It is clear that the Full Bench of the Fair Work Commission's ruling in favour of reducing Sunday and public holiday penalty rates in the retail sector was welcomed by employers in the retail industry.

However, there is now lingering uncertainty about what this means for retailers in practice — with the timing of the changes to Sunday penalty rates yet to be finally determined, the effect it will have on enterprise bargaining unclear, and increased activity from trade unions.

In this eBulletin, we take an in-depth look at the Commission's decision, analyse the reaction of key stakeholders, set out the effect the decision may have on enterprise bargaining and consider what the future could look like for penalty rates in the retail industry.

Why were the penalty rates reviewed?

Under the Fair Work Act 2009 (Cth) (FW Act), the Commission is responsible for ensuring that modern Awards provide a fair and relevant minimum safety net of terms and conditions and, to serve this purpose, conducts a four-yearly review of modern awards.

Historically, the rationale for penalty rates has been expressed as the need to compensate employees for working outside "normal hours" and to deter employers from scheduling employees to work outside normal hours.

In arguing that the Award did not provide a relevant minimum safety net of terms and conditions, employer organisations pointed to changed community expectations regarding Sunday work. They contended that Sunday work was no longer considered to be outside of "normal hours", particularly in light of the prevalence of Sunday trading. Employer organisations also argued that reducing Sunday penalty rates would benefit the economy and employees by enabling employers to employ more staff overall.

In order to establish that the Award no longer provided a relevant minimum safety net of terms and conditions, the employer organisations needed to establish that there had been a material change in circumstances since the Award was made in 2010.

What did the Commission decide?

The Commission ruled in favour of reducing Sunday and public holiday penalty rates in the retail sector.

  • Sunday penalty rates for full-time and part-time employees under the General Retail Industry Award 2010 will reduce from 200% to 150%. For casuals, Sunday penalty rates will reduce from 200% to 175%, which appears to be inclusive of the casual loading.
  • Public holiday rates for full-time and part-time employees under the Award will reduce from 250% to 225%, whilst casuals will continue to receive a penalty rate of 250%.
  • Saturday penalty rates will not be amended as the Commission was satisfied that the rate achieved the Award's objective.

Ultimately, in ruling to reduce Sunday and public holiday penalty rates, the Commission held that the Sunday and public holiday penalty rates under the Award did not provide a fair and relevant minimum safety net, noting that the impact of Sunday work on affected employees in the retail sector was much less than in times past. It did, however, consider that the impact of Sunday work on employees in the retail sector was still greater than the effect of Saturday work. For this reason, it did not reduce Sunday penalty rates to as low as the Saturday penalty rates.

The Commission noted that the high Sunday and public holiday penalty rates had led many business owners and operators to restrict their hours of operation and services provided on Sundays and public holidays.

In the Commission's view, the reduction in penalty rates would likely result in a number of benefits to both employees and employers, including increased trading hours and greater opportunities for employment.

The decreased Sunday penalty rates will be transitioned in

The Commission recognised that a substantial proportion of Award-reliant employees are low paid and that the reductions in Sunday rates are likely to reduce the earnings of those employees who currently work on Sundays. In light of the financial hardship the decision was likely to create for a number of employees, the Commission concluded that appropriate transitional arrangements will be necessary to mitigate this hardship.

It has not reached a final view on what these arrangements will be and will seek submissions from interested parties. However, the Commission has indicated that the transition to the new Sunday penalty rates will be achieved by a series of annual adjustments over a period of at least two (but less than five) years, commencing on 1 July 2017 to coincide with any increases in minimum wages arising from the annual wage review.

A decision regarding the nature of transitional arrangements in relation to Sunday penalty rates will likely be handed down in May or June this year. The changes to the public holiday penalty rates will take effect from 1 July 2017.

In light of the reduction to the Sunday and public holiday penalty rates, and the fact that wages growth has been constrained for some time now, we consider it likely that there will be a higher than usual increase in the minimum wage this year.

