Redundancy

Redundancies and managing the impacts of COVID-19 long term

Many businesses are now facing a downturn in business amidst much uncertainty around COVID-19. Even though it is predicted that restrictions will start to ease mid-May business owners are grappling with what it all means for their businesses over the long term.

We have many clients that are still trading business as usual such as Childcare Centres, Building & Construction businesses and certain Health Care Providers but they are all worried about the following:

  1. An economic downturn impacting on the viability of their business long term even after Australia returns to normal
  2. A COVID-19 case in their business and having to shut-down for 2 weeks and what impact that will have on their business

These are both very real scenarios for many businesses, so what are your options?

Obviously, if you have had a significant reduction in turnover you can apply for the JobKeeper scheme and this should help sustain you and your employees for the next 6 months. We know this is a challenge for some businesses because they will need to pay all eligible employees $1,500 per fortnight now and for those that are not generating any revenue this could be a challenge.

If a business feels that the impact of the loss of business will be long term, it can also look at making employees redundant. For many small businesses (with less than 15 employees) this may be a viable option as you do not have to pay redundancies (unless you are covered by an Enterprise Agreement or Award that overrides the FWA), all you would need to do is pay their notice period as per their contracts of employment and any accrued leave entitlements. You should check out our blog series on how to make employees redundant lawfully to ensure you are following a proper process you can read these here:

Redundancy the right way – Part One

But what if you need to make multiple employees redundant and you are not a small business and you literally cannot afford to pay the redundancies? What are your options?

You can apply to the Fair Work Commission for a redundancy pay variation to seek a reduction in the redundancy pay you are required to pay your employees due to COVID-19.

Two recent cases that were heard on the same day highlight how the Commission is going to view your case and what you need to consider before making an application.

The first case that was recently approved had many business owners excited as they were probably thinking that using COVID-19 as a reason to reduce redundancy pay obligations would be relatively simple. However, another case that was heard on the same day, was in fact denied.

The first case involved a small architectural joinery business. This business was in financial trouble prior to COVID-19. In February 2020 they decided to make one employee redundant and they could not afford to pay the 3 weeks’ notice and 7 weeks’ redundancy pay. They could only afford to pay the notice and accrued leave entitlements, so that is what they did and they then made an application seeking to make a downward variation.

After hearing the application, the Commission reduced the redundancy pay entitlement from 7 weeks to 1 week. There reasoning for the decision was really interesting, as they acknowledged the sums already paid to the employee and noted that these amounts were sufficient to cover the period in which the employee was able to find another job. The employee was also able to go on a holiday to Bali and the sums already paid to the employee also covered their period of self-isolation on their return. They also acknowledged that the business was still under “significant financial strain” and that the COVID-19 pandemic had certainly exacerbated their financial situation.

The second case was heard on the same day and was lodged by a Manufacturing business who applied to reduce redundancy pay for 3 full-time workers from 4 weeks to 1 week.

The business claimed that COVID-19 had impacted their business significantly and they predicted a 30% downturn in business that was going to impact profitability, sales and cash flow. As a result, they made 3 people redundant and stated they were confident they could offer casual employment where possible and wanted to re-employ the employees in the same roles once the pandemic was over.

The business had paid the employees two weeks’ notice and accrued annual leave and pleaded that if they had to pay the redundancy pay it would lead to significant financial hardship.

The employer was asked by the Commissioner to consider the JobKeeper scheme rather than terminating the employees via a redundancy based on the fact that they calculated this amount to equal about 90% of the employees’ wages. The business responded by pleading that the long-term economic outlook was unstable and they did not feel that keeping the employees on was viable.

When questioned by the Commissioner about whether they could afford to pay the full amount of redundancy pay the business did admit it “currently had the means to pay the full amount and had money in the bank to today to do so” they claimed that their fear was more so around the long-term viability of their business.

The Commission considered the application and acknowledged that operating circumstances were difficult due to COVID-19 but it was denied based on the fact that the business had the means to pay the redundancies and that their predicted cashflow issues were forecasted and not in fact having an impact at present.

So, what does this all mean for business owners who are considering making employees redundant and attempting to reduce redundancy pay? These two cases highlight how businesses will need to demonstrate financial strain and hardship. It would appear that predicted cashflow issues or reductions in turnover will not be an acceptable reason to apply for a reduction. It is also clear that the Commission will look at each application on a case by case basis, so employers need to be careful and have a very strong case if they are to be successful in making such claims.

Written by Head Guru Emily Jaksch

If you need help navigating COVID-19 in your business then we can provide advice and support. Please not hesitate to get in touch on 1300 95 95 60.

We have also created a COVID-19 Employer Value Pack with 9 templates including an Employer Guide you can learn more here.

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