Penalty rates for irregular hours of work have become a hotly-contested issue in recent years. As the Australian economy continues to evolve into a ‘24/7’ service model, it has been argued that the system of penalty rates no longer reflects the reality of working arrangements in many industries.

In this article, we examine the recent Fair Work Commission (FWC) Full Bench decision to reduce penalty rates for work on Sundays and public holidays in six modern awards. We also consider the FWC’s rationale as to the necessity of these penalty rate reductions, and explore the decision’s broader implications – including its practical impact for employers.

The Full Bench’s Decision

On 23 February 2017, the Full Bench of the FWC decided[1] to reduce Sunday and public holiday penalty rates in a number of awards relevant to the hospitality and retail sectors.

The decision formed part of the 4-yearly review of modern awards under the Fair Work Act 2009 (Cth) (FW Act).

In reaching this decision, the FWC determined that the penalty rate provisions of the affected awards did not achieve the modern awards objective to provide ‘a fair and relevant minimum safety net’ of wages and conditions (as set out in s 134(1) of the FW Act).

The six modern awards affected by the decision are the:

  • Fast Food Industry Award 2010 (the Fast Food Award);

  • General Retail Industry Award 2010 (the Retail Award);

  • Hospitality Industry (General) Award 2010 (the Hospitality Award);

  • Pharmacy Industry Award 2010 (the Pharmacy Award);

  • Registered and Licensed Clubs Award 2010 (the Clubs Award); and

  • Restaurant Industry Award 2010 (the Restaurants Award).

What are the new penalty rates?

The new Sunday and public holiday penalty rates for the affected awards (as adjusted by the FWC’s decision) are set out in the tables below.

Click here to view tables. 

The FWC also decided to alter the hours during which late night penalties apply in the Fast Food and Restaurants Awards. The 15% late night loading in both awards will only apply between midnight and 6.00 am (instead of until 7.00 am), and the 10% loading for evening work in the Fast Food Award will only apply from 10.00 pm to midnight (instead of from 9.00 pm).

The Full Bench decided that there was insufficient evidence to support a change to Sunday or public holiday penalty rates for the Clubs Award, or Sunday penalty rates for the Restaurant Award. The FWC has offered a further opportunity to interested parties to establish a merit case that these awards do not presently provide a fair and relevant minimum safety net.

When will the rate changes come into effect?

The Full Bench did not set an implementation date for the new Sunday penalty rates and is yet to determine the transitional arrangements that will apply to these changes.

The FWC expressed a provisional view in favour of a ‘phase-in’ scheme, with the reductions to Sunday penalty rates gradually introduced through a series of annual adjustments on 1 July each year. A hearing will be scheduled in early May 2017 to decide on this issue. Interested parties have until 24 March to file submissions.

The changes to public holiday penalty rates will take effect from 1 July 2017. The variations to the late night penalty loading periods in the Fast Food and Restaurants Awards will commence on 27 March 2017.

The Full Bench’s reasoning

In reaching its decision, the FWC observed that penalty rates traditionally served a ‘compensatory’ purpose (additional payment for working outside regular hours) and a ‘deterrence’ purpose (preventing employers from scheduling work outside normal hours). However, the deterrence element is no longer relevant to the setting of weekend and public holiday penalty rates.

The Full Bench was required to consider s 134(1)(da) of the FW Act, a provision inserted into the modern awards objective by the former Labor Government. The FWC stated that when assessing the ‘need to provide additional remuneration’ for employees working on weekends or public holidays, the following three factors should be taken into account:

  • the impact or disutility of working at such times or on such days for the employees concerned;

  • the terms of the relevant award, in particular, whether it already compensates employees for working at such times or on such days (e.g. through ‘loaded’ minimum rates or industry allowances); and

  • the extent to which working at such times or on such days is a feature of the industry regulated by the particular award.

In relation to Sunday penalty rates, the FWC drew two conclusions from the extensive evidence presented in the proceedings:

  1. ‘There is a disutility associated with weekend work, above that applicable to work performed from Monday to Friday. Generally speaking, for many workers Sunday work has a higher level of disutility than Saturday work, though the extent of the disutility is much less than in times past.’

  2. As the Productivity Commission (PC) had found in its Workplace Relations Review Final Report (2015):[2] ‘there are likely to be some positive employment effects from a reduction in penalty rates, though it is difficult to quantify the precise effect. Any potential positive employment effects from a reduction … are likely to be reduced due to substitution and other effects.’

