The effect of the appointment of a receiver or administrator on employees can be complex. The question whether a contract is or is not terminated in these circumstances is important as the date of, and reason for, termination can have significant consequences.
Voluntary administration is now the most common form of insolvency administration whereby an administrator is appointed by a company to determine whether the company should be wound up, sold or restructured. If a receiver is appointed by order of a court (as in bankruptcy), the employees' contracts will probably be automatically terminated, unless the order contemplates the continuation of the business and empowers the receiver to continue to pay the salaries of the current employees.
Automatic termination may also follow the appointment of a receiver to act on behalf of debenture holders, although there are exceptions here also. It has been held that, in principle, there is no good reason why the appointment out of court of a receiver who is an agent of the company, or the appointment by debenture holders of a receiver and manager to act as the agent of the company, should necessarily terminate (end) a contract of employment, except where the company sells the business, or new contracts are agreed to by the employees, or the function, role and objects of the receiver would be inconsistent with the continuation of the employment.
If an employer is declared bankrupt or is 'wound up' then an employee's entitlement to unpaid wages will be governed by the Corporations Act 2001 (Cth) (if the employer is a company) or by the Bankruptcy Act 1966 (Cth), if a person. These set out the order of priority of payment of debts owed by the employer. In both cases wages come after payment of the expenses of the winding up of the company or administering the estate of the bankrupt and after the payment of secured creditors such as banks. Unpaid wages come before leave payments, followed by retrenchment payments. In practice, wages are a priority only over unsecured creditors.
Protection of employee entitlements
The Fair Entitlements Guarantee (FEG) is a legislated Federal government scheme which is available for employees when their employers have become bankrupt or have gone into liquidation after 5 December 2012. Through the scheme some outstanding employee entitlements are available such as redundancy pay, unpaid wages and unpaid annual leave.
For employees whose companies went into liquidation before 5 December 2012 the former government General Employee Entitlements Support Scheme (GEERS) is available and also enables some employee entitlements to be paid.
There are differences between the two schemes and what can be claimed. Information about both schemes, including how to apply under the schemes, is available on the government's website www.employment.gov.au, see the FEG, and GEERS pages of that site.
When a business is sold
When a business is sold, there is no obligation on the new owner to take on the existing employees. The seller usually terminates all employees and pays them for any outstanding entitlements, for example in relation to annual leave or long service leave. If there is a continuity of employment, the employee's entitlements to leave continue with the new employer. It is therefore preferable that the new owner takes over the existing responsibilities in relation to the employees, and an allowance in the purchase price be negotiated between the parties to cover existing obligations.
For further information see Transfer of Business
The most common means of ending a contract of employment is by an employee giving notice, in other words resigning. A reason is not required. Once notice has been given and accepted it cannot be withdrawn unless both parties agree to the withdrawal of the notice.
The contract of employment may stipulate the amount of notice required. If the contract does not specify the period of notice, the courts require that reasonable notice be given. What is reasonable depends on a number of factors, including the status of the worker, the length of service, the customs and practices of the particular industry and how the wages are paid (that is, whether weekly or fortnightly). However, even reasonable notice cannot be used to bring to an end a contract of employment made for a fixed time (such as three years).
However it should be noted that legislation now requires that employers provide a certain minimum notice period when terminating the employment of one of their workers. The Fair Work Act 2009 (Cth) [s 117] sets out the minimum notice periods (for national system employees). These are the same as those set out in the Fair Work Act 1994 (SA)
Where an award an award or agreement does not state what notice must be given, the following times are required (Schedule 8 Fair Work Act 1994 (SA)) :
Period of continuous service Minimum notice less than 1 year - 1 week; 1 - 3 years - 2 weeks; 3 - 5 years - 3 weeks; more than 5 years - 4 weeks.
But if the employee is over 45 years of age and has completed at least two years continuous service, an extra week of notice must be added to these periods of minimum notice.
A workplace agreement or award may also state the period of notice that must be given (such as one eek or one month). Where these are more generous than the statutory minimum they will prevail. By strictly following the requirements of the agreement or award, the contract will be brought to an end at the end of the notice period. If the agreement or award provides for the payment of wages instead of giving notice, the contract of employment comes to an end when the money is accepted. However, if this is not expressly provided for, the termination of the employment contract will not necessarily be effected by giving the employee wages instead of notice.