Reactions to the decision

The decision has sparked a variety of reactions from government, private organisations, and the public.

The Labor Party opposes the decision and shortly after it was handed down, Bill Shorten introduced the Fair Work Amendment (Protecting Take Home Pay) Bill 2017 into Parliament, the objective of which was to ensure that no employee's take-home pay would be reduced as a result of the reduced penalty rates.

On the other hand, Employment Minister Michaelia Cash has been seeking support for the decision from employer organisations. She has defended the decision on the basis that it will create more jobs.

Unsurprisingly, the decision has galvanised the union movement, which is threatening a WorkChoices-style campaign to have the decision overturned. This manifested itself in large street protests earlier this week.

In one of the more interesting responses, the Victorian Labor Government has established a parliamentary inquiry to investigate how Victoria can protect retail and hospitality workers from reductions in penalty rates. Given that Victoria referred its industrial relations power to the Federal Government more than 20 years ago, it is not clear what, if any, steps the State Government can take to protect affected workers.

Most employers have remained silent on what the decision will mean for their business and their employees. In part, this is likely to be because of the uncertainty created by the yet-to-be decided transitional arrangements. Some retailers, such as cosmetics brand Lush, have indicated that they will not apply the penalty rates cuts to their employees.

Effect on enterprise bargaining

The decision will have no immediate impact on employers who pay their employees in accordance with an enterprise agreement as such employers must continue to comply with their obligations under the relevant agreements. However, large retailers with existing enterprise agreements should review their current industrial relations strategy as the reduced penalty rates will impact upon them when they are re-negotiating those enterprise agreements.

While retailers who are re-negotiating enterprise agreements are likely to want to negotiate for lower penalty rates (or in some cases to maintain current penalty rates which are lower than the current Award penalties) this position will be fiercely challenged by the relevant unions. In this regard, larger retailers in particular will now need to contend with a new union in addition to the SDA. While not a registered union, the Retail and Fast Food Workers Union is drumming up support from workers in the retail industry. While it cannot legally exercise a right of entry under the FW Act, its officials can still be appointed as "bargaining representatives" during enterprise bargaining negotiations, giving them a seat at the table.

Further, retailers who are currently in negotiations should be wary of the time at which they apply for approval of a proposed enterprise agreement. The better-off-overall test (BOOT) will be applied by the Commission at the time that the proposed enterprise agreement is up for approval. As the penalty rates decision will not take effect until 1 July 2017, the reduced penalty rates will not be taken into account by the Commission until that time.

On and from 1 July 2017, the Commission will take into account any transitional arrangements that are introduced into the Award. One option for ensuring that newly proposed enterprise agreements meet the BOOT is mirroring any transitional arrangements that are introduced into the Award once a decision has been made by the Commission.

Where to next?

Whilst the Commission has expressed a preference for transitioning in the reduction in Sunday and public holiday rates through a series of adjustments over a period of at least two years, retailers will need to wait for a further decision by the Commission before the implementation is finally determined.

It is nonetheless clear that the retail landscape is changing in Australia and that the law is now catching up. What is less clear is whether this decision signifies the start of further changes to the way in which Australian retailers will remunerate their employees in the future.

Interestingly, the Commission has expressed a view in support of replacing penalty rates with "loaded rates" in the long term. "Loaded rates" are rates that are higher than the applicable minimum hourly rate and are for all hours worked, including on Saturday and Sunday.

The Commission noted that loaded rates may make awards simpler and easier to understand, leading to a decrease in non-compliance, and would also allow small businesses to access additional flexibility without the need to enter into an enterprise agreement.

In our view, it is unlikely that loaded rates will form part of the retail landscape for some time. In the interim, and in view of the currently difficult economic climate for retailers, it is important for all companies in this sector to consider the implications of the penalty rates decision and how they can best implement its outcome to drive business success.