What is meant by an enterprise agreement?

“We don’t want to pay award rates, can’t we just have an enterprise agreement?”  Well no, it’s not that simple.

What is an enterprise agreement (sometimes called an EBA)?  An enterprise agreement (“EA”) is a legislatively sanctioned agreement between an employer and a group of employees which takes the place of an applicable industrial award during its life.

An EA must be negotiated with and approved by a majority of employees and approved by the Fair Work Commission (“FWC”) which must consider whether employees are better off overall (known as the “BOO test” or “BOOT” for short) under the proposed EA than the applicable industrial award.  Employees cannot be worse off under an EA than under a benchmark award.

An EA has several key features:

1. It must be agreed to by the employer and at least 51% of employees (by ballot);
2. Employees must be “better off overall” under the EA than they would under the applicable award – this usually takes the form of increased financial recompense;
3. Once agreed to by the employer and at least 51% of employees, the EA must then be approved by the Fair Work Commission under the BOOT;
4. Once approved by the Fair Work Commission, the EA then overrules any applicable award (and common law employment contract) and is subject only to the National Employment Standards under the Fair Work Act;
5. Once approved, the EA applies to all current and future employees that fall within its coverage and classifications, regardless of whether certain employees agreed to it or whether new employees agree to it;
6. An EA does not prevent an employer from paying in excess of EA rates but the employer cannot pay under the EA rates at any time;
7. The EA continues in force once it passes its nominal expiry date and can only be discharged by order of Fair Work Australia or upon being replaced by another EA.

B. EA Advantages and Disadvantages for Employers

Generally speaking, an enterprise agreement has the following advantages:

1. An EA can help an employer to overcome some of the paperwork or other requirements of modern awards in exchange for greater financial recompense to employees;
2. It can be a mechanism to help the employer to introduce efficiencies into its operations;
3. It means (usually) that terms and conditions of all existing and new employees are fixed for the period of the EA and any pay increases are fixed.

However, an enterprise agreement also has several potential disadvantages:

1. The employer is generally locked into an EA cycle, so that when the EA ends, there will be an expectation of a further EA (with further financial/non financial increases in remuneration);
2. Even if there is no immediate action by the employees or union to replace the EA on its nominal expiry, the EA continues in force regardless (subject only to the National Employment Standards);
3. It can be difficult to reward individual employees outside of the EA terms and conditions;
4. It is not possible easily to obtain approval for changes to the EA during its term (for instance if changed financial conditions mean it is more difficult for the employer to afford the benefits provided under the EA);
5. It can discourage consideration of further efficiencies outside of the EA re negotiation time frame;
6. Breaches of the EA may amount to civil offences under the Fair Work Act and result in civil penalties and potentially prosecution of the employer.

Of the above, the major disincentive for an employer is disadvantage no 1 – unfortunately, the employer cannot get to the end of the first EA time frame and say, “thanks we enjoyed that experience, but we don’t want to do this anymore”.  It is difficult to obtain orders from the FWC to discharge an expired EA without it being replaced by a further EA.  Further, union demands can become more strident the second time around and once they know they have a foothold.

C. EA Advantages and Disadvantages for Employees

From am employee point of view, EAs also have advantages and disadvantages.  The advantages are that an EA:

1. Provides secure terms and conditions of employment for the foreseeable future;
2. Usually establishes a level playing field where employees know the rates and benefits payable to all employees (although note that the employer can choose to pay particular employees in excess of the EA rate); and
3. Provides them with benefits which are greater than their award benefits.

However:

1. An employee cannot opt out of the EA once it is approved, even if they didn’t vote in favour;
2. New employees are bound by the EA, regardless of whether they like it or not;
3. No further formal enterprise bargaining (or industrial action) can occur for the period of the EA;
4. It discourages any further innovation or flexibility that might occur outside of the EA or after the EA is approved.

D. Do we have to bargain for an EA if we don’t want to?

There is no obligation on an employer to enter into negotiations for an EA with employees or a union if it does not want to.  However, if an employer refuses to bargain formally, then it is up to the employees (usually through their union) whether they back away or seek orders from the FWC for a formal ballot to be conducted of support for the enterprise bargaining process amongst employees.  If a majority of employees vote in favour of enterprise bargaining, then the FWC will issue a majority support determination and the employer is then required to bargain in good faith.  It is also open to the employees to seek orders from the FWC approving the taking of industrial action (eg a strike, or a work to rule campaign).

If you agree to bargain, then the employer must send a notice to each employee giving them the opportunity to bargain individually or through a bargaining representative.  For employees who are union members, their union is their default representative if they do not give a notice themselves.  They may appoint their union as bargaining representative or they may choose to be party to the bargaining themselves or they may appoint another person as their representative.  The employer must bargain in good faith with all bargaining representatives (not just the union) although there is no obligation to reach agreement.  This means responding reasonably to proposals by the bargaining representatives including providing financial information to back any assertions made about financial imperatives of the organisation.

E. How is an EA terminated?

Old EAs can be terminated on application to the FWC by agreement of the employer and the employees or on the application of the employer alone.  It has historically been difficult to get approval from the FWC to terminate an old EA without the agreement of employees.  Under the Fair Work Act, the FWC must consider the public interest in considering whether to terminate an agreement.  The FWC has a broad discretionary power to look at both the objects of the Act and, importantly, the effects that termination will have on employers and employees and their ability to bargain effectively.