An employer or an employee can terminate a contract for breach of the contract, provided the breach is of sufficient gravity or relates to a major term of the contract.
An employer sometimes penalises an employee's misconduct or inefficiency by withholding bonuses, denying promotion or putting the employee on a short list in case of redundancy. If such a sanction reduces the employee's contractual rights, the employer is liable for breach of contract. For instance, being suspended for a period without pay derogates from an employee's contractual right to be paid and, unless it is authorised by the contract itself, is in breach of the contract. However, a provision in a contract that provides for a deduction from, or forfeiture of, wages is also invalid under the general law, unless the amount is a genuine pre-estimate of certain damage that might result from some future breach by the employee.
Sometimes, an employer may attempt to alter an employee's working conditions, classification or grading, rate of pay or other employment terms. The effect of this on the contract of employment varies according to the circumstances, but the most likely results are:
- where the change is made by the employer after giving the employee lawful notice to terminate the existing contract, this is an offer of new employment which the employee may accept or reject
- where the change is made by the employer without any notice to terminate the existing contract, the employee can accept the change as an offer of re-engagement or terminate the employment because of the employer's repudiation. In either case the employer is liable to pay damages for the breach of contract. It may be hard for the employee to refuse the change - as failure to accept reasonable alternative employment may mean the employee is accused of failing to mitigate (lessen) the damage suffered and, where damages are claimed, the courts always require the wronged party to limit the damage as much as possible. If the reduced offer of work is accepted only in order to mitigate, the employee must make it clear he or she does so under protest
- where the change is made by mutual agreement but without notice to terminate the existing contract, the contract is varied, but only if the variation is supported by some form of benefit to the employee, or the employee by his or her conduct, is stopped from challenging the result (that is, has led the employer to believe it is acceptable to the employee that this should occur).
In practice it is hard to distinguish between these situations but, since both the unfair dismissal legislation and claims for wrongful dismissal at common law require proof of dismissal as a condition for proceeding, the question is important. Although minor changes can always be enforced (and some variations, such as improvements in working conditions or increases in wages to keep in line with inflation are obviously not breaches of contract), major changes will probably be categorised by the courts as a repudiation by the employer, giving the employee the right to accept the repudiation and be classed as dismissed.
The courts are generally reluctant to assume that a variation is made with an employee's consent (that is, by mutual agreement) as they are aware that employers sometimes make use of their employees' need to work to persuade them to accept lower wages or conditions as a means of avoiding the consequences of dismissal. This makes up a significant part of the doctrine of constructive dismissal - the other part being where an employer forces an employee out - for example by saying 'resign or I'll sack you'.
An employer can summarily dismiss an employee who commits a serious breach of a major term of the contract. Attitudes have changed as to what are the proper standards of behaviour of employees towards employers, and so the old court decisions are of little help today. The relative importance of the terms of a contract is usually determined by the importance the parties see them as having.
The following principles are generally applied when considering whether the employee's conduct would justify summary dismissal, but they are by no means the only ones -
- the conduct of the parties, or the words they have used in the contract, are the best guide as to what are the important terms
- certain implied terms are usually regarded as important, such as the obligation not to steal, or deliberately damage, the employer's property, not to act dishonestly and to obey reasonable orders
- a breach of an important term of contract does not always justify summary dismissal if there is a reasonable excuse for the breach
- the importance of the term breached will be influenced by the nature of the business and the employee's position
- single acts of misconduct are less likely to justify summary dismissal than a persistent pattern of misconduct, although a period of unsatisfactory performance followed by a single act of misconduct may well be enough
- decisions of the courts in other cases have little relevance in deciding a particular case, as each case must be examined in its own context
- whether misconduct is sufficient depends on the nature of the misconduct and not on proof that the misconduct gave rise to serious consequences.
If an employer summarily dismisses an employee in circumstances not warranting summary dismissal it may still be a defence to the employer to establish that, although he or she did not know of it at the time of the dismissal, grounds existed which did provide sufficient basis to exercise summary dismissal.
National system employees redundancy entitlements
Redundancy is when you lose your job because it no longer exists.
