Villa Crerarii Pty Ltd v Daniel Kahl; PYL Nominees Pty Ltd

[2011] FWA 1581

[2011] FWA 1581

FAIR WORK AUSTRALIA

DECISION

Fair Work Act 2009
s.120 - Application to vary redundancy pay for other employment or incapacity to pay

PYL Nominees Pty Ltd ACN 120 344 649 as Trustee for the Lesina Family Trust T/A Mundi Clothing Co
(C2011/3059)

COMMISSIONER RAFFAELLI SYDNEY, 18 MARCH 2011

Redundancy pay - incapacity to pay.

[1] This decision concerns an application by PYL Nominees Pty Ltd as Trustee for the Lesina Family Trust trading as Mundi Clothing Company (Mundi) made pursuant to section 120(1)(b)(ii) of the Fair Work Act 2009 (the Act).

[2] By this application Mundi seeks to reduce the amount of redundancy pay that is required to pay to its six previous employees to nil.

[3] The application is opposed by the Textile Clothing & Footwear Union of Australia (the Union) on behalf of its six members, the employees affected by the application.

[4] Section 120(1)(b)(ii) is found within Sub-Division B - Redundancy Pay of Division 11 Part 2-2 (the National Employment Standards) of the Act. For completeness sub-division B provides as follows:

“119 Redundancy pay

Entitlement to redundancy pay

(1) An employee is entitled to be paid redundancy pay by the employer if the employee’s employment is terminated:

(a) at the employer’s initiative because the employer no longer requires the job done by the employee to be done by anyone, except where this is due to the ordinary and customary turnover of labour; or

(b) because of the insolvency or bankruptcy of the employer.

Note: Sections 121, 122 and 123 describe situations in which the employee does not have this entitlement.

Amount of redundancy pay

(2) The amount of the redundancy pay equals the total amount payable to the employee for the redundancy pay period worked out using the following table at the employee’s base rate of pay for his or her ordinary hours of work:

Redundancy pay period
Employee’s period of continuous service with the employer on termination		Redundancy pay period
1	At least 1 year but less than 2 years		4 weeks
2	At least 2 years but less than 3 years		6 weeks
3	At least 3 years but less than 4 years		7 weeks
4	At least 4 years but less than 5 years		8 weeks
5	At least 5 years but less than 6 years		10 weeks
6	At least 6 years but less than 7 years		11 weeks
7	At least 7 years but less than 8 years		13 weeks
8	At least 8 years but less than 9 years		14 weeks
9	At least 9 years but less than 10 years		16 weeks
10	At least 10 years		12 weeks

120 Variation of redundancy pay for other employment or incapacity to pay

(1) This section applies if:

(a) an employee is entitled to be paid an amount of redundancy pay by the employer because of section 119; and

(b) the employer:

(i) obtains other acceptable employment for the employee; or

(ii) cannot pay the amount.

(2) On application by the employer, FWA may determine that the amount of redundancy pay is reduced to a specified amount (which may be nil) that FWA considers appropriate.

(3) The amount of redundancy pay to which the employee is entitled under section 119 is the reduced amount specified in the determination.

121 Exclusions from obligation to pay redundancy pay

(1) Section 119 does not apply to the termination of an employee’s employment if, immediately before the time of the termination, or at the time when the person was given notice of the termination as described in subsection 117(1) (whichever happened first):

(a) the employee’s period of continuous service with the employer is less than 12 months; or

(b) the employer is a small business employer.

(2) A modern award may include a term specifying other situations in which section 119 does not apply to the termination of an employee’s employment.

(3) If a modern award that is in operation includes such a term (the award term), an enterprise agreement may:

(a) incorporate the award term by reference (and as in force from time to time) into the enterprise agreement; and

(b) provide that the incorporated term covers some or all of the employees who are also covered by the award term.

122 Transfer of employment situations that affect the obligation to pay redundancy pay

Transfer of employment situation in which employer may decide not to recognise employee’s service with first employer

(1) Subsection 22(5) does not apply (for the purpose of this Subdivision) to a transfer of employment between non-associated entities in relation to an employee if the second employer decides not to recognise the employee’s service with the first employer (for the purpose of this Subdivision).

Employee is not entitled to redundancy pay if service with first employer counts as service with second employer

(2) If subsection 22(5) applies (for the purpose of this Subdivision) to a transfer of employment in relation to an employee, the employee is not entitled to redundancy pay under section 119 in relation to the termination of his or her employment with the first employer.

Note: Subsection 22(5) provides that, generally, if there is a transfer of employment, service with the first employer counts as service with the second employer.

Employee not entitled to redundancy pay if refuses employment in certain circumstances

(3) An employee is not entitled to redundancy pay under section 119 in relation to the termination of his or her employment with an employer (the first employer) if:

(a) the employee rejects an offer of employment made by another employer (the second employer) that:

(i) is on terms and conditions substantially similar to, and, considered on an overall basis, no less favourable than, the employee’s terms and conditions of employment with the first employer immediately before the termination; and

(ii) recognises the employee’s service with the first employer, for the purpose of this Subdivision; and

(b) had the employee accepted the offer, there would have been a transfer of employment in relation to the employee.

