Australia: Substantial Reforms Announced To Australian Fair Work Legislation: What's Changing And What's To Come

In Short

The Situation: The Federal Government has published its highly anticipated reform package to Australia's industrial relations ("IR") framework. While less ambitious than some had expected, the Fair Work Amendment (Supporting Australia's Jobs and Economic Recovery) Bill 2020 (Cth) ("Bill") is still the most significant IR reform proposal since the Fair Work Act 2009 (Cth) ("FW Act") was enacted over a decade ago.

The Proposed Reforms: The Bill sets out a targeted reform agenda, focussing on resolving recent confusion around the classification and payment of casual employees; enhancing the regime for resolving underpayment claims by introducing tougher civil and criminal penalties; providing additional flexibility in relation to working arrangements in response to COVID-19; facilitating agreements between part-time employees and their employers to work additional hours; and streamlining Australia's enterprise bargaining process. Each noteworthy in its own right, cumulatively, these proposed reforms are set to significantly alter Australia's IR regime for employers and employees alike.

Looking Ahead: Set to be debated in Parliament in early 2021, the passage of the Bill is already shaping up to be a hotly contested and politicised process. While we wait and see what exactly will result, employers should nevertheless begin considering how these proposed amendments will impact them and what they should do to prepare and respond.

Background

Touted by the conservative Federal Government as a pragmatic effort that balances flexibility and certainty for business and enhances crucial protections for employees, the Bill is the result of a series of IR roundtables held in 2020. Departing from tradition, these discussions involved a range of employer and employee stakeholders in an effort to end the malaise and rancour that has previously characterised IR reform in Australia.

It is anticipated that the Bill will not be passed by the Parliament until March or April 2021 at the earliest. However, with most of the amendments set to come into force the day after the Bill receives Royal Assent (and with several applying retrospectively), employers should pay close attention to the key reforms on the horizon, which we discuss in this Commentary.

Changes for Casual Employees

Among the most significant changes proposed by the Bill are reforms to the regulation of casual employment.

Recent decisions of the Federal Court, notably Skene and Rossato, created considerable confusion in departing from the long-accepted approach that the classification of an employee as casual or permanent is to be assessed at the time of engagement. These decisions held that the nature of the employment relationship may transition over time such that an employee initially engaged as a casual may become something "other than casual" if they are working regular and systematic hours.

The corollary of these findings is that if an employee is found to not be a genuine casual, they become entitled to permanent employment benefits such as annual leave, sick leave, and carer's leave. In Rossato, the Full Federal Court went even further, holding that impacted employees can "double-dip"—recovering accrued leave entitlements while retaining any casual loadings, ostensibly paid in lieu of permanent entitlements.

While the employer has appealed this decision to the High Court, Rossato presents a risk for employers of long-term casuals who have been engaged on a regular and systematic basis. The potential employer back pay liability for permanent employee entitlements has been estimated at between AUD$18 and AUD$39 billion. Fortunately, the proposed amendments to the FW Act appear to have largely taken the heat out of this fire.

Statutory Definition of "Casual Employee"

The Bill proposes to introduce a new statutory definition of "casual employee"—a person will be a causal employee if an offer of employment is made and accepted "on the basis that the employer makes no firm advance commitment to continuing and indefinite work according to an agreed pattern of work". This is to be assessed according to a set of legislated criteria, including whether the employee can accept or reject work offered by the employer, whether the employee will only work as required and whether the employee is entitled to casual loadings. In contrast with Skene and Rossato, the fact that an employee works a regular pattern of hours will no longer be determinative.

The Bill also makes clear that the classification of an employee is "to be assessed on the basis of the offer of employment...not on the basis of any subsequent conduct of either party". In other words, the risk arising out of Skene and Rossato that an employee may inadvertently transition from casual to permanent over time has been resolved. Similarly, in response to the threat of double-dipping, the Bill also introduces a statutory set-off mechanism. If an employee is misclassified and found to be owed unpaid leave entitlements, employers can set-off this with previously paid casual loadings.

