Bench found that as there had been no genuine redundancy the employee could proceed with their unfair dismissal claim.
What does this mean for employers?
The decision does not mean that financial difficulties can never result in a genuine redundancy. Financial pressures may lead to a genuine operational restructure involving the elimination of positions, redistribution of duties or changes to the way work is performed.
However, employers should carefully distinguish between a decision to eliminate a role and a decision to reduce the remuneration attached to an existing role. The key question is not simply whether an employer can afford an employee’s salary, but whether the employee’s functions, duties and responsibilities are still required to be performed by anyone.
Where an employer still requires the same work to be performed, but can no longer afford the existing salary, it should not assume that redundancy is available simply because the employee has rejected a proposed pay reduction.
For further guidance on the obligations employers must meet when making an employee’s position redundant, read our article here.
