Made five staff redundant, then said it couldn't afford redundancy pay

What happened

RingIR Pty Ltd was a technology business that described itself as being in "start up mode, on the edge of transitioning to production". It was wholly owned by a US parent company, RingIR Inc. Its cash flow was under pressure, and the Commission accepted that delays to Australian government contracts had contributed to that.

On and from 10 July 2023 the company made the roles of five permanent employees redundant. They had worked there for between two and almost six years, and one of them was the general manager. Under the National Employment Standards their redundancy pay came to $106,673.08 between them, ranging from 6 weeks' pay for the shorter-serving staff to 10 weeks' pay for the two longest-serving.

The company applied to the Fair Work Commission to have every one of those amounts reduced to nil. It said paying would put its solvency at risk within weeks. The five employees represented themselves at the hearing.

The law on redundancy pay

Section 119 of the Fair Work Act 2009 (Cth) gives an employee whose job is made redundant a set amount of redundancy pay, based on their length of service. The aim, the Commission said, is to compensate for the hardship of having to find another job and the loss of entitlements that do not carry over to a new employer.

There are exceptions. A small business employer, one with fewer than 15 employees, generally does not have to pay. Under s 120, an employer can also ask the Commission to reduce the amount, even to nil, if it found the employee other acceptable work or it cannot pay. The Commission has a broad discretion; the employer must persuade it.

Not a small business

The company first asked the Commission to treat it as a small business because, it said, it operated at arm's length from its US parent. The Commission said it had no such discretion. Whether an employer is a small business is a question of fact, and employees of associated entities, such as a parent company, are counted.

RingIR Inc. was the sole shareholder and controlled the company's budgets, payroll and major decisions. At the time of the redundancies the parent had 10 employees and the Australian company had 7. Together that was more than 15, so the company owed redundancy pay.

Could it really not pay?

Commissioner McKinnon accepted that cash flow was tight but found the company's case "not strong". As the company itself conceded, solvency is not decided on cash flow alone. At 30 June 2023 it had $96,000 in the bank, net assets of about $465,000 (counting the tax credit below) and trade debtors owing $287,410. A research and development tax credit worth about $233,000 net was due within weeks, and the Commission found that alone was enough to cover the redundancy pay.

The cash squeeze was largely caused by the one-off cost of the redundancies, which would save around $450,000 a year in labour costs. The parent company was trading and willing to provide resources, and the company was talking to investors.

Then there was the new CEO, hired in May 2023 on $190,000. His salary rose to $300,000 in early July 2023, an increase of $110,000 that coincided with redundancies costing almost the same amount. The Commissioner accepted the rise had been agreed months earlier, but said there was no reason it could not have been deferred if the business was as close to insolvency as it claimed. The applications were dismissed on 4 September 2023.

The appeal

The company appealed. Because a s 120 decision is discretionary, it had to show a real error in how the discretion was exercised. A Full Bench decided the appeal on the papers and refused to look at new financial reports filed for the appeal: the question was whether the Commissioner erred on the material she had.

The Full Bench agreed the Commissioner was wrong to say the cash flow forecast left out the tax credit, and granted permission to appeal for that reason. But the error was not significant; the credit was one of many factors. The company's complaint that many of its assets could not easily be turned into cash failed, because it did not say none of them could be.

On the CEO's pay rise, the Full Bench accepted that deferring it would not, in isolation, have produced the cash needed. It was still "patently relevant" to whether the company could pay, because together with the other matters the Commissioner listed it would likely have eased the pressure over time. The appeal was dismissed on 14 December 2023.

What this means for you

If you are made redundant and your employer says it cannot afford your redundancy pay, that is not the end of it. The employer has to apply to the Commission and prove it, and the Commission will look at the whole business, including what it is paying its executives. Check, too, whether a company that says it is small is part of a larger group.

For employers, an incapacity-to-pay application needs full financial evidence at the first hearing. New figures produced on appeal will usually not be considered.