13 Sep 2012

Opt-out clauses shown the door by Fair Work Australia

by Dr Graham Smith, Leigh Howard

FWA's rejection of opt-out clauses significantly restricts the flexibility that they could have offered for parties to an enterprise agreement.

The five-member Full Bench of Fair Work Australia has overturned the approval of an enterprise agreement with an opt-out clause, spelling an end to the question of whether they are permitted under the Fair Work Act 2009 (Cth) – leaving employers whose employees have opted out with a practical problem (CFMEU v Queensland Bulk Handling [2012] FWAFB 7551).

What is an opt-out clause?

An opt-out clause allows an employee to choose not to be covered by an enterprise agreement and have their terms and conditions regulated by individual contracts. Opt-out clauses have caused considerable controversy because they are said to undermine the notion of collective bargaining itself.

What does the Fair Work Act say? The Fairly Chosen Test

In order for an enterprise agreement to be approved, Fair Work Australia must be satisfied that the group of employees to be covered by the agreement is fairly chosen (the Fairly Chosen Test). If an enterprise agreement does not cover all employees of the employer, FWA must “take into account” whether the chosen group of employees are geographically, operationally or organisationally distinct when applying the Fairly Chosen Test. Because an agreement with an opt-out clause does not cover all employees, the Fairly Chosen Test is engaged.

There had been conflicting Fair Work Australia decisions as to whether an opt-out arrangement can satisfy the Fairly Chosen Test. At issue was what was really meant by "fairly chosen" and how geographical, operational or organisational factors bear upon that question.

Those decisions that have approved opt-out clauses have done so subject to an undertaking that:

  • the electing employee will receive individual entitlements that are better off overall in comparison to an applicable modern award; and
  • opting out is not a precondition of employment for prospective employees.

Because of the conflicting authorities, Fair Work Australia took the unusual step of convening a five-member bench to definitively decide whether opt-out clauses pass the Fairly Chosen Test. That Bench held that opt‑out clauses could not satisfy the Fairly Chosen Test, and overturned approval of the QBH agreement.

"Fairly chosen" is all encompassing and not confined to geographical, operational or organisational factors

The Full Bench held that the Fairly Chosen Test is a non‑exhaustive one. Fair Work Australia is only expressly obliged to take into account geographical, operational or organisational factors, but can consider others that concern fairness.

Importantly, they reaffirmed that selection criteria which would have the effect of undermining collective bargaining could be unfair. Whether opt‑out clauses have this effect was hotly contested.

Whether or not opt-out clauses undermine collective bargaining, they are inconsistent with the scheme

QBH contended that its opt‑out clause did not subvert the collective nature of an enterprise agreement. An employee’s choice to opt out would be voluntary and free in the knowledge that they are departing from collective terms and conditions. In addition, the very fact that an opt‑out clause has been negotiated into an enterprise agreement is a collective bargain in itself.

The Bench did not cavil with these observations. However, their primary concern was the legal meaning of "fairly chosen". Their analysis of legislative context underpinning the Fair Work Act revealed that an agreement providing for opting out could not be "fairly chosen", because:

  • opting out reduces bargaining certainty. The Fair Work Act sets up a scheme whereby agreements can be varied or terminated in limited circumstances. Employees are prohibited from taking industrial action during the life of any agreement.Employees who opt out could take industrial action and pursue additional enterprise agreements;
  • opting out could frustrate an enterprise agreement. Employees could opt out from an agreement en masse and renegotiate a new agreement well before their existing agreement ceases operation. This is inconsistent with the requirement that agreements can be only terminated prior to expiry by mutual consent of the employees and employer; and
  • the statutory framework already provides for an ability to bargain with individuals via Individual Flexibility Arrangements (IFAs). IFAs already cover the field for individual‑level bargaining, and opt‑out clauses undercut the legislative protections provided by IFAs.

Where to now? IFAs and the Review Panel’s recommendations

The Bench’s rejection of opt‑out clauses significantly restricts the flexibility that they could have offered for parties to an enterprise agreement. However its finding marries with the Fair Work Act Review Panel’s recommendation that opt‑out clauses be prohibited by the Fair Work Act.

Employers must now turn to IFAs if they wish to tailor terms and conditions on an individual basis. While there are questions over the practicality of IFAs, the Fair Work Act Review Panel has made some welcome suggestions designed to encourage their use, which would:

  • lengthen the period of notice to terminate an IFA to 90 days;
  • mandate the model flexibility term as a minimum (meaning that work time, over time, penalty rates, allowances and leave loadings can be negotiated as a default);
  • allow non‑monetary benefits to be exchanged for monetary benefits;
  • require an employer to notify the Fair Work Ombudsman of the making of an IFA; and
  • create a defence to an alleged IFA contravention if the employer notified the Fair Work Ombudsman and reasonably believed that statutory requirements are being met.

The Federal Government is presently considering the Review Panel’s proposals. It remains to be seen whether they will be adopted.

What about partial opt-out clauses?

Finally, the impact of the Full Bench decision and/or the legislated outcomes of the Review Panel's proposal on "partial opt out" clauses (ie. where an employee can elect to opt out of only some of the clauses in the enterprise agreement), remains to be seen.

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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.