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10 legal traps to dodge in the downturn - Smart Company Insights

07 March 2011

Tough times are encouraging firms to cut staff, restructure and outsource to boost efficiency - as well as adjust pay and conditions for employees.

For many, there will be a strong business case for these strategies. But beware. There are legal traps for the unprepared.

The new industrial relations legislation that comes into force on 1 July 2009 will raise the stakes for employers.

New rights for employees and unions will make any changes to your workforce, including outsourcing and acquisitions, more difficult.

And the last thing you need when times are tight is a costly legal dispute. For your own safety, and sanity, make sure you don't fall into these legal traps.

1. Not preparing staff for redundancy

Employers should explain to employees, if redundancies are likely, the financial circumstances of the company and why redundancies are on the horizon as early as possible. Not doing so is a big mistake, says Peter Vitale, principal lawyer at CCI Victoria Legal.

Vitale is seeing an increase in discrimination claims by redundant workers because they were not properly mentally prepared for redundancy. \"It comes as a shock, so their instinctive reaction is to make some sort of claim,\" Vitale says.

The situation will get even more critical after 30 June, when Labor's new industrial relations laws come into force and employees in many firms (where there are more than 15 full-time equivalent staff) will again have a right to claim unfair dismissal.

Under the new laws, from 1 July it will be harder for all employers to prove an employee is a genuine redundancy. Instead of simply relying on \"operational reasons\", employers will have to be able to show that they genuinely tried to redeploy the worker somewhere in the business, including with related companies, but could not.

Vitale says it will be even more important for firms to document analysis of why the redundancies are needed in the business and why those people in particular were made redundant. Notes of meetings and strategy documents could be needed as evidence to defend an unfair dismissal case by the redundant worker.

2. Not protecting your IP when people leave

A recent survey by research security firm Symantec found that more than half of workers leaving roles took confidential company information - including employee records and client lists - with them on the way out.

Not taking steps to prevent this is a common mistake. Most survey respondents reported their former employers did not audit or review documents after they left their jobs, and they could access data on personal networks even after leaving.

Vitale says technology is making it increasingly difficult to protect your IP when people leave, but there are steps you can, and should, take.

\"You have got to make sure that you have clear rules about the use of computer systems and emails. You have to be very clear on employees' confidentiality obligations and their obligation to respect the company's proprietary material.\"

He says if you can't get the employees to sign up to a new contract setting these obligations out, there are common law obligations to remind employees about, especially when they are given a notice of termination or made redundant.

Remind staff that downloads to memory sticks and emails to home accounts are traceable.

And don't forget the technical measures. Vitale says he recommends that the IT people are working on restricting the former employee's access to the company intranet, email systems and any other important information while the manager is giving the employee notice.

3. Not fixing up employee contracts and job descriptions when you restructure

It is critical to get this right. Vitale says if job descriptions and contracts are not renegotiated with employees, the uncertainty about rights, roles and responsibilities can lead to disputes.

For instance, he says, if entitlements are not clarified for employees redeployed to a lower award classification, there could be a costly dispute. The workplace ombudsman could be called in to look for documentary evidence on why certain rates of pay had been applied.

4. Cutting pay and changing conditions in the wrong way

Many employers are considering cutting employees' hours as a way of keeping good staff, but cutting down on wage costs.

Vitale says he is receiving an increasing number of queries about how to do it from employers who are reluctant to make staff redundant because the memory of struggling to recruit in a skills shortage is still fresh in their minds.

He says in some cases it is possible to effectively cut hours by altering shifts under an enterprise agreement that requires giving notice to employees, but in any other case the employer needs the employees' consent.

Unilaterally cutting an employee's hours or rate of pay can be treated as a dismissal, and this can trigger payment of long service leave or redundancy entitlements.

5. Using a restructure to get rid of part-time staff

Andrew Douglas, principal lawyer and managing director of Douglas Workplace & Litigation Lawyers, says that in tough times employers instinctively want to get rid of flexible work practices, part-time staff and job share arrangements.

\"I've already had five or six clients asking how to manage it,\" he says. There is a widely held belief that these staff are inefficient and less committed than full-time workers.

\"It is often a bad mistake\", Douglas says. Not only because it often means losing valuable skills, he says, but because any decision about who to let go or who to hire, based on family responsibilities or gender, could breach the equal opportunity legislation in each state and the current and new industrial relations laws.

The same laws apply to decisions about which employees can have their hours reduced, or who can be redeployed. Unless the decision is based on legitimate, non-discriminatory business reasons, a claim for unlawful termination or a breach of equal opportunity laws could result.

6. A restructure that is used to get rid of staff who are sick or on workers compensation

\"Don't do it,\" says Douglas. Not only does it potentially breach industrial relations laws as discriminatory

behaviour, making redundant a staff member on workers compensation does not work to cut premium costs.

\"Unless the departing staff member resigns or takes voluntary redundancy, the case estimate for premiums will not be reduced (unless the employee has been on workers comp for a number of years and is no longer

'premium sensitive',\" he says.

Depending on how long the staff member has been on workers compensation, it can be a breach of workers compensation laws as well.

7. Not entering into a non-union collective agreement while there is still time

It's possible to roll AWAs or ITEAs into collective agreements now before the new law comes into force.

Douglas says that for many employers who rely on contractors and casuals, this is a good idea because after

1 July the rules about what terms and conditions can be part of a collective agreement change, and unions are more likely to become involved in the negotiation and execution of agreements.

He says how firms use contractors and casuals in particular is likely to become part of collective agreements again, ending the flexibility that employers enjoyed under WorkChoices. If employers enter a new collective agreement now, it will be in force until it expires.

8. Waiting until after 30 June to buy a distressed business

Douglas says if business owners are looking to buy distressed businesses that have staff on too generous pay and conditions, there is good reason to act before 30 June.

\"Under the current laws, 12 months after an acquisition pay and conditions for staff at the target business fall to match those of the acquirer's staff,\" he says. \"After 1 July under the new IR laws, pay and conditions for those staff don't fall at all for the life of their agreements. So the benefit of the purchase may be limited.\"

9. Treating independent contractors like employees

Be aware that if you outsource work to independent contractors you could be facing increased scrutiny.

Vitale says the new laws covering independent contractors have a strict definition of a contractor, and there have been some recent cases where independent contractors have been found by courts to be employed under sham arrangements, and employers have been forced to pay backpay and fines.

Under the Independent Contractors Act and the Workplace Relations Act, companies can be fined up to $33,000 per offence.

10. Not having business partnership agreements in place that plan for every likely scenario

Have you been saving your profits for the past 10 years for a rainy day while your business partner has been living it up? What's going to happen if your business needs a capital injection?

Lots of companies are experiencing cashflow difficulties at the moment. It's important that your shareholder agreements provide for when a capital injection is required, are how that will work. Also if it becomes necessary to sell some or all of the business, the shareholder agreements should set out how that will happen.