HG Alert: Implications of the Fair Work Act in a Contracting Economy - May 2009

It is plainly obvious that many of the changes introduced by the Fair Work Act 2009 and the related legislation will impose additional direct and indirect costs on employers in the Federal industrial relations system.

The ALP industrial relations reform agenda was first announced more than two years ago, at a time when no one ever contemplated the ‘global financial crisis’ and the end of Australia’s economic boom was unimaginable. Given the current economic climate there are many who question whether Australian employers can now afford the changes that the new legislation will bring.

The Fair Work Act was passed earlier this year and will, for most practical purposes, commence operating in two phases from 1 July 2009. Some of the related legislation has already commenced and parts of the Act will commence as soon as 26 May, although none of the transitional legislation has actually passed through the parliament.

The award modernisation process began in March 2008. Otherwise, the first substantial phase, which includes new unfair dismissal rules, good faith bargaining requirements and the transfer of business provisions, will start on 1 July 2009. The balance, including the new “safety net” of minimum terms and conditions of employment, comprised of the National Employment Standards and Modern Awards, will start operating on 1 January 2010.

The purpose of this article is to examine some of the more significant changes that will impose additional burdens on employers.

National Employment Standards

The National Employment Standards will start operating on 1 January 2010 and will apply to all employees covered by the Act. They cannot be excluded by a modern award or enterprise agreement.

The NES contains some new entitlements for employees that will have an economic or administrative impact on employers:

  • Employees who are made redundant will be entitled to redundancy pay of between 4 and 16 weeks pay, depending on their length of service. This is the first time that many employees will have had a legislative entitlement to redundancy pay. Previously, only employees covered by an Award that contained redundancy pay requirements, or who were contractually entitled to a redundancy entitlement, were entitled to receive such a payment. If current economic circumstances continue into next year, the requirement for employers to pay redundancy pay could be a significant imposition on a business that may already be doing it tough.
  • Employers must pay employees who are completing jury service the difference between their base rate of pay for ordinary hours of work while on jury duty, and any amount paid to them for their jury service (for up to 10 days). While this entitlement may be familiar to some employers, it is a new legislative entitlement for many employees, and a new expense for their employers.
  • Employees with children under school age, or who care for children under 18 with a disability, can request a change in their working arrangements to assist with the care of that child. Employers can only refuse a request on “reasonable business grounds” which is not defined. Employers must, if they refuse a request, provide an employee with details of the reason for the refusal. Considering and responding to a request will have, at the least, a time “cost” for an employer. Accommodating a request could also have an economic cost for employers, such as setting up a home office so that an employee can work from home. However, the benefits of flexible arrangements may outweigh any costs if flexibility will help an employer retain, and attract talented staff, decrease absenteeism, and increase employee motivation and satisfaction.
  • Employees are currently, and will continue to be entitled to 12 months of unpaid parental leave until 1 January 2011, when paid parental leave will be available, if they meet the qualifying criteria in the Act. However, under the NES, an employee may request an extended period of a further 12 months unpaid parental leave. Again, a request can only be refused on “reasonable business grounds”. If refused, an employer must provide an employee with details of the reason for the refusal. Again, considering and responding to a request will have, at the least, a time “cost” for an employer. It could also see, for example, additional training costs incurred by an employer when the employee on parental leave returns to the business after up to a 2 year absence. However, the benefits of granting additional leave, which are similar to those discussed above in terms of flexible work arrangements, might outweigh the costs.

Employers bound by an existing workplace agreement (including a wide range of instruments such as AWAs, Federal Collective Agreements, and State Collective Agreements now operating in the Federal system) in place on 1 January 2010, must review the agreement against the NES. If a term of the agreement is detrimental to an employee when compared to an NES entitlement, then the term of the agreement will not apply, instead, the NES entitlement will apply. The “no detriment” rule will be applied to an agreement on a “line-by-line” basis. This means that an employee’s entitlements may be a combination of the more advantageous provisions from both the agreement and the NES. Apart from any actual costs resulting from the imposition of new or additional paid entitlements, the transitional process will almost certainly impose additional administrative burdens on employers in determining, and then administering, relevant entitlements from 1 January 2010.

