Australia: Metes and bounds: Court confirms critical nature of employment contracts and industrial instruments when assessing entitlement to redundancy pay and employees’ expectations of ongoing employment

In the Delta FM decision, the Court confirmed the central importance of the relevant terms of an employee’s contract of employment and industrial instruments in determining whether the employee had a reasonable expectation of ongoing employment, as part of assessing their entitlement to redundancy pay.

We previously published an article on the decision of the Full Court of the Federal Court in Berkeley Challenge Pty Ltd v United Voice [2020] FCAFC 113 (see here). As outlined in that article, the Court in Berkeley Challenge outlined five factors in relation to whether an employer can rely on the “ordinary and customary of turnover of labour” exception in relation to a claim for redundancy pay pursuant to section 119(1)(a) of the Fair Work Act 2009 (Cth). The Court found that the “reasonable exceptions” of employees was a “critical” factor in this assessment.

In Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Delta FM Australia Pty Ltd [2021] FCAFC 107, the Full Court was again required to consider the factors for assessing whether turnover of labour is “ordinary and customary”. In doing so, the Court clarified the importance of the employees’ contracts of employment and industrial instruments, and the interaction between these documents and employees’ “reasonable expectations”, in this assessment.

Background

In short:

• Delta FM Australia Pty Ltd, a contract service provider and part of the Compass Group of companies, was engaged in around 2012 to provide facilities maintenance services at a construction accommodation village during the construction phase of the Wheatstone Project. This Project involved the construction of an onshore LNG facility and related infrastructure near Onslow, Western Australia.
• In August 2018, Delta FM was notified that its contract would conclude on 30 September 2018, at the conclusion of the construction phase of the Project. This meant that Delta FM’s employees were no longer required.
• On 30 September 2018, the affected employees employment was terminated by Delta FM.
• Delta FM did not pay redundancy pay, on the basis that the “ordinary and customary turnover of labour” exception applied.

At first instance, Vasta J of the Federal Circuit Court agreed that the exception applied in the circumstances, mainly because the employees could not have reasonably expected ongoing employment.^[1]

The Union appealed to the Full Court of the Federal Court, alleging that Vasta J had erred by placing too much emphasis on the employees’ contracts of employment, and by ignoring Compass Group’s practice of redeploying employees at the end of client contracts, wherever that was possible.

Justices Rares, O’Callaghan and Wheelahan JJ unanimously dismissed the Union’s appeal.

The importance of clear drafting in the assessment of whether employees had a reasonable expectation of ongoing employment

Their Honours affirmed the test expounded in Berkeley Challenge as to whether the “ordinary and customary turnover of labour” exception applied.

As to “reasonable expectations”, the Court described the relevant question as whether “a reasonable person in the position of both parties to the contract of employment would have understood or expected, from its inception or nature or as the length of the employee’s service grew, that the job was not of a permanent or an ongoing nature, but would come to an end within a reasonably foreseeable timeframe”.

In making their assessment on this question, their Honours made the following key findings:

1. The employees had signed contracts of employment which, in clear and unambiguous terms, provided that:
   1. Delta FM was a contract service provider who operated on sites under contracts between it and its clients;
   2. the employees were engaged to assist in the provision of services to Delta FM’s client at the Wheatstone Project; and
   3. their employment was subject to the continuing existence of a client contract between their employer and its principal, and that continuous employment “cannot be guaranteed”.
2. The relevant industrial instrument^[2] contained a clause to a similar effect – that termination of employment due to a change to or loss/end of contract between Delta FM and a client is a usual reason for a change in Delta FM’s workforce and is part of the ordinary and customary turnover of labour.
3. These terms set out the “metes and bounds” of what the parties must be taken to have understood or expected. As a result, there was no need to conduct any factual inquiry into alleged normal, habitual or long-standing practices in relation to the employees’ particular jobs or the industry in which they worked (as compared to Berkeley Challenge).
4. Evidence of the subjective intentions of the employees has no relevance to this assessment to the extent that this evidence is inconsistent with the plain words of the contracts of employment.
5. Given the clear drafting of the contracts of employment and the enterprise agreement, a reasonable person in the position of either party would not have thought the relevant jobs were permanent or ongoing, and would instead end no later than the completion of the construction phase of the Wheatstone Project.

Therefore, their Honours held that Judge Vasta applied the correct test and rightfully found that the “ordinary and customary turnover of labour” exception applied in relation to the relevant employees.

What does this mean for employers?

This decision reinforces the importance of clear drafting in contracts of employment. Specifically, where employers consider that they may need to rely on the “ordinary and customary turnover of labour” exception, they should expressly:

• state that the relevant job is subject to operational requirements, and changing operational requirements may mean that there is no longer a position for the employee;
• state that continuous employment cannot be guaranteed by the employer beyond the end of the client contract in relation to which they have been engaged; and
• refer to the “ordinary and customary” turnover of labour exception in the relevant redundancy pay clause. Employers may also wish to include such a reference in any industrial instruments.

Such employers should also do the following, which are not expressly referred to in the Delta FM decision:

• ensure on-going communication with employees throughout their employment regarding underlying customer/client needs, which may impact on the need for their role/position; and
• when an underlying customer/client contract is coming to an end, ensure that this is communicated to the employees.

[1] Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Delta FM Australia Pty Ltd [2020] FCCA 2939

[2] Compass Group (Delta FM) Enterprise Agreement 2014 - see clause 17.1

For more information on the actions which are already being taken by best practice employers to address this issue, please contact: