16 Apr 2012

"Opt-out" clause is valid in enterprise agreements

by Joe Catanzariti

In Newlands Coal Pty Ltd v CFMEU [2010] FWA FB7401, Newlands lodged an appeal in response to Commissioner Roe's first instance decision to refuse approval of the Newlands Coal Surface Operations Enterprise Agreement 2010 which contained an opt-out clause. However, Commissioner Roe's decision was overruled by the Full Bench of Fair Work Australia (FWA) in November 2010. In that instance, the majority of the Full Bench upheld the validity of the "opt-out" clause.


Newlands attempted to conciliate with the CFMEU for an enterprise agreement to contain a coverage clause permitting its employees to choose whether or not they wish to be covered by the proposed enterprise agreement.

In particular, this agreement contained an "opt-out" clause stating that the Agreement would not apply to "employees who at any time elect in writing not to be covered by the Agreement." Hence, if an employee chose to opt out of the Agreement, the relevant modern award would apply to them instead. A majority of Newland's employees endorsed the proposed Agreement.

Subsequently, Newlands applied to FWA to have this agreement approved. However, the Fair Work Act 2009 provides that if an application for the approval of an enterprise agreement is made, under section 185 FWA must be satisfied of certain matters prior to approving the Agreement.

First Instance Decision- Fair Work Australia

Commissioner Roe held that a clause in an enterprise agreement allowing "new or existing employees to opt-out of coverage of the Agreement cannot be valid" as it would be inconsistent with the objectives of the Act. His reasons for refusing the application included:

  • Section 186(2) of the Act holds that an enterprise agreement cannot be approved unless the agreement has been genuinely agreed to by the employees covered by the agreement. Commissioner Roe held that there is some doubt that there could be a "genuine agreement" by employees to enter into an enterprise agreement for the purposes of the Act if "an undefined group of employees may at some future date be excluded from the agreement by 'opting out'." 
  • Section 186(2) of the Act holds that an enterprise agreement cannot be approved unless the relevant employees will be better of under the agreement than they would under the relevant modern award. This is known as the "better off overall test" (BOOT). Commissioner Roe held that the agreement did not meet the BOOT as there was no guarantee employees who elected not to be covered would be better off than if the relevant modern award applied. 
  • Section 186(3) of the Act holds that an agreement cannot be approved unless FWA is satisfied that the group of employees covered by the Agreement was "fairly chosen". Commissioner Roe held that the process of choosing which employees would be covered by the agreement was unfair, since those employees voting for the Agreement could not have known who might be covered by it in the future. In particular, the ability of existing and potential employees to opt out of an agreement means that the groups to be covered by the agreement are undefined and therefore not fairly chosen.

In reaching his decision, Roe C stated that employees are either covered by the Agreement or not, there is no capacity for conditional coverage for any employee. Consequently, FWA did not approve the Agreement.

Full Bench decision – Federal Court of Australia decision

In its decision, the Full Bench held that there was no evidentiary basis to conclude, as Roe C had found, that the choice of those employees covered undermined collective bargaining and the interests of other employees. The fact that some employees may choose to opt out did not affect the interests of those who did not. In addition, the fact that some individuals who voted for the Agreement may at a later stage elect not to be covered by the Agreement also did not alter the fact that it had been genuinely agreed to.

For a second time, the Full Bench considered the application of the BOOT. The majority held that the terms and conditions of the Agreement are superior to those contained in the relevant modern award. The effect of such a clause is that each employee has a choice to be covered by the award or to be covered by the terms and conditions contained in the Agreement.

Consequently, the Full Bench held that as long as the employee had a genuine choice, he or she would be better off than someone who was merely covered by the modern award. Accordingly, the Full Bench was satisfied that the agreement satisfied the BOOT provided in section 193.

Further, in considering whether or not the group of employees covered by the Agreement were fairly chosen, as required by sections 186(3) and (3A), the Full Bench held that a consideration of the requirement of section 183(3) ought to be focused on the time that the group of employees to be covered by the Agreement were chosen. All employees were notified and given the opportunity to agree or disagree, "the coverage of the clause was quite clear and comprehensible." Giving employees the power to decide whether or not they will be covered by the Agreement is not unreasonable, consequently, the majority held that the group of employees to be covered by the Agreement were in fact fairly chosen.

Accordingly, Senior Deputy President Hamberger and Deputy President McCarthy quashed the decision of Roe C and allowed the appeal subject to the employer providing a satisfactory written undertaking that no prospective employees would not have their employment made conditional on agreeing to opt out of the Agreement. Commissioner Blair dissented and agreed with Roe C's view that the legislation did not provide for an option to opt-out or opt-in to an Agreement.

The CFMEU challenged this decision before the Federal Court. Justice Katzmann upheld the Full Bench decision and concluded that the opt-out clause was in fact consistent with the intended purpose of the relevant provisions of the FWA and could lawfully be included in the Agreement.

The agreement will be effective from 1 February 2012 and expire on 30 January 2014.

Conclusion / implications

The decision is favourable to employers who want to have greater flexibility. However, one must keep in mind that any such term should not be implemented such that employment is conditional on opting out of the agreement.

In summary, the inclusion of an opt-out clause in an enterprise agreement will not essentially invalidate the agreement and such an agreement is capable of approval as an enterprise agreement, subject to satisfying the other approval requirements in the Act. However, when seeking to have an agreement approved, employers should be mindful that an opt-out clause will not be considered a benefit for the purpose of the BOOT (see Construction, Forestry, Mining and Energy Union v Deputy President Hamberger [2011] FCA 719).

This article was written when Joe was a partner at Clayton Utz and does not necessarily reflect his views as Vice-President of the Fair Work Commission.

This article was first published in the Law Society Journal, March 2012

Related Knowledge

Get in Touch

Get in touch information is loading


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.