FAIR OR FOUL - THE “FAIRNESS TEST” EXPLAINED

Industrial Relations seems to have become the key election issue – the past month has seen both the Liberal and the Labor parties jockeying for position as they try to outdo each other in appealing to the voters. Far from justifying the WorkChoices legislation, Minister Hockey has openly admitted there were mistakes in the legislation but that he was not the Minister when the legislation was enacted. To soften the effect of the legislation, Minister Hockey has now put forward a new “Fairness Test” for workplace agreements, stating that it was never the Federal Government’s intention for protected award terms (such as penalty rates) to be removed without proper compensation.

Whatever the motivation for the Fairness Test, the result is that the goal posts have once again been moved and there is now a new hurdle for parties, intent on concluding a workplace agreement, to get over.

Readers will recall that prior to the WorkChoices amendments (which came into operation on 27 March 2006), certified agreements and Australian Workplace Agreements (AWAs) had to meet the no disadvantage test where the proposed agreement was matched up against the applicable award to see whether the employee would be worse off, in a global sense, on the proposed agreement. The no disadvantage test was scrapped under WorkChoices and workplace agreements were only required to comply with the terms of the Australian Standard. As a result, parties were able to modify or entirely remove so-called “protected award terms” which were therefore not really protected at all. Many employers took advantage of this opportunity by offering new employees AWAs which specifically excluded all protected award terms without any compensation for the loss of these terms – this was entirely permissible under WorkChoices.

However, since the unveiling of the Labor party’s plan for IR reform, the Federal Government has decided to make a bold move to pare back aspects of WorkChoices by introducing the “Fairness Test” for workplace agreements. The legislation has not yet been passed by Parliament but is intended to be of retrospective effect to 7 May 2007.

What then is the “Fairness Test” – is it the no disadvantage test under another name?

In this edition of Employment Alert, we review the Fairness Test and its implications.

The Fairness Test

Essentially, the Fairness Test prohibits protected award terms from being traded off without adequate or fair compensation. The Test applies to all:

• AWAs relating to award covered employees earning less than $75,000 per year; and
• Collective agreements in award covered industries;

lodged with the Office of the Employment Advocate (now renamed the Workplace Authority) on or after 7 May 2007. Agreements lodged before 7 May 2007 are not affected by the Fairness Test.

Protected award terms are:

• penalty rates, including for working on public holidays and weekends;
• shift and overtime loadings;
• monetary allowances;
• annual leave loadings;
• public holidays;
• rest breaks; and
• incentive based payments and bonuses.

The Workplace Authority will conduct the Fairness Test by considering the monetary and non-monetary compensation offered relative to what would have been payable under the applicable award. Thus, if a protected award term is removed or modified, the usual expectation would be that a higher rate of pay than the award rate will be paid as compensation. Compensation does not, however, necessarily need to be in strict monetary terms and non-monetary compensation will also suffice. The draft legislation specifically empowers the Workplace Authority, when applying the Test, to have regard to such non-monetary factors such as:

• the industry, location and economic circumstances of the employer;
• the specific employment circumstances of the employee;
• relevant working arrangements and entitlements, including family friendly conditions.

For example, in an AWA an employee could agree to trade-off penalty rates in exchange for having:

• more flexible working hours to better balance work and family life and responsibilities;
• a car parking space at work; or
• child care costs paid by the employer.

What value to attach to these benefits could, in some instances, be difficult to determine.

When applying the Fairness Test to collective agreements, the Workplace Authority must be satisfied, on balance, that the collective agreement provides fair compensation in its overall effect on employees, in lieu of the modification or removal of the employees’ protected award terms.

If the agreement fails the Fairness Test, the parties will have 14 days to make the agreement fair and the Workplace Authority will provide advice on how to do this and the amount of any back pay involved. If the necessary changes are not made to the agreement, it will be void and in which event:

• existing employees will be covered by the workplace arrangements that previously applied to them; and
• new employees will be covered by the workplace arrangements that would have applied to them but for the failed agreement.

The Workplace Authority will also offer a pre-lodgement assessment of proposed agreements to see whether they meet the Fairness Test – this however could take a considerable period of time.

Implications

Concluding workplace agreements is now more complex than before. If an employer wishes to exclude or modify a protected award term, it will need to demonstrate to the Workplace Authority that there has been adequate or fair compensation for the removal/modification of this term. To all intents and purposes, the Fairness Test is a return to the same system that operated before WorkChoices.

It is expected that the proposed legislation will be approved by Parliament shortly. Whether the Fairness Test is an election stunt or a sincere attempt to mitigate some of the harsher effects of WorkChoices, remains to be seen.