Employee Relations Express 13 November 2009

In this edition of our Employee Relations Express, we update clients on two often contentious issues: hours of work and taxation of redundancy payments.

Is your workforce regularly required to work more than 38 hours each week? How does this fit within the rule that an employer must not request the employee to work more than 38 hours unless the additional hours are ‘reasonable’? In light of recent case law, we provide some insights on this often understood concept.

Second, we provide an update on a recent tax ruling, which clarifies the tax situation where an employee is made redundant, and then later re-engaged as an independent contractor.

When can an employee be asked to work more than 38 working hours per week?

Background

There is a common misconception that employees cannot be required to work more than 38 hours per week. This is probably due to the reference to 38 hours per week in a number of decisions and legislation over the past 10 years, including:

• the 2002 ‘reasonable hours test case’ which inserted provisions in industrial awards restricting an employer’s right to require employees to work overtime
• the 2006 Work Choices legislation, which introduced a prohibition on an employer requiring or requesting an employee to work more than 38 hours per week, plus ‘reasonable additional hours’, and
• the Rudd Government’s new ‘National Employment Standards’ (NES) in the Fair Work Act 2009 (FW Act), which contains an ‘hours of work’ provision similar to the Work Choices legislation.

Employees do not, however, have an entitlement to refuse to work more than 38 hours per week. Rather, an employer must not request the employee to work more than 38 hours unless the additional hours are ‘reasonable’. The question of whether the additional hours an employee was asked to work were ‘reasonable’ was at the heart of the Macpherson case.

The case

Mr MacPherson is an electrical fitter at the Mount Thorley / Warkworth coal mine in the Hunter Valley. He had, until November 2008, been working an average of 40 hours per week. In mid-2008, Coal & Allied decided to reconfigure the maintenance operations at the mine following the purchase of new mining equipment and the need to more efficiently maintain its existing equipment. Changes to the work rosters were proposed, which involved a move to a 44-hour week for Mr MacPherson, some of which was worked as 12 hour shifts.

Coal & Allied did everything that was required under its collective agreement to change the roster. However, one day shortly after the new roster had commenced, Mr Macpherson told his employer that he would not work past 2.30pm that day due to ‘personal reasons’. When Mr MacPherson refused to work the hours required by the new roster, Coal & Allied directed him not to attend work until he was prepared to work the hours on the new roster.

Mr MacPherson brought proceedings claiming that the hours of work were not ‘reasonable’. In particular, he argued that the increase to his hours would impact on his family commitments, including his preference to have dinner with his family at 6.00pm each night and coach his sons’ sporting team.

The decision

The court found that the additional hours above 38 per week that Mr MacPherson had been asked to work were ‘reasonable’, and that therefore Coal & Allied had not breached the hours of work provision introduced in the Work Choices legislation.

The court looked at 18 different factors concerning the hours of work that Mr MacPherson was required to work, which included considering:

• the way in which the hours of work were arranged, such as the number of additional hours to be worked, the number of hours worked without a break, time off between shifts and the number of hours on each shift
• any risks to health and safety from the additional hours – the court found that the company had undertaken a risk assessment prior to introducing the new roster, and that no evidence that risks of injury or ‘near misses’ from fatigue had materialised. Nor had any serious concerns about the health of the employees been raised since the new roster commenced
• the operational requirements of the workplace—the court found that there was a ‘legitimate operational requirement’ to introduce the new rosters so that the company could better service and utilise its mining equipment, especially given the difficult economic circumstances
• the collective agreement operating at the mine, which permitted the company to introduce different work patterns, including implementing a 44-hour per week roster
• Mr Macpherson’s personal circumstances, and the reasons he had stated for his refusal to work the hours – the court took into account the fact that the change to the hours would interrupt Mr MacPherson’s existing personal arrangements, and
• the additional remuneration Mr MacPherson received for working the additional hours.

The court considered that, in all the circumstances, the additional hours above 38 per week were reasonable even though they impacted adversely on Mr MacPherson’s existing family commitments.

Implications for employers

• The MacPherson case is the first judgment in which a court has given some guidance about how the relevant factors will be taken into account in deciding whether additional hours are ‘reasonable’. Even though the decision was made under the existing hours of work provisions, the NES (which commence on 1 January 2010) contains a provision in substantially the same form. Importantly, a wide range of matters will be relevant, including risks to health and safety, working patterns in the industry, how the additional hours are worked, the needs of the employer and the employee’s personal circumstances, such as family responsibilities.
• Each set of facts needs to be considered separately. No one factor will determine whether hours are ‘unreasonable’. Even though additional working hours may adversely affect an employee’s existing personal arrangements, they may still be reasonable, and likewise, additional hours are not necessarily reasonable simply because the employer has a need for them to be worked.

