Over the past decade, Australian employers have had to navigate substantial changes to the Australian industrial relations legislative framework, particularly with the introduction and subsequent repeal of the WorkChoices laws and the introduction of the Fair Work Act 2009(Cth) (FW Act).

While recent years have brought more stability to industrial relations legislation (with only relatively minor changes here and there), the upcoming 2016 Federal election is likely to see industrial relations law reform re-emerge as a hot political issue.

In December 2015, the Treasurer, Scott Morrison, indicated that the Government would consider taking industrial relations changes to this year’s election as part of its efforts to generate economic growth and reduce debt.

Shortly following Mr Morrison’s announcement was the release of the Productivity Commission’s Inquiry Report into the Workplace Relations Framework (PC Report) which made a number of recommendations for reform to the Federal workplace relations system.

It is likely the Government will use the PC Report to inform the Industrial Relations policy it takes to this year’s election.

The PC Report

The PC Report is the result of a request made in December 2014 by the then Treasurer, Joe Hockey, for the Productivity Commission to undertake an inquiry into the performance of the Federal workplace relations framework, including the FW Act, ‘focusing on the key social and economic indicators important to the wellbeing, productivity and competitiveness of Australia and its people’.1

The key message to come out of the PC Report is that while the Productivity Commission considers that ‘some significant problems exist’ and there are ‘an assortment of peculiarities’ within the workplace relations system, the Productivity Commission has concluded that the system is ‘not systematically dysfunctional’ and that repair, not replacement, should be the policy imperative for workplace relations change.2

The above said, the PC Report makes 69 recommendations for reform to the workplace relations framework. Specifically, the Productivity Commission states that reforms to the workplace relations system need to focus on ‘substance over procedure, rebalance some aspects of the system that have favoured some parties over others, and reform [the Fair Work Commission]’.3

Overall, it would be a ‘good news story’ for employers if the Government was to adopt in the Industrial Relations policy the Government takes to this year’s election many of the PC Report’s recommendations.

Below is detail on what we view as the key recommendations from the PC Report that would most significantly impact employers, set out under the following subheadings:

Click here to view the table.

Unfair Dismissal

In the PC Report, the Productivity Commission has found that while fundamental change to the unfair dismissal regime is not required, there is a need for some reform to the system including:

  • to prevent spurious cases from resulting in financial settlement; and
  • to focus on substance rather than process.

The recommendations for reform to the unfair dismissal regime set out in the PC Report include:

  • the introduction of a non-refundable fee for the lodgement of unfair dismissal claims (currently the fee may be refunded if the matter is discontinued prior to a determinative conference or hearing being held before a Fair Work Commission member);
  • the introduction of a subsequent non-refundable fee if a matter is to proceed to arbitration;
  • the Fair Work Commission (FWC) to advise all parties that, based on recent decisions, a majority of arbitrated cases do not result in an award of compensation;
  • the giving of new powers to the FWC to dismiss applications ‘on the papers’ (i.e. before a conference or hearing) in limited circumstances;
  • the introduction of a two-stage test for determining whether a dismissal was unfair so that the FWC would first determine if there was a valid reason for the dismissal and if yes, then determine whether any factors result in the dismissal being harsh, unjust or unreasonable;
  • changes to the penalty regime for unfair dismissal cases so that:
    • employees are only eligible for compensation when they have been dismissed without reasonable evidence of persistent significant underperformance or serious misconduct; and
    • procedural errors by an employer do not result in reinstatement or compensation for the employee but, at the discretion of the FWC, can lead to either counselling and education of the employer or, in repeated or serious cases, the FWC seeking penalties in the Federal Court or the Federal Circuit Court;
  • removal of the focus on reinstatement as being the primary remedy for unfair dismissal; and
  • (conditional on the above recommendations being adopted) removal of the Small Business Fair Dismissal Code.