If passed, these reforms will apply to all casual employees, even those who commenced employment before the amendments take effect. While this retrospective effect will be controversial with employees and unions, the reforms will hopefully provide greater certainty to employers facing the risk of a significant liability in respect of their long-term casual workforce.

Conversion From Casual to Permanent Employment

In exchange for this enhanced certainty, and to prevent employers from subsequently transforming casual workers into de facto permanent employees, the Bill requires employers to offer causal employees an opportunity to convert to part- or full-time if:

• The employee has been employed for a period of 12 months; and
• During at least the last 6 months, the employee has worked a "regular pattern of hours on an ongoing basis which, without significant adjustment, the employee could continue to work as a full-time employee or a part-time employee".

While employees are not required to accept an offer to convert, they retain the right to later request conversion. Employers are obliged to take proactive steps to explain and offer conversion to their long-term casuals and the entitlement to conversion is a "workplace right" protected by the general protection provisions of the FW Act. These proposed reforms will also have retrospective effect, meaning that employees will need to offer all existing casual staff the opportunity to convert provided they qualify (employers will be afforded a six-month transition period to ensure compliance). For some employers, this may constitute a significant proportion of their workforce.

Employers are not obliged to make an offer, or accept a conversion request, if there are "reasonable grounds" based on facts known or reasonably foreseeable. This includes where the employee's position is likely to cease in the next 12 months or a permanent position would require significant changes to employee's hours/days of work unacceptable to the employee. Although the need for reasonable grounds in order to refuse conversion is not new (it has existed in Modern Awards for some time), there is relatively little practical experience in how this concept will operate.

Overall, while these reforms seek broadly to address concerns about the growing "casualisation" of Australia's workforce, it is questionable how effective they will be. Converting from casual employment will give employees the benefit of leave and other entitlements, as well as access to the unfair dismissal regime, but will likely also involve a meaningful upfront pay cut due to the loss of casual loadings.

Limited Changes to Part-Time Employees

The Bill also proposes the creation of "Simplified Additional Hours Agreements", which will allow certain part-time employees to agree to work additional hours at ordinary rates of pay. This is intended to alleviate situations where previously it may have only been possible to offer part-time employees additional work at overtime rates—an obvious disincentive for employers.

While many Modern Awards already allow for part-time employees to agree to additional hours, including at ordinary rates of pay, these provisions are often difficult to implement. Seeking to overcome this, the Bill proposes a new mechanism that facilitates voluntary agreements between employers and part-time employees (who work a minimum of 16 hours per week) to work additional shifts at ordinary rates of pay (up to 38 hours per week).

Interestingly, the proposed reforms will only apply to the following Modern Awards, largely limited to the retail and hospitality sectors: the Business Equipment Award 2020; the Commercial Sales Award 2020; the Fast Food Industry Award 2010; the General Retail Industry Award 2020; the Hospitality Industry (General) Award 2020; the Meat Industry Award 2020; the Nursery Award 2020; the Pharmacy Industry Award 2020; the Restaurant Industry Award 2020; the Registered and Licensed Clubs Award 2010; the Seafood Processing Award 2020; and the Vehicle Repair, Services, and Retail Award 2020.

Although these Awards were selected because they cover those industries most severely impacted by the COVID-19 pandemic, the reforms are not time-limited and possibly open the door for the Government to engage in further industry-by-industry reform. If passed, this will be the first instance of the FW Act dictating award-specific content and suggests a gradual movement away from the evidence-based role of the FWC in overseeing Australia's modern awards regime.

Limited Extension to JobKeeper Flexible Work Directions

As part of the JobKeeper Scheme introduced in April 2020, the Government made temporary amendments to the FW Act to give employers additional workplace flexibility (we have discussed these in our previous Jones Day Commentaries, here and here). Although these amendments are set to expire in March 2021, the Bill proposes to reintroduce a modified scheme to provide employers ongoing flexibility as the economic recovery continues.

For a two-year period, employers can issue any employee covered by one of the 12 Modern Awards listed above with "Flexible Work Directions" requiring them to:

• Perform different duties to their usual duties, provided they are within the employee's skills and competency; and/or
• Work at a place that is different from the employee's normal place of work.

