The Rossato Decision: Permanent Casual Risks

On 20 May 2020, Justices Mordy Bromberg, Richard White and Michael Wheelahan of the Full Federal Court handed down a landmark decision[1] (‘Rossato Decision’) ruling that WorkPac’s casual coal mining worker, Mr Robert Rossato, was eligible for leave entitlements and payment for public holidays despite being classified as a casual employee.

The decision confirms the position taken in the earlier case of WorkPac Pty Ltd v Skene[2] (‘Skene Decision’) that a person who is identified by their employer as employed on a casual basis may still be considered entitled to those entitlements characteristic of permanent employment if their working arrangements demonstrate a firm advance commitment as to the duration of their employment or the days and/or hours that they work and those hours are regular and systematic.

Key Facts

Rossato was employed by WorkPac under six consecutive contracts that expressly identified him as a casual employee.  He was covered by an enterprise agreement that provided for the category of casual employment and payment of a 25% casual loading in lieu of entitlements to annual leave, personal leave, compassionate leave, payment for public holidays not worked, redundancy pay and notice of termination.

A number of Rossato’s employment contracts paid him a flat rate of pay that incorporated the casual loading.  While the flat rate of pay was higher than the minimum rates provided by the enterprise agreement, his employment contracts did not identify any component of the flat rate that was attributable to the casual loading.

Rossato worked a seven days on seven days off roster on a “drive in-drive out” basis and his accommodation was provided by WorkPac’s clients.  His rosters were provided to him months in advance.

WorkPac’s Claims

Instead of appealing the Skene Decision to the High Court, WorkPac brought proceedings against Rossato to undermine the Skene decision.  It sought declarations by the Federal Court that Rossato could not:

• Claim paid annual leave, personal/carer’s leave and compassionate leave entitlements under the NES because he was a casual employee within the meaning of ss 86, 95 and 106 of the Fair Work Act 2009 (Cth) (‘Fair Work Act’);

• Claim payment for public holidays not worked under s 116 of the Fair Work Act; and

• Claim corresponding entitlements under the applicable enterprise agreement because he was employed as a Casual Field Team Member under that agreement.

Rossato’s employment contract did not contain an express set off clause or other contractual provision that allowed WorkPac to claim back the casual loading.  Accordingly, in the event that the Federal Court found Mr Rossato was not a casual employee, it argued in the alternative that:

• It was entitled to restitution of the casual loading that it claimed was incorporated into Rossato’s loaded/flat rate of pay, on the basis of mistake and/or partial failure of consideration; and

• It was entitled to bring into account the payments of remuneration it had made to Rossato on the basis that he was a casual employee, relying on common law principles and regulation 2.03A of the Fair Work Regulations 2009 (Cth) (‘Fair Work Regulations’).

Federal Court Findings

The Full Federal Court found that Rossato was not in fact a casual employee for the purposes of the Fair Work Act and not a Casual Field Team Member under the enterprise agreement despite the designation under this employment contracts. 

It considered that his sequence of employment contracts and rosters, which were provided months in advance, demonstrated an advance agreement that his employment would be stable, regular, predictable and of indefinite duration.

Accordingly, Rossato was held to be entitled to the permanent entitlements he had claimed under the Fair Work Act and enterprise agreement, particularly, paid annual and personal/carer’s leave and compassionate leave and payment for public holidays not worked.

Regarding WorkPac’s other claims, it held that WorkPac was not entitled to restitution of the casual loading, nor was it entitled to set-off the higher flat rate of pay against its liabilities for Rossato’s permanent entitlements because:

• The component of Rossato’s wage that WorkPac paid due to mistake or in reliance on his acceptance that he was a real casual employee was indeterminable;

• It could not be ruled out that the flat rate simply reflected the market rate for assuring Rossato’s service; and

• WorkPac received the benefit of Rossato’s services when he would have otherwise accessed leave.

Accordingly, there was no relevant mistake and no failure of consideration to support restitutionary relief.

Furthermore, the casual loading could not be said to be intended to satisfy leave entitlements it was otherwise liable to pay because it was expressed in terms of being paid “in lieu” of leave entitlements, which denotes that the loading was paid instead of such entitlements.  Had the contract expressed the loading as being paid in satisfaction of such entitlements, it would have demonstrated that part of the flat rate was paid to satisfy WorkPac’s obligations in this regard.

Finally, the casual loading was often paid before the accrual of leave entitlements and as wages for hours worked, therefore regulation 2.03A of the Fair Work Regulations could not apply because Rossato claimed actual entitlements conferred by the NES, rather than entitlements in lieu as provided by the regulation. Accordingly, the casual loading could not be used to reduce the amounts owing.