General Protections

The Productivity Commission’s review of the general protections regime found that while there is strong justification for many of the general protections, the practical effect of the general protections system suggests unnecessary complexity such that some improvements are required. The recommended changes to the general protections regime include:

  • providing a clearer definition of the workplace right of an employee to ‘make a complaint or inquiry’ in relation to their employment so that the complaint or inquiry must bear a ‘direct and tangible relation to a person’s employment’; and
  • introducing a provision in the FW Act to allow for costs to be awarded against an employee who unsuccessfully pursues a general protections dismissal claim following a FWC recommendation that the claim not be pursued.

Enterprise Bargaining

In reviewing the enterprise bargaining system, the Productivity Commission found that while enterprise bargaining has resulted in some enterprises adopting flexible arrangements agreeable to both the employers and employees, several features of the system have made enterprise bargaining unnecessarily rigid and costly.

Consequently, the PC Report sets out a number of recommendations for change to the content of, and process for making and approving, enterprise agreements, including:

  • giving more discretion to the FWC to overlook minor procedural or technical errors when approving an agreement, if it is satisfied that the employees have not been disadvantaged by the error(s), with such errors to include any minor errors or defects relating to the issuing or content of a notice of employee representational rights;
  • narrowing the types of permitted matters to be included in an enterprise agreement, by excluding matters pertaining to the relationship between employers and employee organisations from the list of permitted matters, as well as requiring that enterprise agreements only contain terms about permitted matters;
  • allowing the duration of the nominal expiry date of an enterprise agreement to be a maximum of five years or, in the case of an enterprise agreement for a greenfields project, beyond five years if the longer period is justified;
  • replacing the better off overall test (BOOT) with the no-disadvantage test, which would require the FWC to assess at the time of assessment whether each class of employee, and each prospective class of employee, would not be placed at a net disadvantage overall by the agreement, compared with the relevant modern award(s); and
  • providing that employee bargaining representatives can only be appointed if:
    • they represent a registered employee organisation with at least one member covered by the proposed agreement; or
    • they can demonstrate they were nominated as a representative by the smaller of a prescribed minimum number of employees (say 20 employees) or 5 per cent of the workforce to be covered by the agreement; or
    • the employer agrees to recognise them as a bargaining representative.

Enterprise Contracts

From its inquiry into enterprise bargaining as well as the use of individual employment arrangements, the Productivity Commission found that:

  • some employers who seek to modify award wages and conditions lack options for making agreements as they find the enterprise bargaining process daunting and overwhelming; and
  • although many such employers turn to individual flexibility arrangements (IFAs) or common law contracts, these arrangements do not offer the certainty that comes with an approved statutory arrangement.

In the PC Report, the Productivity Commission suggests a new employment instrument, an enterprise contract, as the solution. The features of an enterprise contract, as proposed by the Productivity Commission, would include:

  • the enterprise contract would vary an award(s) for a class of employees that suited the needs of the enterprise;
  • the enterprise contract could be offered to new employees on a ‘take it or leave it’ basis, and be offered to existing employees not covered by an enterprise agreement with no obligation on existing employees to accept coverage under the enterprise contract;
  • the enterprise contract could not set a standard below the National Employment Standards or minimum wage, and would be assessed against the applicable award(s) using a no-disadvantage test;
  • each employee to be covered by an enterprise contract would be given a personal statement setting out how they are not disadvantaged in comparison to the applicable award;
  • employers could have their proposed enterprise contract pre-approved by the FWC (with this a requirement where the enterprise contract relies on non-cash benefits to pass the no-disadvantage test);
  • employers found to be in breach of the no-disadvantage test would be liable to pay any affected employees the full amount of their lost wages;
  • the enterprise contract would be lodged with the FWC and published on the FWC website so that they could be scrutinised at any time; and
  • the enterprise contract would have a three year nominal expiry date but its application to a particular employee would be terminable by the employee after 12 months, at which time the employee would revert back to the applicable award.