Provided it is safe (having regard to the spread of COVID-19), reasonably within the scope of the employer's business operations, and necessary as part of a "reasonable strategy to assist in the revival of the employers' enterprise", employees will not be permitted refuse a Flexible Work Direction.

Reforms to Enterprise Agreement negotiations

In response to suggestions that Australia's enterprise bargaining framework is no longer effective, the Bill also proposes a series of substantive and procedural reforms designed to streamline the process. The most significant changes include the following.

• Reforming the "Better Off Overall Test" (BOOT): Currently, the FWC can assess whether a proposed enterprise agreement ("EA") will leave employees better off by reference to any theoretically possible combination of rosters and work activities. Responding to criticisms that this time-consuming process ignores commercial reality, the Bill recalibrates the BOOT so that the FWC may only have regard to patterns of hours and work actually engaged in by the business, or that are reasonably foreseeable. Additionally, the Bill will require the FWC to give "significant weight" to the views of employers, employees and stakeholders about whether the BOOT is satisfied, as well as to any non-monetary benefits an EA may provide.
• Relaxing procedural restrictions to prevent otherwise acceptable EAs being rejected: The Bill will replace the employer obligation to take "all reasonable steps" to ensure employees are sufficiently informed about a proposed EA with a relaxed requirement to "take reasonable steps to give employees a fair and reasonable opportunity to decide whether to approve the agreement".
• Temporary exclusion of the BOOT: By far the most controversial aspect of the Bill (with the Government already offering to compromise) is the proposal to expand an existing, but rarely used, provision that permits the FWC to approve EAs that fail to satisfy the BOOT. If passed, for a two-year period, the FWC will be permitted to approve EAs that provide for conditions below Modern Award levels, provided the FWC is satisfied it is appropriate in light of the impact of COVID-19 on the business and would not be contrary to the public interest.

Increased Penalties and Criminalisation of Wage Theft

Following previous reforms to the FW Act in response to the recent rise in underpayment allegations, the Bill also seeks to clarify and expand the pecuniary penalties that apply to claims for "remuneration-related contraventions" (including underpayment claims and sham contracting).

To overcome concerns that the current Court-based process hinders employees from making claims for underpayment, the Bill also expands the existing "Small Claims Procedure". Claims valued under $50,000 (increased from $20,000) that do not seek a pecuniary penalty order can be heard using this streamlined and low-cost procedure. If appropriate, the Court can also refer claims to the FWC for conciliation and, with the parties' consent, arbitration.

However, the most interesting reform in this area is the creation of a new criminal offence for employers who "dishonestly engage in a systematic pattern of underpaying one or more employees". The maximum penalty for employers found guilty of this offence is:

• For individuals, four years imprisonment, a fine of AUD$1.1 million or both; and
• For body corporates, a fine of AUD$5.5 million.

Although this new offence has already been criticised as imposing too high a bar for criminal liability, it provides a clear illustration of the growing attention being given to underpayment and wage theft. With the other amendments to the FW Act hopefully making voluntary compliance and rectification easier, it is hoped that these cumulative reforms will provide greater clarity and protection to employees and employers alike.

Four Key Takeaways

1. By introducing a statutory definition of "casual employee" that is assessed at the time of engagement and by requiring Courts to set-off casual loading amounts against claims for permanent entitlements in the event an employee has been misclassified, the Bill helps clarify the uncertainty that had arisen in this area of Australian IR law following the Skene and Rossato decisions.
2. Although limited to the hospitality and retail industries, the enhanced options for part-time employees to work additional hours at ordinary rates of pay may provide an additional incentive for employers to offer conversion to permanent employment in these traditionally casual-dominated sectors.
3. Underpayment claims remain a key area of potential liability for all employers. The enhanced penalties and introduction of a criminal offence for wage theft demonstrate the attention being given to remuneration related claims, such as underpayments and sham contracting. Ensuring close and careful compliance with awards, EAs and other industrial instruments are crucial.
4. While the Bill takes meaningful steps in these areas, other opportunities for crucial reform, such as the classification and rights of independent contractor arrangements and the inherent complexity of the Modern Award system, remain largely unaddressed and unclear.