Australia: Terminating an enterprise agreement – when and how can it be done?

Last Updated: 28 November 2016
Article by Leonard Lozina and Clare Kerley
Services: People & Workplace, Restructuring & Insolvency
Industry Focus: Life Sciences & Healthcare

What you need to know

  • When enterprise agreements are negotiated during profitable times, parties may agree on terms which later become unattractive once new challenges emerge for a business.
  • Parties are not necessarily 'stuck' with the terms they have agreed, as an enterprise agreement may be terminated in one of two ways – by the parties' agreement, or by application to the Fair Work Commission after the nominal expiry date of the agreement.
  • For businesses seeking guidance on how an application to the Fair Work Commission might be received, two cases shed useful light on how the relevant legislation is likely to be interpreted.

Enterprise agreements are often appealing to employers, employees and unions alike. This is because they enable the parties to agree on terms that are specifically tailored to the particular circumstances of a business and the industry in which it operates, going beyond what would otherwise apply under a relevant award. Common catalysts for enterprise agreements include special salary provisions, penalty rates, leave entitlements and flexible working arrangements.

The trouble is that the underlying circumstances surrounding the negotiation of an enterprise agreement can quickly change. When businesses or even entire industries are facing tough economic conditions, as is currently the case in the mining sector where falling global demand has produced a large contraction in production and profit, terms that seemed beneficial at one stage may suddenly become unattractive to the employer. Further, since the Fair Work Act 2009 (Act) provides that enterprise agreements continue to operate after their nominal expiry date unless they are replaced or terminated, parties can conceivably remain bound by 'legacy' terms established 5 or 10 years ago (or longer) in a vastly different economic climate.

If an enterprise agreement established during more profitable times becomes a threat to the continued success – or even continued existence – of a business, what can be done?

There are two ways an enterprise agreement may be terminated:

  1. by agreement between the parties (ie subject to a vote) and with the approval of the Fair Work Commission (Commission)
  2. on application to the Commission after the nominal expiry date of the agreement.

Termination by agreement

At any time during its term, an enterprise agreement can be terminated if the parties genuinely agree. In practice, this is unlikely to happen frequently as the terms which one party wants to discard might be those which the other party finds attractive and refuses to surrender.

However, in industries where businesses are being pressured by competitive forces including market conditions outside the control of local companies, agreement may be more easily reached. For example, employees may agree to cut salary levels in enterprise agreements that were negotiated in better working conditions, as a means of remaining competitive and saving their jobs. In this case, salary levels could drop to the rates being paid in the underlying award.

If termination by agreement is an option, employees would need to participate in a formal vote and, by a majority, an enterprise agreement can be set aside. Within 14 days of such a vote, an application would need to be made to the Commission to approve the termination of the agreement. Assuming the Commission is satisfied that genuine agreement has been reached, its approval should be forthcoming.

Termination by application to Fair Work Commission

The more commonly travelled path for terminating an enterprise agreement is by application to the Commission after the agreement has passed its nominal expiry date. Any party to the agreement may make such an application.

If an application for termination is made, section 226 of the Act provides the Commission must terminate the agreement if:

  • it is satisfied that it is not contrary to the public interest to do so, and
  • it is considered appropriate to terminate the agreement.

In considering whether it is 'appropriate' to terminate the agreement, the Commission will take into account all the circumstances including:

  • the views of the employees, each employer, and each union (if any) covered by the agreement
  • the circumstances of those employees, employers and organisations including the likely effect that the termination will have on each of them.

The application to terminate must be accompanied by any declarations that are required by the Fair Work Commission Rules, including declarations as to the effect on employees.

There are some interesting cases demonstrating how the Commission has reacted to these types of applications being brought. Useful guidance may be taken from Aurizon's Case 1 and more recently the Griffin Coal Case.2

Aurizon's Case

Aurizon Operations Limited, Aurizon Network Pty Ltd and Australia Eastern Railroad Pty Ltd (Aurizon) had 14 enterprise agreements covering their workforce, each with a nominal expiry date of 31 December 2013.

The enterprise agreements contained very generous provisions that were a legacy from a time when the company was Government-owned and were essentially 'public service' type conditions (such as no forced redundancy). These provisions were unduly complex and imposed unwarranted and costly restrictions on the efficiency and productivity of Aurizon's business.

Eight months before the 14 agreements were due to expire, Aurizon began bargaining with the six unions for new enterprise agreements. Throughout the entire bargaining period Aurizon consistently sought to have these 'legacy' provisions removed. The unions wished to retain the provisions and include them in any new enterprise agreements. Despite seeking and receiving assistance from Deputy President Asbury of the Commission during bargaining, Aurizon and the unions could not reach agreement.