(4) If FWA is satisfied that subsection (3) operates unfairly to the employee, FWA may order the first employer to pay the employee a specified amount of redundancy pay (not exceeding the amount that would be payable but for subsection (3)) that FWA considers appropriate. The first employer must pay the employee that amount of redundancy pay.”

[5] At proceedings in Brisbane on 22 February 2011, Mr Stephen Lesina, a director of Mundi, gave evidence. His evidence included that, given ongoing operating losses, the business could no longer continue unless it was restructured. This entailed terminating the six permanent employees. The employees will have received all their statutory entitlements except redundancy payments.

[6] According to Mr Lesina, Mundi hopes to return the business to profitability by closing the factory and outsourcing the work. He agreed that some taxation liability which was due is being paid in instalments. He said that employee superannuation contributions were up to date. He said that in past months the business has been operating because he and his wife have been putting money into the business. This could not continue for much longer.

[7] In answer to questions from Ms Wiles, representing the Union, going to possible insolvency of the company while it was trading, Mr Lesina seemed to cautiously respond that this might be so.

[8] Finally, he indicated that if the current application was not successful it was probable that the business could not continue. On the other hand, if Mundi did not have to pay the $32,000 due as redundancy and without having to pay factory rent, it could continue to operate

[9] Ms Paulette Clark, Mundi’s external accountant gave evidence. She referred to her correspondence to Fair Work Australia of 16 December 2010 (Exhibit PYL1). That correspondence had included what was a management report for the year ending 31 December 2010. In that correspondence she concluded:

“It is obvious from the management report that our client is no longer able to operate this business profitably due to the high level of employee entitlements.

Our client is prepared to fund the employee entitlements which as at December 2010 amount to approximately $45,500.00. Our client will have to take out a further loan on their principal place of residence to fund these entitlements.

In view of the extreme circumstances we request your favourable consideration that the redundancy payments which will amount to $32,500.00 as at 31 December 2010 be waved. If the redundancy payments are not waived, our client will have no option but to close the business down.”

[10] If this application failed the Lesina family would need to borrow money to pay into Mundi to fund the redundancy payments.

[11] Under cross-examination, Ms Clarke said that the business has not been profitable since day one. As to whether she had any confidence that Mundi could continue trading and be profitable she did not know and was unsure how the owners were going to restructure the business.

[12] Mr Jacques Morel, the Queensland secretary of the Union gave evidence which included a written witness statement (Exhibit TCFUA1). That evidence included that Mundi is subject to the Mundi Clothing Company Certified Agreement 2006 (AG847301) (the Agreement). He said that Mundi’s superannuation payments on behalf of its employees is in arrears. The evidence also included that he had several meetings with the directors of Mundi concerning the company’s predicament. He had suggested to it that the redundancy entitlements could be paid in instalments. This had not been agreeable to Mundi.

Submissions

[13] In his submissions on behalf of Mundi, Mr Schefe put that Mundi was a small business employer who employed less than 15 employees. The business has total liabilities of over $200,000. The employee entitlements on their termination (not including redundancy entitlements) amount to $45,000. Mundi is prepared to fund these entitlements by taking out a further loan secured against the home of Mr Lesina.

[14] Mundi hopes to make the business profitable by restructuring. However, if it needs to pay redundancy pay of about $32,000 it will need to close the business.

[15] Consequently, there is no capacity to make redundancy payments. The obligation should be reduced to nil.

[16] The submission of Ms Wiles of the Union included that the six affected employees all had very extended periods of service with Mundi and limited prospect of securing alternative employment.

[17] Mundi and the Union are parties to the Agreement. The Agreement incorporates the terms of the former Clothing Trades Award 1999 [AP772144CAV] (the 1999 Award) which makes provision for severance pay to employees of a small employer. Clause 4.2 of the Agreement also allows for more beneficial provisions of any replacement award to apply.

[18] From 1 January 2010 the modern Textile, Clothing, Footwear and Associated Industries Award 2010 [MA000017] (the TCF Award) replaced the 1999 Award. Clause 19 of the TCF Award deals with redundancy and provides for redundancy pay as provided in the NES. Despite the NES exclusion of small business employers from redundancy pay obligations, the TCF Award provides a scale of payments for small business employers.

[19] In exercising its discretion under section 120, FWA needs to balance a range of considerations including the objects of the Act. Such consideration needs to recognize that the clothing industry is somewhat unique in having redundancy benefits applicable in small businesses. This reflects a long history in relevant predecessor awards. The particular nature of the clothing industry needs consideration given that it is characterized by poor working conditions, exploitation of both factory workers and outworkers and chronic levels of non-payment of entitlements.

