Australia: New Fairness Test For Workplace Agreements Creates Uncertainty For Employers

Last Updated: 9 May 2007

Last Friday, 4 May 2007, the Federal Government announced the introduction of a "Fairness Test" that will apply to workplace agreements lodged from 7 May 2007.

The stated aim of the new Fairness Test is to protect award conditions, such as penalty rates, and shift allowances and allowances that are not traded off without adequate compensation.

Employers and employees who are currently making workplace agreements (either Australian Workplace Agreements or Collective Agreements), including using template agreements prepared prior to 7 May 2007, must be aware of this new Fairness Test if the workplace agreements will remove or modify any protected award condition that would otherwise apply to the employee.

The new Fairness Test has come into effect before the legislation has been released. This will lead to a period of uncertainty for employers trying to set their terms and conditions. It may also lead to an increase in compliance costs for businesses that are introducing workplace agreements.

The Federal Government has no doubt introduced these changes in response to the release of the Federal Opposition’s Industrial Relations Policy last week and to help neutralise the ongoing criticism of the WorkChoices reforms.

What is The Fairness Test?

Any workplace agreement, either an Australian Workplace Agreement or Collective Agreement, lodged from 7 May 2007 will be subject to the new fairness test.

The Fairness Test will apply to agreements lodged for employees who would otherwise have been entitled to the benefit of protected award conditions, and are earning less than $75,000 per year.

The question of whether an employee will have the benefit of protected award conditions will depend on the circumstances and employers should get advice on this issue. However, the employees of totally new businesses that came into operation after 27 March 2006 are unlikely to be protected. The proposed changes to the legislation may clarify this issue.

The Fairness Test appears to have some similarities to the "no-disadvantage test" that existed prior to WorkChoices. A workplace agreement will pass the Fairness Test where the new Workplace Authority is satisfied that the employees have received fair compensation where protected award conditions have been removed or modified by the agreement.

Previously, WorkChoices agreements were underpinned by the Australian Fair Pay and Condition Standard, and could expressly remove protected award conditions. However, from 7 May 2007 workplace agreements will also be underpinned by protected award conditions.

The protected award conditions include:

  • penalty rates including weekend and public holiday rates,
  • shift loadings
  • overtime rates
  • monetary allowances
  • annual leave loadings
  • rest breaks
  • incentive-based payments and bonuses.
How Will The Fairness Test be Assessed?

All workplace agreements will still be lodged with the new Workplace Authority that replaces the Office of the Employment Advocate. They will operate upon lodgement.

The information released by the Federal Government indicates that the Workplace Authority will conduct the Fairness Test by considering both monetary and non-monetary compensation offered, relative to what would have been payable under protected award conditions.

If an agreement does not meet the Fairness Test, the Workplace Authority will inform the employer and employee why the agreement is not fair, how it can be changed, and the amount of any back pay to compensate the employee.

In these circumstances, back pay from the date the agreement was lodged will need to be made.

The employer and employee will then have 14 days to agree on how they will vary the agreement. Employees will be able to be represented by their bargaining agent, which may be a union. If the necessary changes are not made, the agreement will be void, and the previous agreement or award will continue to apply.

Some Exemptions to The Fairness Test

The statement released by the Federal Government appears to give some employers an exemption to the Fairness Test. This includes where a business is suffering financial hardship, and factors such as the location of the business, and specific employment circumstances of the employee.

This appears to be similar to the "public interest test" that applied to the "no-disadvantage test" prior to the WorkChoices reforms, but may offer further exemptions for employers.

For example, it may allow the removal of weekend penalty rates, where an employee, due to personal circumstances prefers to work on weekends or after normal hours.

What This Means for Employers?

The immediate impact of the changes is great uncertainty in the making of workplace agreements. While the Federal Government has put the reforms into effect from 7 May 2007, they have not released the legislation setting out the detail.

Employers who have developed template agreements that are WorkChoices compliant cannot necessarily utilise these agreements if they remove or modify any protected award condition. Even agreements signed prior in the fortnight prior to 7 May 2007, may not be able to be enforceable if lodged on or after 7 May 2007.

The introduction of the Fairness Test re-regulates the agreement making process, as it gives the Workplace Authority the ability to declare agreements to be unfair and require higher terms and conditions to be paid. It is unclear whether the Workplace Authority will review every workplace agreement lodged, or will only do so on the request of a party.

Prior to WorkChoices, the Office of the Employment Advocate often took more than a few weeks to determine if an AWA passed the "no-disadvantage test". Similar backlogs may develop again in the future.

The introduction of the Fairness Test will also mean that there is little certainty in agreement making for the parties. Employers who believe they have reached agreement may have to seek to justify why agreements are fair, and if they cannot will need to pay additional amounts to employees or retrospectively recalculate wages paid to employees. This may not only increase the labour costs of employers but also substantially increase compliance costs with agreement making. Unions may use these changes as a way of encouraging employees to have new workplace agreements reviewed on the offer of substantial backpay claims.

Other changes announced include changes to the transmission of business arrangements that will place restriction on a new employer purchasing a business making the offer of employment subject to an AWA.

Until further details are released, employers should arrange for any template workplace agreements to be reviewed in light of the changes. Consideration should also be given to including any non-monetary benefits provided to employees in the agreements.

Employers should assume that any workplace agreement filed on or after 7 May 2007 may be subjected to the new Fairness Test.
Article by Dan Feldman

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