Company P v D.S

[2014] FWC 4673

[2014] FWC 4673

FAIR WORK COMMISSION

DECISION

Fair Work Act 2009
s.120—Redundancy pay

Company P
v
D.S.
(C2014/850)

COMMISSIONER HAMPTON ADELAIDE, 1 AUGUST 2014

Application to vary redundancy pay on the basis of incapacity to pay - redundancy provisions of NAPSA preserved by modern award - whether employer lacks capacity to pay redundancy payments - basis of application not demonstrated - application dismissed.

1. Background

[1] The parties have been de-identified in this decision due to the particular nature of the application and the fact that the public identification of the parties and the details associated with the matter may of itself lead to adverse trading and business consequences for the privately owned applicant. It is however in the public interest for a decision to be published as it discloses how the Commission has exercised its jurisdiction in this matter and this is consistent with the concept of open justice.

[2] Company P has made an application to vary the redundancy pay otherwise due to one of its former employees, D.S.. The application was made on the basis that Company P does not have the financial capacity to make the redundancy payment and in that context seeks that the redundancy payments be reduced to zero.

[3] Company P conducts a business in South Australia and D.S. was employed in the capacity as an administrative and accounts employee. In effect, D.S. was the employer’s bookkeeper who also assisted with the administration of related businesses.

[4] There is no dispute that D.S. has been made redundant. It is also evident that Company P is a small business within the meaning of the Act. 1

[5] D.S. opposes the application on the basis that Company P is able to pay the redundancy payments, either directly or through related entities and businesses, and should do so.

[6] Following a directions conference, the parties lodged comprehensive written submissions and materials. Despite a request to do so, 2 none of the “evidence” was in the form of statutory declarations or affidavits. Some of the material provided by Company P was in the nature of formal financial statements supported by a Director’s statement.

[7] Neither party sought a hearing for the purposes of challenging the material of the other. As a result, I have determined the application based upon the submissions and material filed by the parties.

2. The relevant award provisions

[8] Although the application has been made pursuant s.120 of the Fair Work Act 2009 (the Act) it is in reality an application to vary the severance pay entitlements arising from provisions that have been preserved by a modern award.

[9] The Clerks (South Australia) Award 3 (the State award) is a former instrument of the Industrial Relations Commission of South Australia (the IRCSA).

[10] The redundancy provisions of the State award have been preserved by virtue of clause 14.5 of the Clerks Private Sector Award 2010 4 (the modern award) and other statutory transitional provisions.

[11] Clause 14.5 of the modern award provides as follows:

“14.5 Transitional provisions – NAPSA employees

(a) Subject to clause 18.5(b), an employee whose employment is terminated by an employer is entitled to redundancy pay in accordance with terms of a notional agreement preserving a State award:

(i) that would have applied to the employee immediately prior to 1 January 2010, if the employee had at that time been in their current circumstances of employment and no agreement-based transitional instrument or enterprise agreement had applied to the employee; and

(ii) that would have entitled the employee to redundancy pay in excess of the employee’s entitlement to redundancy pay, if any, under the NES.

(b) The employee’s entitlement to redundancy pay under the notional agreement preserving a State award is limited to the amount of redundancy pay which exceeds. the employee’s entitlement to redundancy pay, if any, under the NES.

(c) This clause does not operate to diminish an employee’s entitlement to redundancy pay under any other instrument.

(d) Clause 14.5 ceases to operate on 31 December 2014.”

[12] This matter has proceeded on the basis that D.S. (and Company P), was subject to the terms of the State award and was a NAPSA 5 employee for present purposes. The parties were not subject to an agreement-based transitional instrument or an enterprise agreement.

[13] The State award provided severance pay in the case of a redundancy for small business 6 employers as follows:

“4.4.7 Severance pay

4.4.7.1 Employees are entitled to severance pay as prescribed below in addition to the period of notice prescribed for termination in clause 4.3.1 and 4.4.4.

