Furloughing Employees, how Stand Down Works in Australia

"Furlough" is a term Australian employers rarely use, but the idea behind it is common enough. It describes a situation where an employee stays employed but is not working, usually because there is no work available for them at the moment. In Australia the legal mechanism that does this is called stand down, and it is set out in Part 3-5 of the Fair Work Act 2009 (Cth) (the Fair Work Act).

Understanding how stand down actually works matters because it is one of the few lawful ways to stop paying wages on a temporary basis without terminating anyone. It is also easy to get wrong. A stand down that is not legally justified becomes an underpayment of wages, which can attract back pay demands, regulator action and, in serious cases, court penalties. This article walks through the mechanics of the stand down power, the situations where it applies and where it does not, what happens to leave during a stand down, and the consequences of using it incorrectly.

Who is involved in a stand down

Stand down sits at the intersection of three parties, each of whom plays a distinct role:

The employer: Makes the decision to stand down an employee because there is no useful work for them. The employer holds the risk: if the justification is wrong, the employer owes wages for the whole period.
The employee: Is not terminated but also is not paid (subject to the leave rules below). The employee can challenge the stand down if they believe it is invalid.
The Fair Work Commission (FWC): Resolves disputes about whether a stand down was valid. An employee, an employee organisation or a Fair Work Inspector can apply to the FWC to have the dispute dealt with, including by arbitration, under s 526 of the Fair Work Act.

Behind these sit the Fair Work Ombudsman as regulator. Although the Ombudsman is not a party to an individual stand down, it is the body that investigates an unpaid stand down as an underpayment of wages and can take enforcement action. An employer that uses stand down is effectively relying on a statutory power while answerable to a regulator, which is why the justification needs to be watertight.

The statutory power to stand down

The stand down power is found in s 524(1) of the Fair Work Act. An employer may stand down an employee, without pay, during a period in which the employee cannot usefully be employed because of one of three circumstances:

industrial action, other than industrial action organised or engaged in by the employer;
a breakdown of machinery or equipment, if the employer cannot reasonably be held responsible for the breakdown; or
a stoppage of work for any cause for which the employer cannot reasonably be held responsible.

Each limb has two distinct requirements that must both be satisfied. First, one of the three circumstances must exist. Second, because of that circumstance, the employee must be unable to be usefully employed. If there is useful work the employee could be doing, stand down is not available, even if the business as a whole is struggling.

There are two important limits on the statutory power. Under s 524(2), if an enterprise agreement or a contract of employment already provides for stand down in the same circumstances, the employer must follow that agreement or contract rather than the statutory power. Note 2 to s 524 also flags that an agreement or contract can add extra requirements an employer must meet before standing down, such as a consultation or notice obligation. And under s 524(3), if the employer validly stands down an employee, it is not required to make payments for that period.

Machinery breakdowns and industrial action

The first two limbs of s 524 are more straightforward than the third, but each carries its own trap.

Industrial action that is not organised or engaged in by the employer can justify a stand down. A common example is a strike by a union at a supplier or in a related part of the operation that leaves your employees with nothing to do. The key qualification is that the industrial action must not be your own. If you have organised or participated in the action, you cannot stand down your employees because of the disruption you helped create.

A breakdown of machinery or equipment justifies a stand down only if you cannot reasonably be held responsible for the breakdown. If a computer server or production line fails through no fault of the business, that limb may be available while the equipment is out of action. But if the breakdown resulted from poor maintenance that you ought to have attended to, the responsibility sits with you and stand down is not available. The test is one of reasonable responsibility, so an unexpected failure of well-maintained equipment is easier to justify than one that followed from neglect.

The core question: stoppage of work

The third limb, a stoppage of work for a cause for which the employer cannot reasonably be held responsible, is the one that most employers rely on and the one that causes the most difficulty. The phrase "stoppage of work" is narrower than it sounds. A reduction in demand, a slow period, or a downturn in profitability is generally not a stoppage of work. The work itself must stop, through a cause outside the employer's control, such as a government direction shutting the business, a natural disaster, or the failure of a critical supplier.

The source article frames this as a distinction between a "slow down" and a "stoppage". That is a helpful way to think about it, provided you remember the legal test. The question is not simply whether business is quiet. It is whether the employee cannot usefully be employed because work has genuinely come to a halt for a reason the employer cannot be held responsible for. A business that is still operating, but at much lower volume, has not necessarily seen a stoppage of work under s 524(1)(c).

At the same time, a genuine stoppage can exist even where the broader enterprise survives. During the COVID-19 pandemic, Qantas stood down around 20,000 ground-based employees without pay when government border closures effectively stopped its airline operations. That approach was considered and upheld through the Federal Court in Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Qantas Airways Limited [2020] FCAFC 205, in circumstances where a catastrophic external event, rather than ordinary business fluctuation, had halted the work.