This article was written by Ben Dudley, Senior Associate, Sydney.

Tax update: concessional treatment of redundancy payments where the employee is re-engaged as an independent contractor

Earlier this year, the ATO issued a tax ruling² which assists employers by clarifying the taxation treatment of redundancy payments when former employees continue to perform work for the employer after their dismissal. In short, employees made redundant may still retain the benefit of taxation concessions on ‘genuine redundancy payments’ if they are re-engaged after dismissal, provided they are engaged as genuine independent contractors (rather than as employees) and the new contracting role is not simply same work performed as an employee.

The tax ruling

Ruling TR 2009/2 gives guidance to employers and employees on when a payment to an employee will qualify as a ‘genuine redundancy payment’ under section 83-175 of the Income Tax Assessment Act 1997 (Cth) (ITAA). Genuine redundancy payments are generally tax-free, up to a certain limit (generally relating to the length of service of the employee). Importantly, the ITAA provides that a payment is only a ‘genuine redundancy payment’ if, at the time of the employee’s dismissal, there was no ‘arrangement’ between the employee and the employer to employ the employee after the dismissal.

In the past, there has been some doubt about whether a redundancy payment made to a person who continued to perform work for the employer as an independent contractor or non-executive director after termination was a genuine redundancy payment, because (at least arguably) there was an ‘arrangement to employ’ that person after dismissal.

However, the ruling now confirms that an ‘arrangement… to employ’ refers only to common law ’employment’, and that the Commissioner’s view is that the section does not refer to a situation where there is an arrangement to engage the former employee as an ‘independent contractor’. This means that an arrangement to engage a redundant employee as an independent contractor after dismissal should not affect the concessional tax treatment of the employee’s redundancy payment, provided that the role of the employee was otherwise genuinely redundant.

Implications for employers

The ruling emphasises the importance for employers to carefully consider the following points where they are making an employee redundant, and propose to re-engage that person as an independent contractor after dismissal:

1. Whether the role or position is actually ‘redundant’. The ruling confirms that the Commissioner takes the view that an employee’s position is ‘redundant’ if the employer determines that it is superfluous to the employer’s needs and the employer does not want the position to be occupied by anyone. This means that employees may not retain the concessional tax treatment if the work they perform as an independent contractor is the same as that they performed as an employee. In addition, it is important to remember that there may be a difference between an obligation under legislation or an industrial instrument to pay an employee a severance payment in certain circumstances, and the treatment of that payment is treated as a ‘genuine redundancy payment’ under the tax legislation—the obligation to make a payment to an employee under legislation/industrial instrument does not necessarily mean that it will be a ‘genuine redundancy payment’.
2. Whether the engagement would be characterised as ‘employment’ or not. This is not a question that can be answered by a ‘tick the box’ exercise with reference to specific rules or regulations. The courts will look at a range of factors in determining the real and substantial nature of the relevant relationship, despite the way in which the parties themselves might describe that relationship. While one of the most commonly referred to factors is whether or not the employer ‘exercises control’ over the work to be conducted by the person, the courts have not approached the question of whether a person is an ‘employee’ by applying hard-and-fast rules, but by looking to all of the indicia of employment. As a result, employers are likely to be exposing themselves to risk if they simply rely on a statement in a contract that the relevant person will ‘not be an employee’. 
3. Whether the ‘sham arrangements’ provisions in the Fair Work Act 2009 (Cth) apply. Those provisions impose penalties if the employer:
   • represents to a person that he or she will be engaged as an independent contractor, when the engagement is actually an employment relationship, and
   • dismisses, or threatens to dismiss, an employee in order to engage the person as an independent contractor.

As always, employers should obtain professional legal and/or tax advice if they are unsure of their obligations.

This article was written by Ben Dudley, Senior Associate, Sydney.

Endnotes

1. MacPherson v Coal & Allied Mining Services Pty Ltd (No.2) [2009] FMCA 881 (9 September 2009)
2. TR 2009/2 - Income tax: genuine redundancy payments (as at 22 April 2009)

More information

For information regarding possible implications for your business, contact a member of the Employee Relations team.