On the second point, the Full Bench accepted that a reduction in penalty rates would be likely to lead to:

  • increased trading hours on Sundays and public holidays;

  • a reduction in the hours worked by some owner operations;

  • an increase in the level and range of services offered on Sundays and public holidays; and

  • an increase in overall hours worked.

However, the FWC cautioned that these changes would not apply uniformly across all businesses and that the actual impacts on employers would depend on the particular circumstances affecting their business.

The Full Bench also drew attention to the ‘distinguishing characteristics’ of the hospitality and retail sectors. In particular, it noted that the proportion of employees in these industries who worked on weekends was generally much higher than in other sectors.

In relation to public holiday penalty rates, the FWC found that the disutility of working on public holidays was greater than that of working on Sundays (‘relative disutility’). However, the extent of that disutility had been alleviated in recent times with the introduction of the statutory right for employees to refuse to work on public holidays on reasonable grounds.

Furthermore, the Full Bench found that lower public holiday penalty rates would be likely to lead to some additional employment, as well as an increase in the level and range of services offered by some hospitality and retail enterprises. However, it qualified this conclusion by noting that, as a group, it was improbable that existing workers’ hours would rise sufficiently to offset the income effects of the penalty rate reduction.

The FWC acknowledged that employees in the hospitality and retail sectors were relatively low paid, and that a reduction in Sunday and public holiday penalty rates would have a negative impact on employees’ living standards and their capacity to meet their needs.

While this weighed against reducing penalty rates, the Full Bench emphasised that the primary purpose of penalty rates is to compensate employees for the disutility associated with working on Sundays or public holidays, rather than to address the needs of the low paid. Nevertheless, it was noted that the impacts of the changes on employees would be taken into account when determining the transitional arrangements for the new penalty rates.

The broader implications of the Full Bench’s decision

In many respects, reductions in penalty rates in the hospitality and retail industries became almost inevitable once the PC recommended reducing Sunday rates to Saturday levels for permanent employees in its 2015 report.

The PC reached the conclusion that, in these industries, ‘social trends and community norms have shifted so that the historically distinctive role of Sundays as a time when people did not shop or engage in other consumer-oriented activities has changed’.

Similar conclusions were reached by the Full Bench, based on its consideration of extensive economic and expert evidence (in addition to the PC’s findings).[3] As noted above, the FWC also adopted the PC’s view about the potential employment benefits arising from penalty rate reductions.

Nevertheless, those views are by no means universally accepted, and the FWC’s decision has been met with considerable hostility from unions and the Labor Opposition. Labor quickly sought, unsuccessfully, to introduce legislation into federal Parliament overriding the decision.[4] The union movement is considering various responses to the decision, including mobilising consumer support to persuade retail and hospitality businesses not to implement the penalty rate reductions, and political protest action.

Prime Minister Turnbull has indicated that the Government would support a phasing-in of the changes to penalty rates over a period of years to alleviate the effects of the reductions on take-home pay.

It is clear that the issue of penalty rates will now form a major focus of the political debate over workplace relations in the lead-up to the next federal election.

Further, the FWC has foreshadowed the potential review of penalty rates in other modern awards relevant to the hospitality and retail industries, in particular the Amusement, Events and Recreation Award 2010 and the Hair and Beauty Industry Award 2010.

4 steps employers should take now

Employers with operations in the sectors covered by the six retail and hospitality awards will need to consider the practical implications of the Full Bench’s penalty rates decision and take the following four steps:

  1. Closely monitor further developments, especially the transitional arrangements for implementation of the penalty rate reductions.

  2. If you do not have an enterprise agreement which varies the applicable award penalty rates, keep in mind that you may be able to implement Sunday penalty rate reductions in accordance with the FWC’s proposed phase-in timetable (yet to be finalised), and public holiday reductions from 1 July 2017. However, remember to check the wording of the employment contracts of relevant employees, as this may preclude any unilateral variation of existing conditions.

  3. When negotiating a new enterprise agreement for your business (or a renewal of an existing agreement) keep in mind that the reduced penalty rate levels (once operational) will form part of the basis for comparison with the applicable award when the FWC applies the ‘better off overall test’ in considering whether to approve the agreement.

  4. Consider that there may be opportunities to reduce operating costs to allow businesses to open or open for longer hours during periods of high demand on Sundays and public holidays, not only for SMEs but also for larger employers operating (for example) hotels, resorts and casinos on a 24/7 basis.