F. OK, what is the process for making an EA?

In summary:

1. The process usually starts from the artificial starting point of when an employer initiates bargaining – this is known as the notification time for the agreement which is the nominal date you decide you wish to negotiate for an agreement.
2. The effective first step is to give all employees a notice of employee representational rights which has to be done within 14 days of the notification time.  The 2 dates can be the same.    A prescribed form must be given to all employees and cannot be varied.  It is very important this form is prepared and given properly because agreements have been disallowed on the basis the form was not completed correctly or was accompanied by other documents.  The notification should be given to each employee who will be covered by the agreement who is employed at the notification time – this includes part time and casual employees if covered by the agreement.  (Any new employees who are employed after the date of giving the notice of representational rights do not have to be given a notice of representative rights).  Ideally, the notice should be personally handed to each employee and they should be asked to sign for it.
3. Bargaining then begins and there are various rules about good faith bargaining.  One or more meetings should be held with employees to explain the central points of the proposed agreement and then meetings held with bargaining representatives to negotiate.
4. Once negotiations have finished (and it is not necessary that the parties reach agreement as to the terms of the EA), a vote must be conducted and all the employees who will be covered by the agreement can vote for it.  The voting process cannot start until at least 21 days after the last notice of employee representational rights has been provided.  At least 7 days before the vote is to be held, employees should be given the proposed agreement and other material incorporated into it or referred to in it such as the award.  Employees must also be notified of the time and place of the vote and the voting method to be used.  You must also take all reasonable steps to ensure the terms of the proposed agreement and the effect of those terms are explained to employees in an appropriate manner for each employee depending on their circumstances and needs such as employees from culturally and linguistically diverse backgrounds, young employees and employees who did not have a bargaining representative for the agreement.

   An interesting example of what can be done involves McDonalds.  In the McDonald’s case (2010), McDonald’s held meetings with staff to explain the new agreement, using a variety of meeting venues to encourage attendance, including the hiring of movie theatres. Agreement summaries were prepared by the union in consultation with McDonald’s, which set out the differences between the terms of the agreement and current terms and conditions.  Employees were given hard copies of the summaries or access to electronic versions and copies on notice boards.  Additional meetings were conducted by the union at which explanations were given and questions could be asked. Employees were also able to contact the People Resources Department in each State to seek clarification of any matter.  The FWC ruled that these were reasonable steps to ensure that the explanation was provided in an appropriate manner, taking into account the needs of employees including young people.

   However, it is not enough to simply offer to answer any questions and explain the agreement to employees upon request, particularly if the proposed agreement removes significant entitlements from which the employees would otherwise have benefited.

   A manual voting system is still the safest and most reliable form of voting.  You can do this yourself or you can engage a professional returning officer to organise and conduct the vote.

5. If a valid majority of employees vote in favour of the agreement, then the employer and at least one employee representative must sign and date the enterprise agreement.
6. Within 14 days of the successful vote, application must be made to the FWC for approval of the agreement.  The application must include a signed copy of the agreement and certain declarations.  A hearing will then be convened to determine whether the agreement should be approved by the Commission or not.

G. The Alternative – Common Law Contracts subject to an Industrial Award

In our view, EAs are often not worth the trouble under the current legislative regime.  We think it is generally preferable to have a common law contract regime subject to any overriding industrial award provisions.  This means that:

1. Only the NES and the award provisions apply as statutory obligations, breach of which may be a civil offence under the Fair Work Act;
2. Contractual obligations (which are not merely duplicating NES/award provisions) are generally only enforceable through a common law breach of contract claim;
3. Above award terms and conditions may be negotiated with each employee individually;
4. Contractual terms can be changed by agreement between the employer and employee rather than being subject to a fixed EA term;
5. It deters the entrenchment of collective bargaining in the workplace which, if run by a union, can become more a matter of form than of substance and of threats and posturing rather than genuine negotiation.

However, it is necessary to keep on top of the individual terms and conditions of individual employees rather than simply deferring to the EA and the employer is stuck with the terms of the applicable industrial award which may contain some impractical provisions.

From an employee point of view, a common law contract with an underlying award allows an employee to keep their remuneration and conditions confidential if they wish and to negotiate with an employer according to their own needs and wishes.  It also allows for conditions to be changed by agreement (by variation of contract).  However, on the minus side it is harder to enforce a contractual obligation than an EA obligation.

Of course, sometimes entry into an EA can be a requirement by a head contractor before granting a contract to perform work, particularly on large building sites.  This sort of requirement is controversial as are “site agreements” which are agreed with a union but which are not approved by the FWC.

A final point on contracts is that it may be desirable for some matters to be addressed in employer policy rather than in a formal contract.  Policies can be changed unilaterally by an employer on giving reasonable notice to employees whereas contracts can only be varied by agreement (express or implied).

H. So which one is the best?

At AWL, we think most small-medium employers would be better off having a flexible common law contract regime subject to any overriding industrial award conditions but this does depend on the situation of the particular employer.  The starting place is really to sit down with the applicable industrial award and ask whether an EA is really necessary or whether the same outcome can be achieved by other means, such as using a common law contract “set off” clause with an annualised salary arrangement.  Lastly, employers adopt “template” EAs or EAs drafted by unions (sometimes called pattern bargaining) at their own peril.  It pays to spend some time establishing an EA that suits the particular needs of your business.