Among the many changes introduced by the Fair Work Legislation Amendment (Closing Loopholes) Act 2023 are those in Schedule 1 Part 2 that address the
“anomalous consequences of the small business redundancy exemption in insolvency contexts by providing an exception to its operation when a larger business downsizes to become a smaller business employer due to insolvency”: Explanatory Memorandum to the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023.
These anomalies have been the subject of comments by the AAT in a series of decisions going back to 2016 where reform of the law has been suggested and, also, where insolvency practitioners have, perhaps unfairly, been criticised for not knowing about this quirk in the law. The AAT decisions concern the entitlement of employees to payments under the Fair Entitlements Guarantee Act 2012 (Cth); see Keay’s Insolvency, 11th ed, pp 543-544.
As the Ex Memo explains, the pre-existing small business redundancy exemption is a longstanding feature of the workplace relations framework under the FW Act. It encourages employment by small businesses by relieving them of National Employment Standards redundancy pay obligations, which can be a significant contingent cost of employing staff. To qualify for the exemption, businesses must employ fewer than 15 staff.
However, an unintended anomaly arises in some insolvency contexts when a larger employer incrementally downsizes due to insolvency, either in the period leading to its liquidation, or after, when the liquidator lays off the bulk of the employees but retains a small number to assist in the orderly wind-up of the business. They then lose the entitlement they previously would have had to redundancy pay, possibly accumulated over years of continuous service with their employer.
The amendments to the FW Act provide an exception to the operation of the small business redundancy exemption in such downsizing contexts, thus preserving an employee’s redundancy pay entitlement in a range of scenarios in which the employer may have become a small business employer due to insolvency. This ensures an employee’s legal entitlement to redundancy pay is not taken away based on when they were made redundant.
The amendments
The main change is to extend the coverage of s 121 of the FW Act, with old s 121 continuing to apply in relation to the termination of an employee’s employment that occurred before the commencement date of 15 December 2023: as to commencement, see s 2 of the Fair Work Legislation Amendment (Closing Loopholes) Act 2023.
The new s 121 is set out below. The changes add new subsections (4), (5), (6) and (7) into section 121. New subparagraphs (4)(d)(i)-(iii) provide a six month ‘look back’ period to apply in determining the application of the exception, from six months before the bankruptcy or liquidation, or the appointment of the insolvency practitioner, or, if the appointment of the insolvency practitioner was immediately preceded by the appointment of other insolvency practitioners, from the earliest appointment date.
The EM gives an example of a receiver and manager appointment, during which the employer terminates the employment of one or more employees with the result that the employer becomes a small business employer. The receivership concludes and the employer enters liquidation six months and one day later.
“New subparagraphs (4)(d)(i)-(iii) do not apply to the employer because of the length of time between the conclusion of the receivership and the liquidation. However, new subparagraph (4)(d)(iv) applies because the terminations that caused the employer to become a small business employer were due to insolvency”.
While members’ voluntary windings up are excluded from new section 121(4) because the law only applies to insolvent liquidations, new subsection (6) applies in circumstances where the members’ voluntary winding up turns out to be insolvent. The original appointment date of the members’ voluntary winding up is treated as the date the company went into liquidation.
Comment
There is a series of AAT decisions where liquidators have traded-on in good faith with a small and reduced number of employees, thereby unwittingly taking the company’s employee numbers below 15, and thereby denying those employees the right to redundancy under the Fair Work Act. That will now no longer be a concern.
Those cases go back to at least 2016 when the AAT in Mi and Secretary, Department of Employment [2016] AATA 419 made its decision “with some regret” that the applicant was excluded by the then s 121 from an entitlement to a redundancy payment.
“This an unfortunate result which I doubt was an intended outcome but the law in respect of administration is clear and gives rise to the result that in this case the Applicant does not have a redundancy pay entitlement”.
Four years later, the AAT in Bower and Secretary, Attorney-General’s Department [2020] AATA 4353 said, at [18-20],
“I respectfully suggest that the attention of the Attorney General be drawn to the injustice that appears to be created in this kind of matter when the intention of the legislature was to enact beneficial legislation”.
While liquidators have been criticised in some of these cases for not realising the implications of the FW Act when they retain some employees in a trade-on, the better course has always been to amend what is obviously an unintended consequence of the law.
This is particularly the case when the AAT has, over a period of time, drawn the anomaly to the government’s attention.
The proposed Administrative Review Tribunal, to replace the AAT, adopts a recommendation of the Robodebt Royal Commission that the Tribunal should publish decisions which involve significant conclusions of law or have implications for Commonwealth policy.
That may help but these series of AAT decisions on the problems with the Fair Work Act have always been published and available on AustLII in any event.
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Fair Work Act – section 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 (other than periods of employment as a casual employee of 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.
Certain small businesses to pay redundancy pay
(4) Despite subsection (1), an employee whose employment is terminated is entitled to be paid redundancy pay in accordance with this Division if:
(a) at the time of the termination, section 119 did not apply to the termination because the employer was a small business employer; and
(b) the employer is bankrupt or in liquidation (other than only because of a members’ voluntary winding up); and
(c) the employer is a small business employer because the employment of one or more employees was terminated; and
(d) those terminations occurred:
(i) on or after the day that is 6 months before the employer became bankrupt or went into liquidation; or
(ii) if there was an insolvency practitioner (the last insolvency practitioner) for the employer on the business day before the employer became bankrupt or went into liquidation—on or after the day that is 6 months before the insolvency practitioner was appointed; or
(iii) if, before the last insolvency practitioner was appointed, other insolvency practitioners for the employer were appointed without any intervening business days between any of those appointments—on or after the day that is 6 months before the first of those insolvency practitioners was appointed; or
(iv) due to the insolvency of the employer.
(5) A members’ voluntary winding up is a winding up under section 495 of the Corporations Act 2001.
Time of liquidation—members’ voluntary winding up where company turns out to be insolvent
(6) If a liquidator takes action under section 496 of the Corporations Act 2001 (company turns out to be insolvent) in relation to a small business employer whose liquidation began as a members’ voluntary winding up, then, for the purposes of subparagraph (4)(d)(i), the time the employer goes into liquidation is the time the employer goes into liquidation because of the members’ voluntary winding up.
Application to partnerships
(7) For the purposes of subsection (4), a small business employer that is a partnership is not bankrupt or in liquidation unless each partner of the partnership is bankrupt or in liquidation, as the case requires.
