28 June 2021

Are your employees entitled to redundancy pay? Not when it is the “ordinary and customary turnover of labour”

Redundancies can be a costly exercise. In addition to paying out notice and other entitlements, there is also redundancy pay which is additional severance pay calculated as multiples of weeks pay per year of service. There are some exceptions to redundancy. One of the most controversial is whether employment ceases “due to the ordinary and customary turnover of labour”.

It seems to be a straight-forward concept, but what does the “ordinary and customary turnover of labour” really mean?

Frustratingly, there is no clear and concise answer. Courts and tribunals make an assessment considering the particular facts of each case to decide whether usual business practices meet the description. 

That said, some general factors guide decision-making:

  • Every business has turnover to some degree. Individuals come and go all the time. But this is not what is meant by “ordinary and customary” turnover.

    Instead, the turnover must be “commonly observed” and “habitual or of longstanding practice”. This might be a feature of the industry the business operates in, or the nature of work being performed.

    An illustrative example would be the film and television industry. If an employee is hired to work on a particular show that runs season to season, when the decision is made to end that series, it may be expected that the employment ends too (no matter how long the show went for).

  • Courts and tribunals consider the parties’ mutual intention when the employment relationship started. One way to do this is to look at the terms of the contract of employment and ask whether it makes clear the employment would naturally end as a matter of custom.

    Does the contract expressly say that the employment will end when a specific outcome is reached? Is the employment limited to the location of a specific project? Is the employment only to service that specific project?

    None of these questions are determinative, but collectively they begin to paint a picture as to whether the parties expected the employment to end at a specific point or be ongoing.

  • An employees’ personal expectation may also feature. Did the employee think that their employment would end at a certain time? Or did they think it would be ongoing? In this instance, their expectation is a matter of reasonableness.

    For example, an employer may conduct their business on the understanding the work may be contingent on external funding. But unless that understanding is firmly established from the start, then the employee may be under a reasonable belief their employment is indefinite. This disjunction is why communicating intention from the get-go is paramount.

When is it not the “ordinary and customary turnover of labour”?

Last year, the Federal Court of Australia was called upon to consider the meaning and operation of the phrase, “ordinary and customary turnover of labour” in the widely reported case of Berekley Challenge Pty Ltd v United Voice [2020] FCAFC 113.

Two related companies provided cleaning and security services to a client. The arrangement was subject to the continual renewal of a commercial contract. Both companies hired staff to service that particular commercial contract. 

When the companies lost the contract, they dismissed the cleaners and security guards, but did not pay redundancy. This took the outgoing staff by surprise — many of whom had been employed for a long period of time. Court action commenced to claim the unpaid redundancy. Both companies argued they fell into the exception.

At trial and on appeal, the Court found that the terminations were not the “ordinary and customary turnover of labour”. While it was common knowledge amongst the managers that employment would end if the service contracts were lost, there was no evidence that the employees were made aware of this fact. Their employment contracts provided for permanent, ongoing employment. Further, there was no evidence that it was the norm in those industries to expect employment to end when the employer lost the tender. 

This all being the case, the exception did not apply. The companies had to pay redundancy.

And when is it?

The decision in Berekley Challenge was recently reaffirmed in CEPU v Delta FM Pty Ltd [2021] FCAFC 107. Again, the Federal Court had to answer whether the termination was because of the “ordinary and customary turnover of labour”.

A plumber, an electrician, and a refrigeration technician each brought a claim for unpaid redundancy. Their employer was engaged to assist in the construction of an offshore facility that produces liquified natural gas. This was a long project that started in 2012 and finished in 2018. 

The employees admitted that they did not carefully read their contracts. They all expected to be reassigned to another project when construction finished. 

Had they paid closer attention to their contracts, though, they may have realised their belief was misguided. Their contracts clearly stipulated that ongoing employment was subject to the operational needs of their client. The purpose and location of work was to service that construction project.

Once the construction contract was over, or if it was lost, their termination would be treated as the “ordinary and customary turnover of labour”. Ongoing employment could not be guaranteed.

At trial, and on appeal, the employees were not found to qualify for redundancy pay.

Some lessons for employers?

Whether an employer can rely on the “ordinary and customary turnover of labour” exception is not something that can be retrospectively cobbled together out of convenience. Employers need to set an expectation from the moment they engage an employee that their employment falls into the exception.

Not only that, but that expectation must be founded on genuine business reasons. Their must be some custom or practice in the industry to ground the reason, or a feature of the work being performed (such as to service a single project). 

Courts have made clear that the terms of the contract must reflect the nature of this kind of turnover. If the terms of the contracts do not align with employees’ expectations, then the employer may be caught needing to pay redundancy when it thought otherwise (as was the case in Berekley Challenge).

Accurate messaging and precise contractual terms provide eligible employers the best chance to rely on this exception – which is best based on legal advice before taking action. 

Authors: Darren Gardner & Joshua Handley