Last week the Fair Work Commission (FWC) published two contrasting decisions regarding applications to reduce the amount of redundancy pay due to incapacity to pay, the first two of their kind since the COVID-19 pandemic.
Section 120 of the Fair Work Act allows the FWC to reduce the amount of redundancy pay (including to nil) if the employer cannot pay the amount.
Employer allowed to reduce redundancy pay
The first decision concerned Mason Architectural Joinery, a small business employer, who sought permission to reduce an employee’s redundancy pay from 7 weeks to 1 week because it could not afford to pay the full entitlement.
Commissioner McKinnon calculated the former employee to be out of work and unpaid for only 8 days due to the redundancy of his position as he started another job with a $2 per hour pay rise 8 days after the termination date.
At the time of the hearing, the situation for Mason Joinery had improved slightly since the termination of the employee’s employment and after having received no business income for two months, it had received one payment for a completed job and was hopeful of two new contracts coming through. It was still finishing pre-booked jobs although two had been lost due to the COVID-19 pandemic. Commissioner McKinnon was satisfied the employer was under such significant financial strain that it could not afford to pay the full entitlement and reduced the amount of redundancy pay to 1 week’s salary.
Finding in the employer’s favour the Commissioner noted,
“The business is trying to work through the current crisis and much depends on how long the situation lasts. I am satisfied that Mason Joinery is under significant financial strain and that it cannot afford to pay Mr Grant’s full entitlement to redundancy pay”.1
Employer not permitted to reduce redundancy pay
In the second decision, Worthington Industries2, a manufacturer, made applications to reduce the amount of redundancy pay for three employees from 4 weeks’ pay to one. The employer made the employees redundant because of a reduction in production output due to competition and COVID-19. The employer asserted that based on customer advice and public announcements, they anticipated their sales will drop by up to 50% over the coming months.
Although the employer claimed that paying the full entitlement to the employees would cause financial hardship, Deputy President Clancy was satisfied the employer currently had the means to pay the full entitlements and would likely be eligible for the JobKeeper payments. Indeed the employer conceded that it currently had the means to pay the full amount and had money in the bank today to do so, (albeit submitting that it would be dealing with a deficit and cash flow problems in the coming weeks). It was this concession that resulted in the employer’s applications being ultimately rejected, and the employees remaining entitled to 4 weeks’ redundancy pay.
The Mason Joinery decision is the first time the FWC has reduced redundancy pay since the COVID-19 pandemic. Although the outcome was in direct contrast to the Worthington Industries decision, the decisions indicate that if an employer currently has the means to pay redundancy payments, it is expected to do so. Projections of future loss in earnings will not be enough to establish that the employer does not have the capacity to pay.
Although it is expected that more employers will make s 120 applications to the FWC as the economic effects of the pandemic worsen, the Government has urged eligible businesses to apply for the JobKeeper subsidy to keep employees employed rather than making them redundant.
If you have any questions regarding your obligations to your employees in the wake of COVID-19, including any advice on redundancies or a s 120 application, please get in touch with McCabe Curwood’s Employment group.
1 Application by Mason Architectural Joinery  FWC 1897, -.
2 Application by Worthington Industries Pty Ltd  FWC 1912.