WorkPac’s Pitfalls

The key factors that hampered WorkPac’s case were:

1. The fact that Rossato’s rosters were provided months in advance and his work hours were relatively consistent;

• The casual loading component of his flat rate of pay was not identifiable, nor was it expressed to satisfy NES entitlements; and

• Rossato’s employment contracts did not contain an appropriate offsetting arrangement that could be engaged to set off WorkPac’s entitlements at law.

Mass Exposure to Back Pay Claims

The primary concern of the business world is whether companies will be liable for significant backpay claims and whether this precedent will remain fixed at law.

As the law stands, the Rossato decision currently poses a risk of backpay claims for employers:

• That engage casual employees who have worked for them for an extended period of time and has generally worked the same days or hours for long periods;

• Whose employment contracts do not have an appropriately worded set off clause and a clause allowing the employer to reclaim casual loading payments in circumstances where the employee is later found not to be a casual;

• Whose employment contracts or industrial instruments refer to the casual loading being paid “in lieu” of entitlements rather than “in satisfaction” of entitlements; and

• Who pay casual employees a flat rate of pay that purports to incorporate the casual loading where the casual loading component of that rate is not identifiable.

This is unlikely to be the end of the story.  The cost of backpay claims for Australian businesses arising out of this decision is estimated by economists to be $14.2 billion.  This will be an unacceptable burden to the economy that the Government is unlikely to allow in the wake of the economic impact of COVID-19.  Furthermore, this would be an unacceptable legacy for the Morrison Government moving forward.  Christian Porter issued statements following the decision indicating that the Government will either pursue legislative change to either introduce a statutory definition of casual employment or remedy any flaws in the offsetting regulation,[3] or join an appeal to the High Court should WorkPac choose to challenge the decision. 

On 17 June 2020, WorkPac sought special leave to appeal the Rossato Decision to the High Court.  Christian Porter has confirmed that the Government will intervene in the case that he says has created confusion and uncertainty during a period where businesses are facing their greatest challenge ever, alluding to the post-pandemic business environment.

The Government has also established the five working groups for industrial relations reform comprising employer groups and business stakeholders, unions and other minor parties.  One of these working groups is solely dedicated to the question of defining casual employment at law. The Government has voiced its interest in legislating a definition, however the nature of that definition will depend on the discussions held by the working groups. 

Furthermore, recent history indicates that even if employees or class action law firms start to bring proceedings against businesses claiming permanent entitlements, these proceedings may not advance greatly until the legal uncertainty is dealt with on appeal.  Class actions that were sought to be brought after the Skene Decision were stayed once proceedings commenced for the Rossato Decision. Given the impact of significant backpay claims on the economy it is likely that any proceedings brought in the wake of the Rossato Decision will also be stayed until the legal issues are resolve by the High Court. 

An alternative outcome arising out of these decisions is the introduction of the new “perma-flexi” category of employee, which was proposed by employer groups after the Skene Decision.  This category features a fixed number of minimum hours per week, permanent employment entitlements and flexible rostering for 10% higher pay. The employer may give one week’s notice of when the employee’s ordinary hours are to be worked the following week.  While employer groups withdrew the bid for this new category once legislative change to the Fair Work Regulations was table by the Government.  This solution may yet be raised again in discussions of the working group.

In short, while the Federal Court decision has set an alarming precedent, it is unlikely to go unchallenged or remain fixed at law.  The next six to twelve months is likely to present a resolution to these issues.

Mitigating the Risks of Liability

While it is unlikely that the judicial precedents established by the Skene Decision and the Rossato Decision will remain fixed at law, there are a number of measures that businesses can take to mitigate the risk of exposure to claims over the intervening months until either a legislative fix is introduced or the appeal is decided.

Casual Conversion

Labour hire employees are typically reticent to exercise any right to convert to permanent employment because they prefer the flexibility of casual work and the higher rate of pay.  Offering casual conversion to an employee and retaining a written record of their refusal to exercise that right will not be sufficient alone to evince that the engagement is on a truly casual basis.  The Federal Court found that the description given by the parties as to the nature of the employment relationship is relevant, but not a conclusive consideration and that the operative nature of the arrangement is also relevant. 

Therefore, retaining a record demonstrating that a casual employee who has worked on a regular and systematic basis elected not to convert to permanent employment will only go so far in demonstrating an understanding between the employer and employee that the engagement is casual.  However, without some other key elements, it will not be enough in the face of the precedents set in Skene and Rossato.

Casual conversion may be an effective risk mitigation measure if the policy is for casual employees to convert to permanency automatically after 6 months of regular and systematic service unless they object in writing.  Under this form of policy, employees would need to be notified at the outset that if they elect not to convert to permanency, the company cannot continue to roster them on consistent rosters with regular hours.  Their choice would be to either remain a casual employee, engaged on irregular, intermittent and variable hours, or take a permanent position with guaranteed hours of work.

The employer would then need to ensure that employees who elect not to convert to permanency are rostered on an intermittent basis to reflect the nature of their engagement.

