Federal Court clarifies when payments in lieu of notice must be delivered to parting employees

The Federal Court has provided a timely wake up call to employers who provide payments in lieu of notice after termination of employment, finding that such practice is unlawful and could subject employers to significant pecuniary penalties.

Introduction

Over time, it has become common practice for employers to provide payments in lieu of notice to outgoing employees following the termination date of their employment. While this conduct was seldom opposed in the past, the Federal Court’s recent decision in Southern Migrant and Refugee Centre Inc v Shum (No 3) [2022] FCA 481 makes it clear that, for termination of employment to be lawful, payments in lieu of notice must not be made after the termination date.

Facts

Ms Shum was an employee of Southern Migrant and Refugee Centre Inc (SMRC). Her employment was terminated by way of redundancy on 19 June 2017. On that date, Ms Shum received correspondence from her employer specifying that her employment had ceased with immediate effect, and that she would receive payment in lieu of notice in the week following her termination. This payment was provided to Ms Shum on 23 June 2017, four days after the termination date.

At the preliminary hearing, the trial judge found that SMRC had not departed from their obligations under the Fair Work Act 2009 (Cth) by providing payment in lieu of notice after the termination date. However, this decision was overturned by the Federal Court.

Appeal

On appeal, Snaden J held that, under section 117(2)(b) of the Act, payment in lieu of notice must be made as a mandatory prerequisite to lawful termination. Consequently, SMRC’s failure to discharge this precondition (due to paying Ms Shum in lieu of notice after the date of termination) amounted to a contravention of s117(2)(b). Ultimately, the decision was remitted to the Federal Circuit Court of Australia.

What is the notice period?

In light of the Federal Court’s decision, it is necessary to clarify the obligations an employer owes to its employees in respect of the notice period. As a starting point, employers must be cognisant that, where they intend to terminate the employment of an employee, they must stipulate a relevant notice period that explains when the prospective termination is to take effect. Employees are required to continue working for their employer until the notice period elapses.

The amount of notice an employer is compelled to give will often be determined by notice requirements prescribed by the National Employment Standards (NES), an award, an enterprise agreement or employment contract. Employers should be aware that, where the minimum notice stipulated in an employment contract is not the same as notice requirements under the NES or an award, the period that is more favourable to the employee will apply.

Payment in lieu of notice

There are many instances where employers choose to make payment in lieu of notice. Importantly, this payment must be equivalent to the employee’s full rate of pay for the time they would have worked during the notice period. Employers are also reminded that it is no longer permissible to make such payment after the termination date.

Conclusion

Employers are encouraged to consult relevant stakeholders in their enterprise about the change to ensure payments in lieu of notice comply with the requirements under the statutory framework. Non-compliance with this obligation will amount to a contravention of the FW Act and may subject the employer to pecuniary penalties that increase in severity the longer the delay in payment subsists.