Recent Case Clarifies Employer’s Responsibility For Severance Allowance

Redundancy and severance allowance: the law

Section 30 of the Employment Act 2000 (“Act”) permits an employer to terminate the employment of an employee whose position is redundant. Section 30(3) sets out the various conditions which, if they directly result in a reduction in the employer’s work force, will amount to a “redundancy” for these purposes, for example the discontinuance of all or part of the employer’s business.

Section 23 provides for the payment of severance allowance to employees whose employment terminates for certain reasons, including redundancy. This allowance is equal to two weeks’ wages for each completed year of continuous employment up to the first ten years, plus three weeks’ wages for each completed year of continuous employment thereafter, capped at a maximum of 26 weeks wages.

An employee’s eligibility for severance allowance is subject to some limited exceptions, including under section 23(4)(a) where the employee “unreasonably refuses to accept an offer of re-employment by the employer at the same place of work under no less favourable terms than he was employed immediately prior to the termination”.

The case

In this case, the Supreme Court was asked to rule on the correct interpretation of “the employer” for the purposes of section 23(4)(a).

C12 had a contract with the Department of Airport Operations to operate airport services, including air navigation and airport maintenance services. When that contract expired on 31 March 2019, the Bermuda Airport Authority (“BAA”) was appointed to take over the airport operations, including the employment of all of C12’s Bermuda-based employees. Accordingly, C12 terminated their employees’ contracts on 31 March 2019 and all of the employees, save for two who voluntarily left the island, started work with BAA in the same roles at the same location, and on terms which were no less favourable than their contracts with C12.

The Bermuda Public Services Union (“BPSU”), which represented some of the transferred workers, subsequently filed a claim for severance allowance against C12. That dispute was referred to the Permanent Arbitration Tribunal (“PAT”). As to the issue of whether “the employer” in section 23(4)(a) refers to the same employer, namely C12, or the new employer, namely BAA, the PAT held that it means the same employer. Accordingly, the exemption did not apply and C12 was liable to pay severance allowance to the transferred employees.

The same question then came before the Supreme Court on appeal. C12 contended, amongst other things, that in circumstances where offers of re-employment were made by BAA to each of the employees, at the same place of work and under no less favourable terms than each was employed on prior to the termination, a natural and ordinary interpretation of “the employer” should include BAA, the new employer. To adopt this interpretation would mean that the transferred employees would fall within the exemption in section 23(4)(a) (leaving aside the separate question as to whether those employees could be said to have “refused” any such offer).

BAA also argued that one of the crucial reasons why the Act provides for payment of severance allowance is to ensure a terminated employee has some financial support until they find alternative employment, not to act as a bonus or windfall in circumstances where the employee takes up new employment immediately after termination. On that basis, BAA said, it would defeat such purpose if the Court were to find C12 liable to pay severance allowance in this case.

The Supreme Court’s finding

Perhaps unsurprisingly, C12’s appeal was rejected. The Court held, applying ordinary principles of statutory interpretation, that the meaning of section 23(4)(a) was clear and unambiguous and that “re-employment by the employer” means when the employer before termination offers an employee a different position, as an alternative to making them redundant. As such, the section had no application to the facts of this case, in which the employees were offered new employment with a different employer (BAA), not the original employer (C12).

Further, with respect to the ‘windfall’ argument, the Court held that although payment of severance allowance seems intended to mitigate financial hardship suffered by a redundant employee, there is no basis to interpret section 23(4)(a) as applying to circumstances (as in the present case) where that employee becomes immediately employed by a new employer.

C12 was therefore liable to pay severance allowance to the transferred employees.

Summary

Although the Court’s conclusions on the meaning of section 23(4)(a) are not unexpected, given the somewhat stretched interpretation argued for by CAA, this case serves to provide useful clarity on an employer’s responsibilities when employees transfer to a new employer, for example as a consequence of losing a contract, or selling its business, to the new employer. In such situations, the original employer would be well-advised to obtain protection from the new employer, such as an indemnity against any such costs, or to ensure the employees sign settlement agreements waiving their rights to severance allowance.

Anyone with any questions about the issues discussed in this article can contact Bradley Houlston ([email protected]) the head of Appleby’s Employment and Immigration practice.