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Alternatives to redundancies

Newsletter 05 May 2009

In the current economic climate, we have found that our clients (mostly employers in the Federal employment system) are looking for advice on how to implement necessary cost-cutting measures to survive -- such as the short-term solution of redundancies -- but also how to retain talented staff.

Some of the measures to retain employees, while meeting increasing financial constraints, can include changes to annual leave entitlements, asking employees to take a reduction in remuneration, or requesting a change in their employment status from full-time to part-time positions.  Although less common, we have also explored the ability of employees to change the nature of their relationship with organisations from that of an employee to an independent contractor.

Annual Leave

It is not uncommon for employees to accumulate excessive annual leave balances over time. In accordance with the Workplace Relations Act 1996 (Cth) (Act) an employer is able to direct an employee to take up to one quarter of their accumulated annual leave entitlement if that employee has accrued more annual leave than the amount specified in the Act (8 weeks for a full time employee).  For example, if a full-time employee has accrued more than 40 days of unused annual leave then an employer can direct the employee to take at least 10 days of annual leave during a specified period.

We have also suggested to a number of our clients that they ask their employees to consent to taking annual leave in accordance with their entitlements during quiet times. It is important to note that an employee can refuse to take annual leave if their annual leave entitlements are less than the amount prescribed in the Act and the employer has not initiated a formal workplace shutdown.

If employers are open and honest about the reasons for requesting employees to take their annual leave, often they will find their employees willing to agree to take holidays.  Often such employees come back more refreshed and energetic when the workload picks up again.

Requesting employees to take a reduction in remuneration

Our clients have also sought advice about reducing a portion of their employee’s salaries instead of making the positions of such employees redundant. Some employers have held open meetings with staff members to discuss the necessity of the company reducing a disclosed amount of costs from their budget in order to continue to operate its local offices.  At such meetings, employers have informed employees that as an alternative to curtailing costs through redundancies that staff members will be asked to agree to a reduction in their wages.

In this case, it is imperative to have the consent of the employees whose salaries are to be reduced. An employer is not able to vary a fundamental term of an employee’s employment contract without their consent, otherwise that employer faces the risk of a breach of contract claim.

Requesting full time employees to become part time employees

Other companies have considered reducing employee working hours in order to keep within tighter budgetary guidelines.  If an employee is classified as a casual employee, then an employer is able to reduce that employee’s hours in accordance with its business requirements.

However, the consent of the employee must be obtained if an employer seeks to reduce the hours of a full-time employee to those of a part-time employee. An employer who attempts to make a unilateral amendment to a material term of an employment contract also faces the risk of a breach of contract claim.

In our experience, a strategy of open communication, including clearly explaining the reasons for the requested reduction in hours to employees and outlining the benefits of reduced hours (such as a greater work-life balance), can lead to a “win win” situation for both parties. It is important though that employers do not direct their employees to reduce their hours.

If an employee consents to either a change in their remuneration or to their status as a part-time rather than a full-time employee, we strongly recommend that an employer draws up an amended employment agreement as soon as possible, and have both parties sign it in order to properly document the change. Care should also be taken in ensuring that the employee agrees that no redundancy entitlements arise from the variation in their employment.

Employees becoming Independent Contractors

Companies have also sought to change the status of specific employees to that of independent contractors, as one method of outsourcing certain aspects of an employee’s role.

An employee who opts to become an independent contractor is effectively changing the nature of their relationship with the company. As such, the usual employee protections and conditions contained in the Act (or an applicable Award), no longer apply. Employees may choose to engage as an independent contractor if they require more flexibility in their working life, or if they seek to perform work for more than one organisation (with the consent of the initial company).

An employee may also choose to become an independent contractor if their position has been made redundant for a genuine economic, technological or structural reason (that can be clearly proven by the employer), and an employer still requires aspects of the duties of the former position to be performed.  It is important that both the former employee and employer be very cautious if an employee, whose position was made redundant, chooses to undertake an independent contracting arrangement, so that the redundancy is not characterised as a sham.  An employer must be able to demonstrate, amongst other things, the cost savings involved in making the employee’s position redundant and hiring an independent contractor to undertake aspects of the role as an alternative.

We also suggest that if a former employee chooses to be engaged as an independent contractor, that the company prepare an independent contractor agreement which establishes the precise terms, obligations and conditions of the newly established arrangement.


Peta Tumpey, Partner
Sydney

Newsletter 05 May 2009
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