4.4.7.2 Severance pay - employees of a small business

An employee of a small business as defined in 4.4.1 whose employment is terminated by reason of redundancy is entitled to the following amount of severance pay in respect of a period of continuous service:

Period of continuous service	Severance Pay
Less than 1 year	Nil
1 year and less than 2 years	4 weeks pay*
2 years and less than 3 years	6 weeks pay
3 years and less than 4 years	7 weeks pay
4 years and less than 5 years	8 weeks pay

* Week's pay is defined in 4.4.1.”

[14] The redundancy pay obligations established by s.119 of the Act do not apply where the employer is a small business, which is defined in the same manner as the State award.

[15] As a result, there is no entitlement to redundancy payments for D.S. under s.119 of the Act. However, the modern award operates to provide a severance pay entitlement in the circumstances of these parties.

[16] The State award also provided as follows:

“4.4.8 Incapacity to pay

The Commission may vary the severance pay prescription on the basis of an employer's incapacity to pay. An application for variation may be made by an employer or a group of employers.”

[17] I have dealt with this application on the basis that the preserved transitional provisions for redundancy include the capacity for the Commission to vary redundancy obligations in the event that the employer demonstrates that there is an incapacity to pay as provided in the State award redundancy provisions. No party contended otherwise.

[18] D.S. was employed for a period in excess of 8 years and I understand that the severance entitlement arising from the award redundancy provisions amounts to something in the order of $9,200.

3. The basis of the application

[19] Company P contend that it has been operating with a trading loss and that no allowance has been made for the payment of director’s fees or wages and leave in relation to the main Shareholder and Director (B.C.), or any others.

[20] Company P also contends that there has been a significant decline in the net assets of the business, including a significant reduction in the bank account balance, in recent months. Further, the cash flow of the business is said to be poor with sales being less than the breakeven level in the last three months.

[21] Evidence was provided to the Commission in the form of statements from a firm of Chartered Accountants, and this included discussion of the financial and trading position of the business, the status and incomes of the three shareholders, and changes that have been proposed to enable the business to continue.

[22] These changes included the outsourcing of the “bookkeeping” role previously undertaken by D.S..

[23] In essence, the application is based upon the proposition that any further drain on the cash flow (through the payment of the severance benefit) would have a negative effect upon the continued operation of the business. This, it contends, would put at risk the continuing employment of other employees.

[24] I also note that Company P has stated that the redundancy entitlement will end on 1 January 2015 (as a result of the relevant modern award transitional provisions), and that it was not feasible to carry D.S.’s position for the further six months that would be necessary for the entitlement to be “automatically” eliminated.

[25] It should be appreciated that the future of the transitional redundancy provisions of all modern awards is being considered by a Full Bench as part of the 4 yearly modern award review and that no decision has yet been made. 7

[26] In response to certain issues raised by D.S., Company P indicated, in effect, that the criticisms of the management of the business were misplaced and the suggested alternative management strategies were not realistic given the cash flow position.

[27] Company P also indicated that the business had been profitable in the years leading up to 2010 however since that time the business has been declining and the Directors had to make further contributions through the loan account to keep the business afloat.

[28] The material provided on behalf of Company P also asserted the professionalism and standing of the charted accountants.

4. The position of D.S.

[29] D.S. opposes the application for any reduction in her severance/redundancy entitlement and contends, in effect, as follows:

● The Directors have taken out cash and materials from the business and plant purchased by Company P was used by other businesses in which the family has an interest;
● B.C. was not actively involved in the business and poor business decisions led to any present financial difficulties; and
● The bank account balance and cash flow position was impacted by the recent pay out of leave entitlements, but did not reflect a tax refund due to the business, and the result was, in effect, “manufactured” to produce a result for present purposes.

[30] D.S. also contends that B.C., and his family, were paid dividends in recent years and that he held money in various term deposits and owned many properties and received rental income from some of these.

