If only some employees are covered by a workplace or enterprise agreement, the agreement won't be valid unless the part selected forms an operationally, organisationally distinct part of the business.

Agreements made with a part of your business will have to be considered carefully, following a landmark decision by the Full Federal Court (CFMEU v Pilbara Iron Company (Services) Pty Ltd [20110 FCAFC 91).

Although the agreement in this case was made under the Workplace Relations Act 1996 (Cth), the Fair Work Act 2009 (Cth) uses the same wording and we see no reason why the reasoning in this case would not be applied to the Fair Work Act.

The agreement made between Pilbara Iron and some of its employees

Pilbara Iron entered into the agreement after amendments to the Workplace Relations Act in early 2008 removed its ability to enter into AWAs with new employees.

The workplace agreement in this case covered new employees "employed by Pilbara Iron on or after 28 July 2008" in classifications connected with the rail network.

The offer was limited to a small number of employees and was not made to existing employees employed on a variety of different arrangements (including AWAs (current and expired), ITEAs and common law contracts underpinned by a federal award, all in respect of which the CFMEU was not a party).

It was approved by the then Workplace Authority and took effect in November 2008.

Pilbara Iron has since engaged all new employees in the relevant classifications and performing the relevant types of work under the Agreement (at the time of the hearing at first instance, 31 CFMEU members had been employed after 28 July 2008 in connection with the rail network).

What is "part of a single business"?

To come into operation, the Agreement had to meet the requirements of section 327 of the Workplace Relations Act, including being made with "persons employed at the time in a single business (or part of a single business) of the employer whose employment will... be subject to the agreement".

But what is "part" of a single business?

The Court looked at the words of section 327 themselves, in conjunction with the definition of "part of a single business" found in section322(3) – "a geographically distinct part of the business" or "a distinct operational or organisational unit within the single business" and held:

"The fact that the employees with whom the agreement is made must be employees "in" a single business or part of a single business is the clearest indication that the identification of the part of the single business (if that is the choice made) must be separate from the identification of the persons employed in it. The part of the single business concerned cannot simply be the employees with whom the employer has chosen to make the agreement. The part must be identifiable by reference to factors other than the employees themselves or the date they acquire that characteristic. The part cannot be constituted simply by those employees whom the employer has chosen as the other parties to the proposed agreement".

In this case it could not be said that "employees employed after 28 July 2008" constituted a recognisable "part" of Pilbara Iron's business. Rather, it was a selection of employees determined by Pilbara Iron. The workplace agreement was therefore invalid

The effect of this decision is that in order for a group of employees to be said to be "part" of a business for the purposes of section 327, those employees must constitute a recognisable section, segment or constituent of the business and cannot be merely an arbitrary selection of employees (on whatever basis) by the employer.

The decision makes it clear that selecting employees to be covered by a workplace agreement based on when they became employees amounts to an arbitrary selection on the part of an employer, and will therefore not constitute a "part" of a business for the purposes of s 327 of the WR Act.

What does this mean for employers?

There are workplace agreements made under the Workplace Relations Act still operating which were voted on by only a small number of employees. The effect of this decision on other existing agreements will depend on, amongst other things, the particular circumstances in which the agreement was made, and the precise terms of the agreement. Employers should consider:

  • the impact of this decision goes beyond these agreements. As noted above, this reasoning could be applied to enterprise agreements made under the Fair Work Act, and employers should consider the following: if you're selecting a part of a business to which an enterprise agreement is to apply, you must be able to show that the part selected forms an operationally, organisationally distinct part of the business. This will become even more of an issue with bargaining parties able to challenge the proposed coverage of an agreement by way of seeking scope orders under the Fair Work Act;
  • if you're concerned about the validity of existing workplace or enterprise agreements, seek advice on their status and whether employees or their representatives will be able to have the agreement set aside and to commence bargaining under the Fair Work Act; and
  • if you are negotiating or plan to negotiate an enterprise agreement that relates to only part of a business, seek advice as to the bargaining strategy, including contingency options.  

Pilbara Iron intends to apply for special leave from the High Court to appeal the decision, and we will keep following this important case.