Modern Awards

Modern Awards are currently being developed by the Australian Industrial Relations Commission for commencement on 1 January 2010. They are designed to replace the thousands of Federal and State awards that are currently operating in the Federal system under the Work Choices reforms. Modern Awards will generally apply to industries or occupations, in much the same way that State based ‘common rule’ awards currently operate, rather than requiring employers to be bound as named “respondents” to awards the way in which Federal awards currently operate. They shall begin operation on 1 January 2010. Employers need to know which Modern Awards, if any, apply to them and their employees.

In drafting the Modern Awards the AIRC has had to bring together many varied Federal and State based awards, each of which contain their own minimum terms and conditions of employment, including wage rates. Based on the Modern Awards that have been drafted to date, it appears that there will be an increase in minimum wages payable in some industries in some States. For example, Restaurant and Catering Australia claim that the current draft of the Hospitality Modern Award will result in wage increases of 8.5% in Queensland. The Australian Retailers Association claims that wages in the retail industry will increase under the applicable Modern Award by between 9.5% and 16.5%, depending on the State. Whether all employers face an increase in minimum wages payable, will depend on current minimum pay rates compared to those contained in any applicable Modern Award.

Except in relation to wage rates, Modern Awards (unlike the NES) will not override the provisions of a workplace agreement that is in operation on 1 January 2010. This means that employers must identify whether any Modern Award applies to them and their employees, and if so which, in order to determine the applicable base rates of pay. This will enable employers to ensure that their employees are being paid at least those rates.

There is some concern that Modern Awards will cover employees not previously covered by awards, including high income and managerial level employees. For example, a “miscellaneous” Modern Award is to be drafted as a “catch all” award. It will be designed to cover employees not covered by any other Modern Award and who perform work of a similar nature to that historically regulated by awards. The extent of its potential application is presently unclear. However, it has the potential to impose additional and otherwise unaccounted for costs on employers who employ workers who, not previously award regulated, become subject to the award safety net. It could, in particular, expose employers to significant liabilities for the underpayment of wages, in many cases regardless of the actual wage rates being paid.

It will be possible to exclude “high income employees” (defined in the Act) from the application of Modern Awards where, by agreement with employees, employers guarantee a level of annual remuneration above the “high income threshold” (the ‘HIT’) (as prescribed by the Act from time to time). For now we understand that the ‘HIT’ will start out at $100,000 indexed for inflation from 1 July 2007, or exceeding $106,000 from 1 January 2010. Formal requirements must be met for the exclusion to be effective. We would expect that, in most cases, the exclusion will be applied through the terms of the applicable employment agreement.

Coverage of managerial or high income level employees under a Modern Award will give these employees access to the unfair dismissal regime, where they would otherwise be excluded because of their remuneration levels.

Termination of employment

From 1 July there will be significant changes to the unfair dismissal provisions that currently operate in the Federal industrial relations system.

At the moment, employees in that system who work for an employer with 100 employees or fewer and whose employment is terminated, have no access to the unfair dismissal jurisdiction. That exclusion will be abandoned from 1 July. Instead, employees who complete a “minimum period of employment” of either 6 or 12 months (depending on the size of their employer) and whose employment is terminated, will be able to make an unfair dismissal claim.

Some employers with fewer than 101 employees may have changed their performance management and termination processes (or in practical terms abandoned them altogether) when the current exclusion was introduced on 27 March 2006. However, these employers will, from 1 July have to ensure that they do not unfairly dismiss any employee. This means that any dismissal cannot be “harsh, unjust or unreasonable”, employers must have a valid reason for dismissal relating to an employee’s conduct or capacity and follow procedural fairness requirements such as giving employees an opportunity to respond to the reason, warning employees about unsatisfactory performance, and notifying employees of the reason for their dismissal. Ensuring that an employee is not unfairly dismissed may, subject to their current performance management and termination processes, add to the cost sub-101 employers will face in terminating employees.

In the current economic climate it is possible that employees whose employment is terminated will make an unfair dismissal claim, whether or not they have a good case for doing so, in the hope of obtaining a further payout from their employer. Defending such a claim will obviously require devotion of time to manage the claim, as well as payment of legal costs and money to settle the claim.