[31] D.S. also submitted that it would not be appropriate to reduce or eliminate her entitlements given the above circumstances and suggested that Company P had spent money on obtaining advice from its accountants to assist in this matter that could otherwise have been used to pay her.

5. Consideration

5.1 Is there an incapacity for Company P to pay the redundancy entitlements?

[32] The ability of an employer to apply to the Commission for a variation in relation to its obligation to pay redundancy has its origins in the Termination, Change and Redundancy Case of 1984. 8

[33] Drawing upon that decision and the various decisions of the Commission when applying provisions akin to those in the State award, the following principles appear:

● The provision means that the Commission “may” determine to reduce the amount of redundancy pay up to an amount of nil, indicating that the granting of full or partial relief from the obligation is an exercise of discretion in the circumstances of the case. The employer bears the onus of establishing that there are grounds justifying the exercise of the discretion. 9

● The employer must satisfy the FWC that it is not financially competent or possessed of the necessary funds to make the payment, and has no reasonable source of funds. 10

● The assessment of financial competence will include consideration of the financial standing of the business including its cash position and the assets of the business. 11

● The effect upon the employees immediately concerned will be considered including whether making an order prevents the employee from recovering the entitlement through other means should the company be liquidated; the effect that any order may have on the status of employees as potential creditors should the company become insolvent; and the impact of any order on the employee’s rights under the General Employee Entitlements and Redundancy Scheme 12 (GEERS) or similar schemes.13

● The effect upon the continuation of the business, including whether reducing the entitlement of dismissed employees may have a beneficial effect on other employees, thereby enhancing their prospects of being able to remain in employment, are also relevant considerations. 14

[34] The absence of sworn evidence is a constraint in this matter, particularly given some of the assertions made by the parties. However, I do place weight upon the formal financial reports as provided by the chartered accountants given the nature of those reports and that firm. These reports go to the financial state of Company P and to some degree, its Directors, but do not deal with the related businesses to any significant degree. The financial reports are also subject to the normal caveats noted in the accountants’ compilation report including that the material has been compiled using material provided by the Directors and that no audit or review of the source material has been conducted.

[35] Company P is a private company owned through shares by B.C. and his family, and it is held, at least in part, as an element of a portfolio of business interests designed to provide an eventual retirement income. 15

[36] The financial reports indicate that during 2013/14 financial year to 31 May 2014, Company P had sales of just in excess of $1.2m and made a gross profit of over $677,000. However, it also had expenditure of over $790,000 and accordingly was operating with a trading loss of about $116,000 for that period. A trading loss of almost $100,000 was experienced in the previous full financial year.

[37] The largest expenditure item is salaries and wages ($436,000) with total employment expenditure being in the order of $496,000 16 in the year to 30 May 2014.

[38] The balance sheet reveals that Company P has total assets of over $319,000 and net assets of almost $128,000 as at the end of May 2014. This is a significant decline from the position at the end of the 2012/13 year. Some of that difference reflects the provision of almost $50,000 in the allowance for employee entitlements where no provision was apparently made in the previous year’s accounts.

[39] The reduction in total equity in the business, from $294,000 to $128,000 (both in approximate terms) largely reflects the reduction in retained earnings due to the trading loss the previous year.

[40] I do not consider that the suggestions made by D.S. that poor management decisions have led to any present difficulties are presently relevant. That is, it is not the role of the Commission to second guess the decisions by management or to make an assessment of who or what has contributed to any change in financial standing as part of determining whether an applicant employer has an incapacity to pay redundancy. Where an employer has contrived to create difficult circumstances, this may be relevant to the discretion to reduce the entitlements, but would need to be based upon evidence. This consideration certainly does not arise in this matter. I also add that the decision to use the services of the chartered accountants was also reasonable given the circumstances of this case.

