Key Points:

The Full Bench of the Fair Work Commission has recognised that, in a contracting environment, loss of contract is an ordinary and customary feature of business.

Notwithstanding that the phrase "ordinary and customary turnover of labour" is one of the most commonly used phrases in industrial relations parlance, it has been interpreted very differently by various courts and tribunals.

This is a significant issue for employers who operate in a contracting environment where contracts are regularly turned over. As the test had been slowly eroded over time, it's become more and more difficult for employers to rely upon the ordinary and customary turnover of labour exemption. A recent decision of the Full Bench of the Fair Work Commission has returned the concept of ordinary and customary turnover of labour to the previous position (Compass Group (Australia) Pty Ltd v National Union of Workers [2015] FWCFB 8040).

"Ordinary and customary turnover of labour" as an exemption to the definition of redundancy: the history

In the early 1980s a number of cases of Industrial Tribunals considered the appropriate standard severance pay provisions for employees whose position had been made redundant.

Early decisions, such as that of Justice Fisher of the New South Wales Industrial Relations Commission in SDA (NSW) v Countdown Stores [1983] 7 IR 273, identified that redundancy pay ought not to be payable where there was not an expectation of ongoing work because the loss of employment (for example, due to regular loss of customer contracts) was an expected feature of the business of the employer. This concept came to be known as the "ordinary and customary turnover of labour", and was incorporated as an exemption to the definition of redundancy in the major decision of the Australian Industrial Relations Commission in relation to redundancy, which became known as the Termination Change and Redundancy Case (TCR) in 1984.

Since the TCR decision the phrase ordinary and customary turnover of labour has been included as an exemption to redundancy (and therefore the entitlement to severance pay) in most awards, enterprise agreements and legislative standards in relation to redundancy. In fact, those words are now part of the National Employment Standards under the Fair Work Act 2009 (Cth) which provide that an employee is entitled to be paid redundancy pay by the employer if the employee's employment is terminated 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 then "ordinary and customary turnover of labour".

In the early decisions, where the employer lost a contract to provide services to a third party and the employee was employed to work on that contract, the loss of the contract was generally seen as being part of the ordinary and customary turnover of labour.

In more recent years, Tribunals, particularly the AIRC and then subsequently the Fair Work Commission, have found a number of instances where terminations of employment that arose from a loss of contract did not come within the ordinary and customary turnover of labour exemption.

The Compass Group decision sets the course for "ordinary and customary turnover of labour"

In Compass Group (Australia) Pty Ltd v National Union of Workers [2015] FWCFB 8040 a Full Bench considered an appeal against a decision in a dispute over the application of redundancy provisions in an enterprise agreement.

The enterprise agreement contained an exemption from redundancy where this was due to the ordinary and customary turnover of labour. The Compass Group had held contracts for the provision of services to the Department of Defence for many years in the Riverina Murray Valley region. In 2014 it no longer had those contracts and therefore terminated the employment of employees. At first instance Commissioner Roe determined that the loss of these contracts did not come within the concept of ordinary and customary turnover of labour. This meant that Compass Group was liable for significant redundancy payments to those employees.

In its decision the Full Bench noted that the definition of redundancy used in the enterprise agreement contained the ordinary and customary turnover of labour exemption and that this was in similar terms to the TCR decision. It also noted that the standard practice of Compass Group over a number of years had not been to pay employees redundancy payments upon loss of contract and that this had been upheld by the Fair Work Ombudsman.

The Full Bench referred in detail to the TCR decision and quoted from the decision of Justice Fisher in Countdown Stores. It endorsed the view that dismissals arising from loss of contract could come within the concept of ordinary and customary turnover of labour where this is a normal feature of the business. The Full Bench noted that Justice Fisher expressly referred to loss of contract as an example of the concept of ordinary and customary turnover of labour.

On a proper analysis, it held, it was common practice for Compass Group to terminate the employment of employees when a contract was lost, especially with Department of Defence contracts. It was also common for employees to be redeployed where this was possible and that there was a link between the contract and the employment, which carried with it the understanding that a loss of contract could well lead to termination of employment. The Full Bench noted that this was often referred to in the contracts of employment and was part of a long-standing practice of Compass Group not to make redundancy payments at the conclusion of contracts.

The Full Bench therefore concluded that the terminations of employment arose from the loss of the Department of Defence contracts and in the context of Compass Group's business this was due to the ordinary and customary turnover of labour. As such there was no entitlement to redundancy pay for those employees whose employment was terminated due to the loss of the Department of Defence contracts.

Full Bench recognises that loss of contract can be an ordinary and customary feature of business

By restoring the TCR position the Full Bench appeared to recognise that, in a contracting environment, loss of contract is an ordinary and customary feature of business. Where no expectation of ongoing employment beyond the life of a contract is created, it would not be fair or appropriate to require the employer to make redundancy payments in circumstances where most employers would make no provision for them in their future accounts, and where the loss of contract is and always has been considered an ordinary and customary feature of the business.

Employers who operate in a contracting environment need to take great care in making sure that their employment arrangements reflect the nature of their business. In particular, if the ordinary and customary turnover of labour exception to redundancy is to be used or relied upon, employers need to ensure that the framework of employment properly reflects thisand supports the employer to maintain that position if challenged.