The practical takeaway is this. If your operation has genuinely ground to a halt through no fault of yours, stand down may be justified while that stoppage continues. If the business is simply quieter than usual, stand down is risky, because a court or the regulator may characterise it as an unlawful reduction in pay rather than a valid stand down.

Leave during a stand down

Stand down intersects with leave in ways that often surprise employers. Section 525 of the Fair Work Act provides that an employee is not taken to be stood down on any day they are taking authorised leave, including unpaid leave. The note to s 525 makes it clear that an employee may take paid or unpaid leave, such as annual leave, during all or part of what would otherwise be a stand down period.

This means a stood-down employee can often draw down the annual leave they have built up, and would be paid for that portion of the time. Many enterprise agreements and awards allow this as a way of cushioning the loss of income. Long service leave can also be taken in appropriate cases.

One type of leave, however, is not available during a stand down. The Qantas Full Court decision confirmed that employees who have been validly stood down are not entitled to take paid personal or carer's leave, or compassionate leave, during the period of the stand down. The reasoning is that those forms of leave respond to a real incapacity or compassionate need, and a stand down is not such an occasion. This is a counterintuitive result that employers should not assume away, because an employee who is stood down may expect to claim sick leave during that period only to find it is not available.

Leave continues to accrue during a stand down in many cases, because the employment relationship continues even though the employee is not at work. Annual leave and personal leave generally keep building up during a period of unpaid stand down. Employers should check their award, enterprise agreement and contract, because the practical effect of leave accrual during an extended stand down is a liability that grows the longer the stand down runs.

When stand down is paid for: public holidays

One payment point that is easy to overlook is public holidays. If a public holiday falls during a stand down period, the ordinary public holiday rules in the National Employment Standards continue to apply. This can oblige an employer to pay the employee for the public holiday even though the surrounding days are unpaid. The exact result depends on whether the employee would otherwise have worked on that day and on the terms of any applicable award or agreement, so it is worth checking the position for each public holiday rather than assuming the stand down covers it.

Getting it wrong: the cost of an invalid stand down

The consequences of an invalid stand down flow directly from the fact that no wages were paid. If the stand down is found not to have been justified, the employee is treated as having been available for work the whole time, and the employer owes back pay for the entire period. For a stand down that ran for weeks or months across a number of staff, that figure can be substantial.

Beyond back pay, an invalid stand down is a breach of the Fair Work Act. The Fair Work Ombudsman can investigate, and where the Ombudsman reasonably believes an underpayment has occurred it can issue a Compliance Notice requiring the employer to fully back-pay the affected employees within a specified period. Non-compliance with a Compliance Notice is itself a separate contravention that can lead to further enforcement.

If the matter proceeds to court, the Federal Court or the Federal Circuit and Family Court of Australia can impose pecuniary penalties. The maximum penalties under s 539 and s 546 of the Fair Work Act are expressed in penalty units, which are indexed each year, and a body corporate faces a maximum penalty of five times the amount that applies to an individual. A deliberate and large-scale underpayment that meets the test of a serious contravention under s 557A attracts higher maximum penalties again. Because the figures index over time, the precise dollar amount changes each financial year, but the scale is significant enough that an invalid stand down across a workgroup is not a matter to treat casually.

There is also a personal dimension. The Ombudsman and the courts can pursue penalties against the individual responsible, not just the company. A director or manager who made or directed the invalid stand down can find themselves personally exposed, which is a point worth weighing before acting on the strength of an assumption.

Where a lawyer helps

Stand down is a decision where the cost of being wrong is borne up front, before the regulator or a court ever becomes involved. A lawyer's role is to test the justification before you act. In practice, that means confirming the situation genuinely falls within s 524 and does not collide with a stand down clause in your enterprise agreement or contract, checking whether there is useful alternative work you could instead direct the employee to do, and working through the leave and public holiday consequences so that the stand down is structured lawfully.

A lawyer also helps when a stand down is already in dispute. If the FWC is dealing with a challenge under s 526, or the Ombudsman is investigating, having someone who can assess whether the stand down was valid, and negotiate a resolution or defend the position in proceedings, can materially change the outcome. Given the penalty exposure can sit with the individual as well as the business, this is not a matter to handle quietly in the hope it goes away.

The decision point

The single area where employers most often lose with stand down is not the machinery breakdown or the industrial action, but the stoppage limb, and the reason is timing. By the time a business is quiet enough that stand down looks attractive, the stoppage test has often already been failed. A stand down made during a slowdown, in the hope that it will be viewed as a stoppage, is the classic mistake, because the back pay, Compliance Notice and penalty exposure all trace back to that one judgment call. Before you act, pin down whether the work has genuinely stopped through no fault of the business, and confirm the position on leave and public holidays as well. That assessment is quick to run with guidance, and it decides whether your stand down protects the business or creates a debt it will have to repay.