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05 May 2009

The impact of the new Fair Work transfer of business rules on Commonwealth outsourcing

by Christa Lenard

The commencement of the Fair Work Act 2008 (FW Act) on 1 July 2009 will herald the end of the Work Choices era.

Arguably one of the most significant changes in the FW Act relates to the transfer of business rules which replace in their entirety the Workplace Relations Act's transmission of business rules and create an entirely new test for determining whether there has been a transfer of employment (and therefore a transferable instrument) from an old employer to a new employer.

These changes could have a real impact on Commonwealth outsourcing arrangements.

The creation of a new test

As of 1 July 2009, the existing business characterisation test in the Workplace Relations Act will no longer apply. Instead there will be a transfer if the work the employee performs for the new employer is the same or substantially the same and there is a connection between the old employer and the new employer. This new focus on a transfer of work rather than a transfer of business is radically different to the exist law.

The FW Act therefore creates a much broader test which captures not only a traditional asset acquisition arrangement, but extends to certain outsourcing and insourcing arrangements. This has potentially massive implications for business, and in particular could radically impact on Government outsourcing arrangements.

While the term outsourcing is not defined in the FW Act, it is evident from the legislation that the phrase is to be broadly interpreted to cover any situation where an employer (the old employer) decides that it no longer wishes to perform work of a particular type and so engages a third party to perform that work instead, who in turn engages employees of the old employer to continue performing that work.

This provision applies irrespective of whether there is a transfer of assets between the old employer and the new employer. The rules also capture insourcing arrangements where and employer decides to in-source the work previously done by the transferring employee of the old employer.

Impact on the Commonwealth

It is common practice for Government to outsource particular work or projects and this trend is becoming increasingly so for departments and agencies in an effort to cut costs and streamline operations.

Ordinarily, outsourcing will involve a tender process whereby interested parties tender for a contract to perform the work. Ultimately, the successful tender will engage its own employees to perform the work, with reference to the broad terms and conditions relating to those employees included in the performance contract between the Commonwealth and the successful tenderer.

It is not uncommon however for there to be a change in the scope of work which results in either the Commonwealth re-tendering and appointing a new contractor to perform the work of the original contractor or the existing tenderer being no longer able to perform the work. In this situation, it may be that the contractor engages a third party to perform the work and that third party in turn engages employees of the contractor to continue performing that work.

Here it is also not uncommon for the Commonwealth to impose transitional conditions which involve agreement between the outgoing and incoming contractor to enable a smooth transition of existing staff from one contractor to the other. This is often a point of great interest for the Commonwealth, concerned with minimising disruption to existing services during the transfer period and beyond.

Any agreement to transfer employees from an outgoing contractor to an incoming contractor will be caught by the new transfer of business rules. While this would have a direct impact on the contracting parties in terms of any transferring instruments, it could also have important contractual and financial implications for the Commonwealth, whose services the contractors are performing and whose interest in ensuring that employee entitlements can be transferred with minimum disruption to services and minimal financial impact on the Commonwealth needs to be protected.

This is particularly important in situations where there is a question as to the ability of a new contractor to meet particular transfer of business obligations or where an incoming contractor would ordinarily otherwise have not anticipated having to employ transferring staff, but for the Commonwealth's insistence to do so.

Key considerations

The issue for the Commonwealth therefore will be to ensure that contractual arrangements between the Commonwealth and successful tenderers clearly anticipate and make provision for, the potential impact that transferring employees in outsourcing or insourcing situation may have, particularly where the preference is on maintaining continuity of existing services during the life of a particular project.

While any legal responsibility in a transfer of business situation rests with the incoming and outgoing employers, it remains important that any related contractual documentation that the Commonwealth is party to is drafted in a such a way as to minimise the potential for the Commonwealth to ultimately have to foot the employment bill' where transferring arrangements are not properly anticipated or are unable to be honoured or agreed to by an potential incoming contractor.

Finally, it remains sensible business practice for all parties to be aware of changes to the legislation and to ensure that proper due diligence is carried out prior to finalising any agreement to transfer employees.

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Clayton Utz communications are intended to provide commentary and general information. They 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 communication. Persons listed may not be admitted in all States and Territories.