Australia: The Fairness Test

Last Updated: 1 November 2007
Article by Peter Punch and Mick Sheils

New Requirements For Agreements

Employers contemplating entering into Workplace Agreements under the federal Workplace Relations Act 1996 (the Act) need to be aware of recent changes to the Act which provide that fair compensation must be afforded to an employee if "protected conditions" are modified or removed.

Prior to the enactment of the above changes to the Act the protected conditions listed below could be removed or modified if the applicable AWA or Collective Agreement made specific reference to such. In such circumstance it was not necessary for the Agreement to provide for any compensation for the loss or modification of protected conditions. This situation has been reversed by the recent amendment to the Act introducing what is called the "Fairness Test".

What are "Protected Conditions"?

An employee will become subject to a Workplace Agreement either by making or approving a Workplace Agreement with an employer, or by taking up employment that is covered by a Workplace Agreement. Certain conditions of employment will be protected when employees become subject to Workplace Agreements.

These conditions are called ‘protected conditions' and will be automatically included in a workplace agreement unless they are expressly excluded or modified.

Protected conditions are found in:

  • a federal award – these awards generally cover employers who are named in the award or who are members of an employer association who is named in the award. For the purposes of protected conditions, it does not matter that the employment may have been subject to an Australian workplace agreement or certified agreement (which would have overridden the award.
  • a Notional agreement preserving State awards – State Industrial Tribunals can make common rule awards that will apply to all employers in a particular industry (who are not covered by a federal award or agreement, or a state agreement). Any State award, if applicable to a constitutional corporation from 27 March 2006, is known as ‘Notional Agreement Preserving State Awards'.
  • a Preserved State agreement – if the employer and employee had entered into a state employment agreement before 27 March 2006 then that agreement will become what is called a ‘Preserved State agreement'. The terms of that agreement are the terms of the state agreement (and also any state award term that applied and certain state or territory industrial laws).

Protected Conditions

The following are protected conditions:

  • rest breaks
  • incenteive based payments and bonuses
  • annual leave loading
  • public holidays, or days substituted for public holidays and entitlements to employees to payment in respect of those days
  • days to be substituted for public holidays or a procedure for such substitution
  • monetary allowances (for employment expenses, skills, disabilities)
  • overtime or shift work loadings
  • penalty rates
  • outworker conditions
  • any other matter specified in the Regulations from time to time.

The Fairness Test

All workplace agreements (AWA’s and Collective Agreements) lodged with the Workplace Authority (formerly the Office of the Employment Advocate) on or after 7 May 2007 are subject to an assessment by the Workplace Authority in circumstances where the workplace agreement modifies or deletes protected conditions.

The assessment to be made by the Workplace Authority is similar to the "No disadvantage test" which applied to agreements made prior to the implementation of Workchoices.

The Fairness Test applies to Australian Workplace Agreements (AWAs) applicable to employees earning less than $75,000.00 per annum and who are covered by one of the awards or agreements mentioned above and which agreement modifies or removes protected award conditions. The Fairness Test will also apply to Collective Agreements in the same manner as for AWAs with the exception that the $75,000.00 cap does not apply.

The thrust of the recent legislative change is to ensure that employees receive fair compensation in circumstances where they negotiate an agreement which excludes or modifies one or more protected award conditions such as penalty rates. In most instances the compensation will be by way of a higher rate of pay, however the Workplace Authority may take into account other factors such as the industry in which the employees work, the location and economic circumstances of the business in deciding if the agreement meets the fairness test. It may also take into account all relevant working arrangements and entitlements, including family-friendly conditions when making its assessment. This is a very subjective test and no clear guidelines, as yet, have been given by the Workplace Authority on this aspect of the assessment.

Should the Workplace Authority consider that an agreement does not satisfy the fairness test the employee(s) and the employer have 14 days to amend the agreement to satisfy the fairness test. Advice as to why the agreement did not meet the fairness test will be given to the parties by the Workplace Authority.

Pre-lodgment assessments are available from the Workplace Authority to assist employers and employees meet their obligations in this regard.

It is important for employers to note that if they are contemplating entering into an agreement with an employee(s) which removes or modifies protected conditions the Fairness Test assessment will:-

  • Establish the reference award.
  • Identify the protected conditions in the reference award.
  • Identify those protected conditions that have been excluded or modified by the agreement.
  • Identify the work obligations/working patterns of the employee(s) under the agreement, those protected conditions that apply based on the employee's/ employees' work obligations/working patterns and the value of the applicable protected conditions based on those work obligations/working patterns.
  • Identify monetary and non-monetary compensation provided in the agreement and compare to the value of the applicable protected conditions based on the employee's/employees' work obligations/working patterns.

Where the compensation provided in the agreement equals or exceeds the value of the applicable protected conditions modified or excluded, the agreement meets the Fairness Test.

As previously mentioned, it is expected that in most instances fair compensation will be provided by way of a higher hourly rate of pay.

It is to be noted that the fairness test does not apply to agreements entered into prior to 7 May 2007.

A great deal of uncertainty currently exists in relation to Industrial Relations generally due to the impending election. It is not clear as to the future of Australian Workplace Agreements if the current Government is not returned. Our advice to employers at this time is to adopt a wait and see approach in relation to entering into new agreements with your staff until the political landscape is clearer. However if there is a need to enter into such arrangements care needs to be taken in relation to complying with the Fairness Test.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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