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Enterprise Agreements: How do they operate and how can they be terminated?

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29 Sep 2017

For larger organisations, or employers who engage a multifaceted workforce, an enterprise agreement (“EA”) can be a very sensible and practical instrument to simplify the terms and conditions of employment for its workforce. It is not uncommon for employers to have a number of Modern Awards applying to their employees and thus creating complexity and administrative difficulties. In addition, as modern awards are not focussed on individual businesses but apply across industry, many of the terms are often difficult and costly to implement and on the whole can be a challenge for a business to ensure compliance.

The Fair Work Act 2009 (Cth) (“FW Act”) provides a mechanism whereby employers can negotiate directly with their employees to create an agreement specifically suited to their workforce and which sets out the terms and conditions governing the employment relationship between the employer, its employees or a group of its employees. These agreements are known as Enterprise Agreements. The real advantage of enterprise agreements are as follows:

  • They allow the employer and employees to directly negotiate the terms and conditions of employment applicable to that business;
  • They allow the employer to adopt a flexible approach to matters which are otherwise prescriptive in a modern award;
  • Enterprise agreements replace in their entirety any modern award that would otherwise apply;
  • During the nominal expiry period, no party to the agreement including any union organisation representing employees can take industrial action.


But first, what is an EA? The FW Act broadly defines an EA as an instrument between one or more national system employers and their employees and in some circumstances, a trade union or employee association, as specified in the agreement. These agreements are negotiated through collective bargaining, and there is a requirement for this to occur in good faith.

There are three types of EAs that can be made:

  1. Single-enterprise agreements: means an agreement made between a single employer (or two or more single interest employers) and employees employed at the time the agreement is made, who will be covered by the EA. Single interest employers are those with a common enterprise or are related entities, such as a joint venture or franchise network; and
  2. Multi-enterprise agreements: means an agreement between two or more employers (that are not single interest employers) and their employees employed at the time the EA is made, and who will be covered by the agreement; and
  3. Greenfield agreements: means an agreement that is made in relation to a new business enterprise before any employees are employed.

For all three EA categories available, the FW Act requires the agreement to deal with certain “permitted matters” which includes, but are not limited to, the following:

  1. Terms and conditions about the employment relationship;
  2. Terms about the relationship between the employer and any employer organisation representing the interests of employees (such as a trade union);
  3. How the agreement will operate, and for what period of time; and
  4. Such other matters as the parties may agree that are permissible and do not offend the requirements of the FW Act because they are, for example, objectionable, discriminatory or inconsistent with the industrial action provisions. 

In addition to containing lawful matters, the FW Act mandates that an EA must also contain the following terms:

  1. A nominal expiry date which cannot exceed the period of 4 years from the date the EA is approved by the Fair Work Commission;
  2. A dispute resolution clause which authorises the Fair Work Commission or another independent body to settle disputes about matters which relate to any aspect of the agreement;
  3. A flexibility clause that allows the making of flexible working arrangements to meet the operational needs of the employer and the individual needs of an employee; and
  4. A consultation term which requires the employer to undertake consultation with employees in relation to major workplace change that is likely to have a significant impact on an employee (or group of employees).

Relevantly, once the parties have agreed upon the content of the EA, and the EA has been approved by employees by a successful vote in accordance with the specific requirements of the FW Act, the employer will need to apply to the Fair Work Commission to approve the agreement. In order to gain the approval of the Fair Work Commission, the agreement must be genuinely made (or agreed) between the employer and the employees covered by the EA; the agreement must pass the “better of overall test” which means, as against any applicable modern award, the employees are considered better off under the EA; the agreement must not contain any prohibited terms; the employees who voted on the agreement must have been fairly chosen; the agreement must contain the compulsory clauses mentioned above; and the agreement must have a nominal expiry date. Assuming the employer can demonstrate to the Fair Work Commission compliance with these requirements, the EA will be approved.

