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Downsizing your workforce without upsizing your liability

07 March 2011

Given that redundancies are usually a measure of last resort to cut costs, it is important that cost savings in labour cuts are not depleted or overshadowed by litigation, or threatened litigation, arising from those terminations. So, how do you downsize your workforce without \"upsizing\" your liability?

The legal approach

What steps should you take to reduce the risk that an employee will commence legal proceedings? The simple answer is to conduct the redundancy process in such a way that there is no legal redress available. However, that is easier said than done.

Essentially, with the advent of WorkChoices, the ability of employees to bring legal action has been severely curtailed but it has not been abolished (although readers should watch this space as Labor's \"Forward with Fairness\" policy is going to effect further changes). The current position is that where a termination of employment occurs in a \"constitutional corporation\" and is for a \"genuine operational reason\" of the business, that is a ground or reason for the termination is a genuine operational reason, employees can no longer bring unfair dismissal claims. A \"genuine operational reason\" is an economic, technological, structural or \"other similar\" reason. If the employer cannot make out the reason as fitting within the \"genuine operational reason\" exemption then an employee may, subject to other jurisdictional exemptions, be able to bring an unfair dismissal claim in relation to a termination of employment. As mentioned above, this unfair dismissal exemption only applies if the employer is a \"constitutional corporation\", that is, a trading, financial or foreign corporation. If you are a sole trader, partnership or government organisation, you are unlikely to be a constitutional corporation so \"WorkChoices\" does not apply to you. You should therefore pay particular care in relation to redundancies as State or Territory unfair dismissal schemes under the relevant State or Territory industrial relations legislation are likely to apply and these may not have a similar \"genuine operational reason\" exemption.

Additionally, employees whose employment is terminated for reasons of redundancy can bring other claims at common law and pursuant to statute, namely, claims of discrimination, breach of contract, breach of the Trade Practices Act and breach of industrial instruments (such as awards).

We therefore recommend the following course of action:

Understand that a redundancy means the organisation no longer requires the position(s) being performed to be performed by anyone. This can mean the abolition of a role or breaking it up into component parts and requiring existing employees to take on additional duties or outsourcing.

Have objective evidence of the need for redundancies. Examples may include profit downgrades, a drop in sales, loss of contracts, inability to fund projects, refinancing problems. A \"mere assertion\" by an employer will not be adequate to demonstrate the redundancy was for a genuine operational reason.

Work out which employees occupy the positions to be made redundant (the affected employees)

Become familiar with the affected employees' contracts of employment. Are they employed pursuant to some other industrial instrument? (award, enterprise agreement etc) What is their notice period? Must it be in writing? Can the organisation make a payment in lieu? Is there a provision for a severance payment in the contract? Are there any applicable policies such as those dealing with redundancy or termination?

Comply with all applicable contracts, policies, industrial instruments. This means not just observing amounts to pay but whether any consultation with them and/or unions is required.

Consider any other additional areas of concern. Could they argue discrimination on the grounds of sex, race, age, disability etc? Did someone (including any consultants you engage) during the recruitment process make promises of longevity of service or security of employment? Are they on some form of leave? Maternity? Paternity? Workers' compensation? Sick leave? Is there a \"custom and practice\" in relation to redundancies? If so this could be an implied term of their contract of employment.

Comply with legislative requirements if there are more than 15 affected employees. You will have to notify Centrelink in accordance with the provisions of the Workplace Relations Act (WR Act).

Consider if you may fit within any exemptions from redundancy requirements in applicable industrial instruments. Most industrial instruments will exempt employers of under 15 employees. Employers may not have to pay severance if they find acceptable alternative employment for the affected employees. Employers who can demonstrate an inability to meet the payment obligations may also seek an exemption.

Ensure that any payments over and above minima are \"protected\". You can protect publicity of these payments, and therefore manage (minimise) the expectation by future employees, by making the execution of a Deed of Release a condition of the payment. You should seek legal advice in relation to this step and have a lawyer draft this document for you.

Ensure that the correct tax treatment is applied to the payment


The humanitarian approach

Whilst covering the legal bases is important to minimise liability, there is also an indirect benefit in treating the affected employees with respect and dignity. Aside from it being the right thing to do, your actions in assisting the affected employees leave on the best possible terms are likely to be noticed by existing employees. As a result, whilst you might not be able to quantify the saving of acting in this manner, there is likely to be less absenteeism, less turnover and greater motivation to work with management to ensure the organisation performs to the best of its ability during what are challenging times for all.

The future

The Rudd government will soon seek to enact the substantive changes to the WR Act and some of these affect redundancies. For example, the National Employment Standards which are due to commence on 1 January 2010 will make redundancy payments to all employees mandatory except in limited circumstances. You should ensure you keep up to date with these legislative changes.


The WorkChoices amendments have made it easier for \"constitutional corporation\" employers to retrench without legal consequences but they have not abolished all forms of legal action that terminated employees may bring, so it is still necessary to approach implementation of redundancies with care. Further, because not all employers are covered by WorkChoices, not all employers will be able to rely on the \"genuine operational requirements\" exemption and thus redundancies by these employers may still be subject to unfair dismissal actions. Aside from protecting your legal position, there is also a benefit in approaching terminations of employment on the grounds of redundancy with care and sensitivity, as you keep the remaining employees happy and productive and ensure the affected employees are less likely to seek revenge for their termination. Complying with legislative and contractual obligations whilst supporting the affected employees will assist you to minimise the risk associated with the terminations and ultimately, is more likely to ensure the objectives for introducing the redundancy program are achieved.


Kathryn Dent is a partner of Gadens Lawyers, Sydney specialising in Workplace Relations law. Gadens Lawyers has workplace relations practices in each of its offices. Kathryn is happy to answer brief inquiries from Ruby members in relation to this article, at no charge. Please contact her on (02) 9931 4715

This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.




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