Currently, employees who are terminated for “genuine operational reasons” (eg on redundancy grounds) are excluded from making an unfair dismissal claim, regardless of the number of employees employed by the employer. From 1 July, some employees will be able to make an unfair dismissal claim if their dismissal was not on account of the “genuine redundancy” of their position. A dismissal will not be based on a genuine redundancy if it would have been reasonable in all of the circumstances to redeploy the employee within the employer’s business, or the business of an associated entity. This is a new requirement and what may have been a “genuine operational reason” will not necessarily be a “genuine redundancy”. Neither will a redundancy be considered “genuine” if the employer failed to comply with the requirements of an applicable Modern Award “to consult about the redundancy”.

If, from 1 July, an employer does not consider the redeployment of an employee whose position has become redundant, both within their business or that of an associated entity or, does not follow the consultation requirements from an applicable Modern Award, then the employee will be able to make an unfair dismissal claim against the employer (with the associated costs for the employer). For employers that are part of a wider group of companies, this requirement could be quite onerous. While not specified, it would be safe to assume that an employer need to be able to demonstrate that they properly considered all redeployment options within all relevant businesses, including by the production of relevant paperwork.

Transfer of business provisions

What is currently known as “transmission of business” will be known under the Act from 1 July as “transfer of business”. There are a number of significant changes associated with these new provisions. At the moment, where there is a transmission of business (such as the purchase of a business where the employees of that business are employed by the purchaser), it is generally the case that any industrial instruments that apply to the employees of the purchased business will only apply to those employees for a maximum of 12 months. The transferring instruments do not apply to existing employees of the purchaser or any employees hired by the purchaser after the transmission of business.

From 1 July, any industrial instrument that applies to employees in a transfer of business situation will not stop applying to those employees after 12 months. Instead, the industrial instrument will continue to apply to those employees until it is formally terminated or replaced by a new agreement. Any new employees employed after the purchase of the business will also be covered by the transferring industrial instrument if there is no other applicable enterprise agreement or Modern Award, and the new employee performs the same type of work as the transferring employees.

These new rules could significantly increase the wages costs for a purchaser of a business. The application of transferring instruments could mean the retention of business practices that may be uneconomic for the purchaser. It could also result in purchasers not offering ongoing employment to the employees of the business they purchase if the incoming employees bring with them “undesirable” industrial instruments of potentially indefinite application. It may be cheaper and less “hassle” to employ new employees who will not bring with them existing industrial coverage that may undermine the business objectives of the purchasing entity.

In the current economic climate the new transfer of business provisions have the potential to operate counter-productively.

Enterprise agreements and good faith bargaining

From 1 July, employers wanting to make any enterprise agreements with their employees will be required to bargain in “good faith”. This means that they must:

  • attend and participate in meetings at reasonable times;
  • disclose relevant information in a timely manner;
  • respond to proposals made by another party in a timely fashion;
  • give genuine consideration to the needs of the other parties and provide reasons for their responses; and
  • refrain from capricious or unfair conduct, or conduct that undermines freedom of association or collective bargaining.

These new requirements may be quite onerous and labour intensive to meet, particularly for smaller businesses that do not have a dedicated HR professional to oversee the process.

From 1 January 2010, all enterprise agreements will be assessed against the “BOOT” (better off overall test), rather than the current NDT (no disadvantage test). The NDT requires that a workplace agreement not result, on balance, in a reduction in the overall terms and conditions of employment of the employees whose employment is subject to the agreement, when compared to the applicable reference instrument. In contrast, the BOOT requires that each employee be ‘better off overall’ if the enterprise agreement applied to the employee, rather than the applicable Modern Award.

There is uncertainty as to how the BOOT will be applied in practice – for every employee or for each class or category of employee. While the Act says “every employee”, government publications say that the BOOT will not look at each individual employee’s circumstances. Further, the BOOT appears to impose a positive obligation on employers to ensure that employees are actually better off under the agreement, rather than not being disadvantaged when considered from an overall perspective. We will have to wait and see how the BOOT will be applied in practice.


The current economic climate is not an ideal climate within which to move into a more tightly regulated industrial relations system. Nevertheless, the new system is upon us. Clearly it will present all kinds of challenges for business, when many businesses are focused on little more than survival.

For more information on the Fair Work Act, please contact HopgoodGanim’s Industrial and Employment team.