By May 2014, negotiations had reached a stalemate. Aurizon applied to terminate all 14 of its expired enterprise agreements (though it ultimately only pursued its application in relation to 12 of them, since two were shortly replaced).

Aurizon's application was heard before the Full Bench of the Commission (Vice President Watson, Deputy President Gostencnik and Commissioner Spencer), which was tasked with considering the application against the criteria in section 226 of the Act. That is, the Full Bench had to consider whether termination would be contrary to public interest and whether termination would be 'appropriate' in all the circumstances.

Aurizon argued that the preconditions in section 226 were met and the Commission was required to terminate the expired enterprise agreements.

Aurizon contended that the removal of those restrictive 'legacy' provisions would enhance Aurizon's ability to be competitive in pitching for contracts across its coal rail network, freight, intermodal business and maintenance services.

Aurizon acknowledged that the leading authority at the time was Tahmoor Coal,3 in which it was held that:

  • the emphasis on promoting productivity is primarily to be achieved through collective bargaining in good faith, rather than by other means such as the termination of an expired enterprise agreement
  • generally, it is inappropriate for the Commission to terminate an expired enterprise agreement as this would interfere in bargaining for a new agreement.

Aurizon contended that the Tahmoor Coal decision should not be followed, as it had been in a number of other decisions.

What did the Full Bench of the Commission find?

The Full Bench agreed with Aurizon. It held that to approach the construction of section 226 in the manner suggested in Tahmoor Coal, which results in a predisposition against the termination of an enterprise agreement which has passed its nominal expiry date, was incorrect. The Full Bench said there is no statutory imperative that the promotion and delivery of productivity benefits at an enterprise level are to be primarily or exclusively achieved through enterprise bargaining in good faith, rather than by other means.

It further held that section 226 of the Act operates according to its terms. These terms provide that on application by a person covered, an agreement that has passed its nominal expiry date must be terminated if the circumstances identified in section 226 exist. Indeed, the Full Bench acknowledged that productivity benefits may also be delivered by terminating the agreements.

The Full Bench found that:

  • terminating the expired enterprise agreements would not be contrary to the public interest
  • there is nothing inherently inconsistent with the termination of an expired enterprise agreement and the continuing of collective bargaining in good faith for a new enterprise agreement
  • the provisions that Aurizon had sought to have removed or varied were not common provisions in enterprise agreements generally, and were provisions that restricted Aurizon's capacity to effectively manage its labour resource needs
  • undertakings made by Aurizon to preserve certain terms and conditions for six months would offset the impact on employees
  • it cannot be expected that terms and conditions in an enterprise agreement will continue unchanged in perpetuity (particularly after an enterprise agreement has passed its nominal expiry date)
  • it was entirely appropriate for Aurizon to improve its efficiency and productivity in an industry which was in a state of transition.

Accordingly, the Full Bench found it was appropriate in the circumstances to terminate all 12 agreements.

Griffin Coal Case

Earlier this year, the Griffin Coal Mining Company (Griffin Coal) sought to terminate one of its enterprise agreements by application to the Commission. Griffin Coal argued that termination of the agreement was necessary due to the company's financial position, including trading losses of almost $300 million since 2011.

In considering Griffin Coal's application for termination, the Commission applied the public interest and the appropriateness test as required by section 226 of the Act. The 'public interest' matters that the Commission considered included:

  • the flexibility of the business
  • promotion of productivity
  • economic growth.

Community interests were balanced with the potential for operational growth and the extent to which increased productivity could facilitate job retention and expansion.

Ultimately, the Commission approved Griffin Coal's application to terminate the enterprise agreement. This decision was subsequently appealed but the Full Bench of the Commission upheld the initial decision, finding that all relevant factors had been considered in a fair and equitable manner.

Key takeaways

The Aurizon and Griffin Coal decisions demonstrate the robust approach taken by the Commission in interpreting section 226 of the Act and expressly overruled the previous authority which arguably made it more difficult to succeed on an application to terminate.

For businesses operating in particularly challenging industries such as mining and manufacturing, these cases provide clear and compelling authority on the principles that would be applied to an application to terminate an enterprise agreement past its nominal expiry date.

Footnotes

1 Aurizon Operations Limited: Aurizon Network Pty Ltd; Australia Eastern Railroad Pty Ltd [2015] FWCFB 540.

2 Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union" known as the Australian Manufacturing Workers' Union (AMWU) v Griffin Coal Mining Company Pty Ltd [2016] FWCFB 4620.

3 Re Tahmoor Coal Pty Ltd [2010] FWA 6468

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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