[41] The financial affairs of Company P have declined in recent years and it is presently operating with an operating loss. The payment of the severance entitlement to D.S. will have an impact upon the assets of the business and it might be assisted if it did not need to do so. However, the question remains whether Company P has demonstrated that it lacks the capacity to pay the redundancy entitlements within the meaning of the award.

[42] There is little doubt that Company P has the sources of funds from within its own accounts to literally make the payment to D.S.. That is, it has sufficient assets that could be utilised for that purpose. However, the effect upon the continuation of the business, including whether reducing the entitlement of D.S. may have a beneficial effect on other employees, thereby enhancing their prospects of being able to retain them in employment, is also a very relevant consideration.

[43] This in turn requires consideration of two elements; namely, the likely impact of the payment upon the continuation of the business and whether there are other sources available to make the payment that would mitigate that potential impact.

[44] In my view, the severance payment presently due to D.S. is not significant enough in relative terms to change the business prospects of Company P. That is, I am not persuaded that in all of the circumstances evident here that the reduction in the payment (potentially to zero) will have a significant influence upon the continuation of the business for present purposes. These circumstances include the size of the business, the level of overall operations and the income, expenditure and trading position evident in the material before the Commission, and the relative size of the entitlement.

[45] In terms of other potential sources, in the context of a family owned private business that is operated as part of a suite of businesses and assets, the Commission needs to be careful to ensure that the evidence deals with any suggestion that alternative relevant sources to meet the obligation might exist. That is, the capacity for related entities to quite properly use and share resources between commonly owned private businesses leads to the need for caution.

[46] In this case, the material supplied on behalf of Company P on the issue is a submission that it “understands” that any “personal items” that “it is aware of” are “driven through the loan account.” 17 The absence of any significant material or evidence dealing with these matters is potentially significant given the onus that exists for the applicant employer to demonstrate its case.

[47] In any event, Company P has not demonstrated that it lacks the capacity to pay the redundancy entitlements due to D.S..

5.2 Should there be a variation to the redundancy entitlements and if so, to what level?

[48] Given my findings, there is no basis for the exercise of a discretion to reduce the redundancy entitlement under the terms of the State award that have been preserved by the modern award.

6. Conclusions

[49] Based upon the material presently before the Commission, I am not persuaded that Company P lacks the capacity to make the redundancy entitlements due to D.S. under the terms of the modern award.

[50] The application must therefore be dismissed and I so order.

Written submissions:

Company P:

27 June and 11 July 2014.

D.S.:

4 July 2014.

 1   S.23 of the Act - Company P employed less than 15 employees at the relevant time.

 2   Provided in written directions issue on 3 June 2014.

 3   AN150039.

 4   MA000002. The parties were subject to a NAPSA within the meaning of this provision.

 5   Notional Agreement Preserving a State Award.

 6   “Small business” under the State Award was defined to mean an employer that employs less than 15 employees.

 7   AM2014/190 - see the background paper issued by the Commission on 2 June 2014 - available on the FWC website.

 8   AIRC Print F7262 and AIRC Print F6230.

 9   Supra; Timbercraft Pty Ltd [2011] FWA 6283;

 10   Timbercraft; Baywood Products Pty Ltd v Mr Mervyn Inall[2010] FWA 9303.

 11   Timbercraft; Villa Crerarii Pty Ltd v Daniel Kahl [2013] FWA 903.

 12   GEERS is a Commonwealth scheme designed to provide certain entitlements when an employee ceases employment through liquidation or insolvency of their former employer. The Fair Entitlements Guarantee (FEG) is a more recent version of the scheme.

 13   Villa Crerarii Pty Ltd v Daniel Kahl; PYL Nominees Pty Ltd [2011] FWA 1581; Moltoni Waste Management v P Fairs, R Ellen and K Birkett [2012] FWA 5590.

 14   Supra.

 15   Performance Review conducted by the chartered accountants in March 2014.

 16   Including training, superannuation and workers compensation costs.

 17   Written submission 11 July 2014.

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