Significantly, whilst much effort and time goes into the bargaining and approval process for an EA, employers often do not consider the lasting application of an EA and what happens after its nominal expiry date. It is in these circumstances that many employers often encounter difficulties and, in some cases, inadvertently breach modern award requirements or other workplace laws. All EA’s continue to operate after the expiry of the nominal expiry date. For example, an EA that is made prior to the commencement of the FW Act on 1 January 2010, will continue to operate notwithstanding that its nominal expiry date may have been in 2008. As such, if an employer continues to apply rates of pay from 2008 in respect to its employees, there is a real risk and likelihood that the rates of pay will be less than the national minimum wages set by the terms of an applicable modern award. In these circumstances, the employer will have an exposure to a backpayment liability to various employees across the enterprise and, in the event of a workplace audit by the Fair Work Ombudsman, the employer could face prosecution and penalties for breaching minimum pay rates.

Accordingly, a fundamental step in the lifecycle of an EA is for the employer to determine how it is going to deal with the EA once it has reached its nominal expiry date. Given the inherent risks associated with the continued application of the agreement, employers must be careful to avoid situations where employees are being disadvantaged as compared with the minimum modern award requirements or the terms of the agreement become unattractive for the employer due to emerging economic conditions.

To this end, most EA’s will specify that the parties to the agreement must engage in discussions to renegotiate the EA within a certain timeframe either before or after the nominal expiry date with a view to replacing the agreement. However, if this does not occur or agreement is not reached, the EA can only essentially be terminated in one of two ways – by the parties’ agreement, or by application to the Fair Work Commission. Termination by agreement can only occur where the parties genuinely agree. In practice, this is unlikely to happen naturally where one party wishes to retain certain rights they do not wish to surrender, or give up certain benefits they find attractive. In any event, where agreement is reached, employees will need to vote to set aside the EA and apply to the Fair Work Commission to have the agreement terminated within 14 days from the date of the successful vote.

Alternatively, an EA may be terminated, after its nominal expiry date, in accordance with the FW Act, if the Fair Work Commission is satisfied:

  1. It is not contrary to public policy to do so; and
  2. It is appropriate to terminate the agreement.

An application to the Fair Work Commission to terminate the agreement, other than by agreement, must also be accompanied by certain employer declarations. In a decision of the Full Bench of the Fair Work Commission in Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union" known as the Australian Manufacturing Workers' Union (AMWU) v Griffin Coal Mining Company Pty Ltd [2016] FWCFB 4620, it was found to be appropriate to terminate the Griffin Coal Mining Company (“Griffin Coal”) EA on the basis of the company's financial position, including trading losses of almost $300 million since 2011. In considering Griffin Coal’s application for termination, the Fair Work Commission applied the public interest and the appropriateness tests. In this regard, due to the economic environment and the need for business flexibility, the Full Bench concluded that it was in the community interest to terminate the agreement and it was appropriate to do so in the circumstances. In reaching this conclusion, the Full Bench of the Fair Work Commission upheld the initial decision of the primary Judge, finding that all relevant factors had been considered in a fair and equitable manner.

Of significant interest is recent decision by the Fair Work Commission terminating the enterprise agreement at Murdoch University. In August this year, the Fair Work Commission decided to terminate the Murdoch University existing enterprise agreement, despite vehement opposition by the NTEU which had been embroiled in bargaining negotiations with the university for over a year. The university and NTEU were negotiating over terms in the existing agreement which the University did not want to be contained in any new agreement, but given they were in the existing agreement meant they continued to apply and thus gave the NTEU the upper hand in bargaining. Commissioner Bruce Williams decided that as such, it was in the public interest to terminate the existing agreement to effectively level the bargaining playing field. This is a significant decision as the Commission in effect entered into the bargaining playground and to some extent took a side. This is something a number of employers will now be looking closely at, as it means the use of the termination power in circumstances of bargaining a new agreement becomes relevant and may be a useful bargaining weapon.

Whilst in profitable times an EA may be an attractive way for employers to incentivise employees and take themselves outside the modern award regime, it is important that employers have regard to the ongoing operation of an EA and the fact they will have to live with its terms until the agreement is either replaced or terminated. As such careful consideration must be given to the terms of the agreement and their longevity.

If you are considering making an EA, or have an historical agreement creating havoc in your organisation, or wish to discuss any aspect of this article, please do not hesitate to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.