[20] Given the evidence it is probable that Mundi is or will become insolvent. Any order varying the redundancy entitlements would effectively deny the employees their rights as priority employee creditors under the Corporations Act 2001 and remove their eligibility for payments under the General Employee Entitlements and Redundancy Scheme (GEERS).

[21] Finally, the Union also said that in its view Mundi had not discharged the onus on it to establish that it is incapable of making the payments. The report of Ms Clarke was prepared on material provided to her by Mundi. There is no audited report.

Conclusion

[22] It seems that the Agreement incorporated the 1999 Award which relevantly provided:

“4.1 Incorporation of Clothing Trades Award 1999 in Agreement

4.1.1 It is agreed between the parties that the Clothing Trades Award 1999, as at the date of certification of this Agreement, contained in Attachment A to this Agreement (“Attachment A”) is expressly incorporated into and forms part of this Agreement and subject to 4.1.3 and 4.2.3 below constitutes the minimum conditions to apply to all employees covered by this Agreement.”

[23] Then at clause 4.2.1 it is clear that the 1999 Award as varied or any replacement award (e.g. the TCF Award) would apply to and bind the parties to the Agreement but would not be incorporated into the Agreement. However, the Agreement (including Attachment A) were to prevail over the awards described in 4.2.1. Thus:

“4.2 Continuing operations of Clothing Trades Award 1999 or replacement Award

4.2.1 Independent of its incorporation into this Agreement as Attachment A, the Clothing Trades Award 1999 (“the Award”), and any Award intended to replace the Clothing Trades Award 1999 (“Replacement Award”), as varied from time to time, will continue to apply to and bind the parties to this Agreement.

4.2.2 Subject to 4.2.3 below, an Agreement Provision or Attachment A Provision will prevail over an Award or Replacement Award provision to the extent of any inconsistency.”

[24] Finally, any award described in 4.2.1, such as the TCF Award, that has a provision more beneficial than an Attachment A provision, then that benefit would apply.

“4.2.3 An Award or Replacement Award provision which is more beneficial to an employee than an Attachment A Provision will apply to and bind the parties to this Agreement in respect of that employee as if it were an Attachment A Provision, and will prevail over the corresponding Attachment A Provision to the extent of any inconsistency.”

[25] Attachment A (the 1999 Award) provides at clause 23.9 for an incapacity to pay application to be made. However, that is not one made under section 120. It needs to be made under a dispute resolution procedure under the Agreement.

[26] On the other hand, it seems that the TCF Award provision going to redundancy (clause 4.2 of the Agreement) applies to the parties, even though the TCF Award is not incorporated into the Agreement. As a consequence I am satisfied that the TCF Award applies here. Clause 19.3 specifically applies the NES provisions (excepting the NES redundancy pay table) which include section 120.

“19.3 Redundancy pay—employees of a small employer

Despite the terms of s.121(1)(b) of the Act, the remaining provisions of Subdivision B—Redundancy pay of Division 11 of the NES apply in relation to an employee of a small employer in the clothing industry as defined in clause 3.1 above except that the amount of redundancy pay to which such an employee may be entitled must be calculated in accordance with the following table:

Period of continuous service	Severance pay
Less than 1 year	Nil
At least 1 year but less than 2 years	4 weeks’ pay
At least 2 years but less than 3 years	6 weeks’ pay
At least 3 years but less than 4 years	7 weeks’ pay
At least 4 years and over	8 weeks’ pay”

[27] Consequently, and subject to what is discussed below, Mundi is able to make an application under section 120.

[28] I accept that Mundi faces financial difficulties. However, I also note the following:

- the possibility that Mundi is or will be insolvent and the effect that any order may have on the status of employees as potential creditors;

- the impact of any order on the employees rights under GEERS;

- the fact that reducing the entitlements of these employees will have no beneficial effect on other employees. This is not a case where reducing the payments to some, may enhance the prospects of other employees being able to remain in employment;

- the service of the employees and their relatively low level of remuneration.

[29] The Union argued that the financial reports provided were not audited reports. That may be, but I accept the evidence of Ms Clarke and of Mr Lesina. I consider that they reflect the true situation. On the evidence, Mundi cannot pay the amount.

[30] It is clear that Mr and Mrs Lesina have been unsuccessful in their business venture. So much is evident from the evidence, particularly of Ms Clarke. The problems existed from the start.

[31] The question of course is why should the six employees pay for unfortunate management decisions.

[32] I have balanced all the material before me and have decided in all the circumstances to give greater weight to the predicament of the employees.

[33] I have determined not to reduce the amount of redundancy pay due.

[34] The application is dismissed.

COMMISSIONER

Appearances:

B. Schefe, solicitor for the Applicant.

V. Wiles for the Textile Clothing & Footwear Union of Australia.

Hearing details:

2011

Brisbane:

February 22.

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