Further to the above, evidence of an employer’s wilful misconduct in using an enterprise contract would attract penalties, and an employer with a history of misuse of enterprise contracts could be prevented from any future use of enterprise contracts. The Fair Work Ombudsman (FWO) would be given responsibility for monitoring and enforcing compliance with enterprise contracts.

Transfer of Business

The Productivity Commission identified that the transfer of business provisions in the FW Act must carefully balance the competing goals of preventing an employer from restructuring their business so as to avoid the application of an industrial instrument while enabling employers to make necessary structural adjustment and promoting employment opportunities.

With this in mind, the Productivity Commission determined that some rebalancing of the transfer of business provisions is necessary, including amending the transfer of business provisions in the FW Act to:

  • allow the FWC more discretion to order that an industrial instrument (eg enterprise agreement) of the old employer does not transfer to the new employer, where the prospect of employees gaining employment with the new employer is improved if the instrument does not transfer;
  • allow the new employer to make an offer of employment to an employee of the old employer conditional on the FWC ordering that the industrial instrument applicable to the employee’s employment with the old employer will not transfer to the new employer;
  • provide that a transferring industrial instrument ceases to operate 12 months after the transfer (except if the transfer is between associated entities) after which the transferring employees would automatically be covered by any other instrument covering the new employer, and allow transferring employees to commence bargaining for a new enterprise agreement nine months after the transfer;
  • provide that employees who transfer to an associated entity at their own initiative will not bring their industrial instrument with them but be subject to the terms and conditions of employment provided by the new employer; and
  • provide that an industrial instrument does not transfer between associated entities in the situation of an employee being redeployed to avoid a redundancy.

Industrial Disputes

From its review of the industrial disputes provisions of the FW Act and industrial activity in general, the Productivity Commission concluded that there is not a case for large-scale reforms with regard to the regulation of industrial disputes. However, the PC Report did set out some recommendations for improvement, including:

  • reducing the complexity of employee ballots to authorise protected industrial action;
  • allowing greater scope for intervention by the FWC in some disputes;
  • deterring industrial activities that may result in the imposition of unfair costs on employers, such as the use of aborted strikes and brief work stoppages;
  • providing more options for employers when responding to employee industrial action; and
  • a three-fold increase to the current maximum penalties for taking unlawful industrial action.

Right of Entry

The Productivity Commission considered the prescriptive right of entry rules set out in the FW Act when undertaking its inquiry. In doing so, it found that such prescriptive regulation is necessary to set out rules for proper conduct by both employers and unions when union officials enter worksites, but noted that the provisions can still at times be used for ‘strategic or disruptive reasons’ by both sides.4

On this basis, the PC Report recommends reform to the provision in the FW Act that requires the FWC to determine when to make an order to deal with a dispute about the frequency of entry by an employee representative. Specifically, the PC Report recommends the repeal of the requirement that the entry would need to amount to an unreasonable diversion of the occupier’s critical resources before an order could be made, but the inclusion of the requirement that in determining whether to make an order the FWC must consider:

  • the cumulative impact on an employer’s operations of entries onto the premises;
  • the likely benefit to employees of further entries onto the premises; and
  • the employee representative’s reasons for the frequency of entries.

Institutions

As part of its review, the Productivity Commission looked at the effectiveness of the institutions that administer the FW Act. From this review, the Productivity Commission determined that while recent and significant change was made to the institutional framework of the workplace relations system, more reform is needed to result in better outcomes.

Included in the recommendations in the PC Report were:

  • the separation of the FWC into two bodies, with the establishment of an independent Workplace Standards Commission (WSC) to be responsible for minimum wages and awards, and the FWC to retain responsibility for all of its other current functions;
  • reform of the processes for appointing FWC members (including through an independent expert appointment panel) to ensure that the appointment process is transparent and that all appointments are based on merit;
  • FWC member appointments to be for a period of ten years, or to the age of 70, whichever comes first; and
  • the FWC and its members to meet performance standards and be the subject of external review.