Right to redundancy pay is for all employees in businesses with 15 employees or more, for small business employees (14 employees or fewer), redundancy pay is generally not available, it is only if it is covered in the award, contract or agreement.
A genuine redundancy is when:
- The employer no longer requires the job to be performed by anyone; and
- The employer has complied with the consultation obligations in the award or enterprise agreement; and
- It would be unreasonable to redeploy you.
If the redundancy is not genuine, then you may have a case for unfair dismissal.
Unless covered by an industry specific redundancy scheme, or greater entitlements in an award, contract or agreement, redundancy pay is covered by the National Employment Standards (NES) [s119 – 122 Fair Work Act (Cth)].
Redundancy under the NES
Employee’s period of continuous service with the employer on termination Redundancy pay period At least 1 year but less than 2 years 4 weeks At least 2 years but less than 3 years 6 weeks At least 3 years but less than 4 years 7 weeks At least 4 years but less than 5 years 8 weeks At least 5 years but less than 6 years 10 weeks At least 6 years but less than 7 years 11 weeks At least 7 years but less than 8 years 13 weeks At least 8 years but less than 9 years 14 weeks At least 9 years but less than 10 years 16 weeks At least 10 years 12 weeks
Continuous service includes all approved paid leave; however any approved unpaid leave is deducted from the calculation of service.
Service prior to January 2010 when the new Fair Work Act 2009 (Cth) came into effect may or may not count, depending on whether an employee had an entitlement to redundancy pay under the old system – see the Fair Work Ombudsman’s Notice and Redundancy Calculator .
Casual employees are not generally entitled to redundancy pay [s 123(1)(c) Fair Work Act 2009 (Cth)]. However, be aware that some workers are called casual, when they are actually permanent (working regular hours with an expectation of ongoing employment).
Also, if a casual employee becomes a permanent employee, their continuous service starts from when they became permanent.
Transfer of business over the time an employee was working at the business may affect entitlements. Service for the prior business will only be not counted if the new business is not an associated entity (a business that is related to the original business) and it gave the employees written notice when it took over that their prior service would not count. See the Fair Work Ombudsman’s Employee entitlements on a transfer of business page for more information.
Notice on dismissal or redundancy
An employer must provide an employee written notice or payment in lieu of notice of their dismissal or redundancy, even if it is a small business (apart from casuals, employees at the end of a fixed term contract or employees dismissed for serious and wilful misconduct). This is in addition to any redundancy entitlements.
Unless the same or greater entitlements are provided for in an award, contract or agreement, notice pay on termination is covered by the National Employment Standards (NES) [ss117 -118 Fair Work Act 2009 (Cth)].
Notice under the NES
|Employee’s period of continuous service with the employer at the end of the day the notice is given||Period notice or payment in lieu|
|Not more than 1 year||1 week|
|More than 1 year but not more than 3 years||2 weeks|
|More than 3 years but not more than 5 years||3 weeks|
|More than 5 years||4 weeks|
Other entitlements such as accrued annual leave and long service leave have to be paid to you on your redundancy.
For redundancy due to insolvency or bankruptcy of the employer see: Upon the sale or winding up of a business.
As an alternative to redundancy an employee may be redeployed.
Under section 389 of the Fair Work Act 2009 (Cth) a redundancy is not a genuine redundancy if the employer could have reasonably redeployed the employee.
The redeployment has to be reasonable, and what is reasonable is not defined in the Act, however factors to consider include have been considered in case law, and while what is reasonable will be determined on a case-by-case basis, some of the considerations can include things such as:
- Whether the employee has to relocate;
- The employees skill level and qualifications;
- Whether additional training will be provided, and the suitability of this training;
- The pay and other conditions of the position;
- Hours of work;
- The ease of transition into the new position; and
- The employees views about the reasonableness of the offer of redeployment;
There also must be consultation on redundancies and redeployments (see the Fair Work Ombudsman's website for more information on this).
Additionally some employees covered by enterprise agreements or other agreements or contracts may have additional rights in relation to redeployment. Some agreements will have specific procedures that must be followed in relation to redeployment.
It is best to consult your union or get legal advice if you are unsure about your rights or whether to accept or re-negotiate a redeployment rather than a redundancy payment.
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.