Rostering Practices

Casual employees will need to be rostered on a truly intermittent and irregular basis to maintain their status as a casual.  If the business requires a workforce to cover regular shifts, employees will need to be engaged on a permanent basis as required for that roster coverage.  If the business can accommodate intermittent and irregular rostering arrangements, casual employees can be engaged to cover that work.

In all instances, casual employees must be rotated often and work varying days, hours and shifts.  Their rosters should be provided pay cycle to pay cycle and they should be given gaps in work to mitigate against an expectation that work and rosters are ongoing.

Flat Rates of Pay

If employees are paid a flat rate of pay that purports to incorporate the casual loading, their employment contracts should state the value of the casual loading component of the flat as a dollar figure so that it is clearly identifiable.  The value of the casual loading cannot be less than what the employee would be entitled to under the applicable modern award or enterprise agreement for their classification.

This makes it clear that they are in fact being paid as a casual employee and makes the casual loading easily distinguishable from other entitlements that may be incorporated into the flat rate of pay.

Offsetting Arrangements

Employment contracts ought to also contain an appropriate offsetting arrangement, whereby the employer’s obligation to pay certain entitlements and allowances that might apply under the applicable industrial instrument are satisfied by the above-award or above-agreement payment.

Employers should observe the relevant case law and jurisprudence on offsetting arrangements to ensure the relevant clauses are effective in satisfying their obligations at law.  Essentially, a pay rate can only be applied to offset or meet obligations that are expressly identified in the contract, therefore the set-off clause must be appropriately drafted, sufficiently clear in its operation and provide sufficient remuneration to fully meet the employer’s obligations at law, including minimum entitlements.[4]

Project/Task Specific and Fixed Terms Contracts

These types of contracts define the term of employment according to either a fixed period of time as specified by the contract or a specific project or task that the employee is engaged to complete.  Under the Fair Work Act, when these contracts reach their natural end, either due to the expiry of the fixed term or the completion of the specific task or project, the employer is not obliged to pay redundancy pay or notice of termination at the end of employment.  If the employment comes to an end for another reason, such as performance, misconduct or the termination of the commercial engagement on the project, the employee will be entitled to notice of termination and/or redundancy as appropriate.

Nevertheless, these contracts can be a useful alternative to casual employment if the employer’s commercial arrangements on a contract will continue for some years.  The appropriate type of contract will depend on the circumstances.

If the employer is certain as to the period of time the employee will be required to be engaged on a project, a fixed term contract will be appropriate.  Fixed term contracts provide the clear, most definite term of employment because this is generally stated as a fixed number of months or years.  There is no ambiguity about the duration of employment.  Whereas the term of project or task specific contracts can be open to interpretation if they are not clearly drafted.

Where the employer requires an employee for the entire duration of its engagement on a project, a project-specific agreement will be appropriate.  The employee’s engagement will come to an end once the employer has completed all of the works it was engaged on the project to complete.  This allows the employee to be rotated from task to task as required on the project.  However, if the employer will only require an employee to complete a discrete task within the range of tasks the employer is engaged to complete on the project, a task-specific project will be appropriate.  This means that the employee’s engagement will come to an end once they complete their discrete job on the project, even if the employer remains engaged on the project for other works.

Lessons for Employers

While the Skene and Rossato Decisions set an alarming precedent for Australian businesses, this is unlikely to be the end of the story for casual employment.  Numerous sectors of the Australian economy rely heavily on casual employment and casual workforces will need to be reinstated as the economy starts to accelerate emerging from pandemic lock-down. 

Current conditions present the perfect storm to resolve the uncertainty in the law created by these decisions.  Against the backdrop of the ongoing tension between employer and employee interest groups regarding casual employment, the IR working group will be required to formulate a resolution to the satisfaction of all parties that is beneficial to both businesses and individuals in the current economy.  Furthermore, the outcome of High Court appeal will likely resolve the issues arising out of WorkPac’s failed reliance on the offsetting provision, as well as other common law principles at play.  Should the High Court appeal provide an overly onerous outcome, the Government is unlikely to accept a legacy that it allowed an already struggling economy to be burdened by significant back pay claims without providing a legislative solution.

In the meantime, employers ought to review their operations and implement the necessary measures to mitigate any risks in this regard.

[1] WorkPac Pty Ltd v Rossato [2020] FCAFC 84 (20 May 2020).

[2] (2018) 264 FCR 536.

[3] Fair Work Regulations 2009 (Cth), reg 2.03A.

[4] Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate (2015) FCA FC 99

Disclaimer:  This White Paper provides views and opinions of a general nature and should not be construed as advice.   IRIQ Law advises that your unique individual circumstances could give rise to an alternate view or other options which may or may not be available to you and you are encouraged to seek specific advice if you have similar concerns.