Policies for weekend penalty rates

The PC Report contains a detailed analysis on penalties for overtime, night work and weekend work.

From this analysis, the Productivity Commission determined that premium rates of pay for long hours or work at night are justified, given that there is strong evidence that such work can have a substantial impact on the health of employees.

However, the Productivity Commission also found that the argument for high penalty rates for Sunday work is diminishing and that Sunday penalty rates are out of line with Saturday rates for reasons including that the asocial impacts of Sunday work is similar to Saturday work, and there is evidence that there is an excess demand for jobs on Sundays.

On this basis, the PC Report recommends that the FWC as part of its current award review process should, amongst other things, set Sunday penalty rates that are not part of overtime or shift work at the higher of 125 per cent and the existing Saturday award rate for permanent employees in the hospitality, entertainment, retail, restaurant and café industries.

Migrant Workers

The Productivity Commission considered the adequateness of the workplace relations system when applied to migrant workers. It determined that migrant workers are more susceptible to substandard working conditions than other workers in Australia and an approach combining more robust enforcement policies with the provision of more information to workers is needed to reduce the potential for exploitation.

Specifically, the PC Report recommends:

  • the main regulators of migrant work, being the FWO and the Department of Immigration and Border Protection, should make relevant information more accessible to migrant workers;
  • the FWO should be provided additional resources to undertake its monitoring and enforcement responsibilities; and
  • penalties under the FW Act for keeping false or misleading documents about migrant work should be increased to reflect those in applicable migration legislation.

Where to from here?

On the release of the PC Report, the Employment Minister, Michaelia Cash, said that the Government would carefully consider the recommendations set out in the PC Report and that if there is a case for ‘sensible and fair’ changes to the workplace relations system, these would form part of the Government’s Industrial Relations policy to be taken to the next election. Ms Cash also stated that she would conduct public consultations on the PC Report in early 2016.5

Many of the recommendations of the Productivity Commission appear to fit within the parameters of being ‘sensible and fair’ and it would be a positive step for employers if the Government adopted many of the recommendations set out in the PC Report and took them to the upcoming election as part of its Industrial Relations policy. In particular, the recommended reforms around transfer of business, enterprise bargaining, right of entry, unfair dismissal and general protections would appear to strike the correct balance between ensuring adequate protections are in place for employees on the one hand, and promoting employment and reducing unnecessary cost and process for business on the other hand.

We will be keeping a watching brief on how the Government responds to the PC Report and its recommendations, and provide regular updates on any relevant developments for employers.

It is important to note that prior to Parliament rising at the end of 2015, the Government introduced into Parliament legislation containing provisions removed from the FW Act amending legislation that came into effect late last year.

The Fair Work Amendment (Remaining 2014 Measures) Bill 2015 (Bill) seeks to clarify obligations to pay annual leave loading on termination of employment, provide that annual leave cannot be taken and does not accrue when an employee is receiving workers’ compensation, introduce new provisions around individual flexibility arrangements, and to tighten right of entry and transfer of business rules.

Of particular note is that some of the Bill’s proposed amendments to the transfer of business and right of entry rules are similar to recommendations made by the Productivity Commission in the PC Report, in particular with regard to an employee who becomes employed by an associated entity of their former employer at the employee’s own initiative as well as the frequency of union visits to an employer’s premises.

While the Government was not able in 2015 to obtain the support of the cross-benches to pass these reforms, the Government has said that it has reintroduced these reforms into the Parliament to allow for the ‘continuation of constructive discussions with crossbench Senators’.6

In addition to the above, the Government has indicated that it will introduce legislation into Parliament in early 2016, following the release of the final report of the Royal Commission into Trade Union Governance and Corruption on 30 December 2015. The Government has said that it will give ‘full and careful consideration’ to the report’s recommendations and will announce a detailed response in early 2016. It has also said that its response will include the re-introduction of legislation to re-establish the Australian Building and Construction Commission as well as legislative reform to improve transparency and accountability in registered organisations.