The Federal Court has overturned a Fair Work Australia (FWA) Full Bench’s decision to approve an enterprise agreement which contained a coverage clause that permitted employees to elect not to be covered by the agreement.

Implications for employers

Section 186(2)(d) of the Fair Work Act 2009 (FW Act) provides that an enterprise agreement cannot be approved by FWA unless the relevant employees will be better off under the agreement than they would be under the relevant modern award.  This is known as the “better of overall test” (BOOT). 

Employers making agreements should be aware that this case makes it clear that under the Fair Work regime, as under previous legislation, a proposed agreement that contains a term permitting employees to choose not to be covered by the agreement will automatically fail the BOOT. This is the case even if, based on the other terms of the agreement, it would otherwise pass the BOOT.

Background

Facts

Newlands Coal Pty Ltd (Company) commenced negotiations with the Construction, Forestry, Mining and Energy Union (Union) for an enterprise agreement.

The proposed agreement contained a coverage clause which permitted employees to, at any time, elect in writing not to be covered by the agreement.  If the employee made this election, the underpinning modern award would apply.

A majority of employees voted in favour of the proposed agreement.  Accordingly, the Company applied to FWA to have the agreement approved.

First instance decision

At first instance, FWA refused approval of the agreement, finding that:

  • an employee cannot opt out of an agreement.  The only way an employee can cease to be covered is if an agreement is varied, terminated or replaced in accordance with the FW Act;
  • the group of employees to be covered by the agreement was not fairly chosen for the purposes of the FW Act because an undefined group of employees could opt out of coverage and therefore, those that remained covered were not geographically, operationally or organisationally distinct; and
  • the agreement did not meet the BOOT as there was no guarantee employees who elected not to be covered would be better off than if the relevant modern award applied.

Full Bench decision

On appeal, a Full Bench of FWA overturned the first instance decision and approved the agreement. 

The Full Bench held there was no uncertainty about agreement coverage as all employees in the relevant classifications would be covered, except for those who made the election to opt out from coverage.

Further, the Full Bench found the agreement satisfied the BOOT because an employee had a choice to be covered:

  • by the agreement, which contained more favourable terms than the award; or
  • at a minimum, by the conditions under the award.

The Union appealed to the Federal Court arguing that:

  • the agreement was invalid because it was not made with a group of employees who would be covered by the agreement;
  • the Full Bench had failed to consider whether the group of employees was fairly chosen, as required by the FW Act; and
  • the BOOT had been incorrectly applied.

Decision

Agreement coverage was certain

The Federal Court found that even though employees could later opt out of the agreement, the group of employees to be covered by the agreement was sufficiently certain for the agreement to be valid. 

The FW Act provides that employees who will be covered by an agreement may be specified by class or by name.  The Court found the opt out clause did not mean the relevant class of employees to be covered was not appropriately described; it simply limited the membership of the chosen class.  The Court noted that the FW Act did not intend for employees to be covered by an agreement indefinitely, as membership of the employee group will inevitably change over time.

However, the Court held the Full Bench had failed to make any finding about whether the group of employees was fairly chosen, and therefore had failed to satisfy the FW Act requirements in that regard.

Incorrect application of the BOOT

The Court held the Full Bench had incorrectly applied the BOOT.

The Court noted that the purpose of the BOOT is to guarantee the benefit of an agreement’s more generous terms to employees covered by the agreement and prospective employees.  The Court noted “the BOOT is concerned with the terms and conditions that will apply to employees, not to the means by which they will acquire them”.  The Court held that the Full Bench had posed a different question to that required by the BOOT.  It had mistakenly considered whether the fact that the employees may choose to be covered by the agreement meant they were better off overall. 

The Court held that the choice to opt out from coverage is not a benefit as it is a right to forfeit the beneficial agreement entitlements.  If an employee elected to opt out, this meant the employee may be no better off than if the relevant award applied.  Accordingly, the Court was not satisfied the agreement passed the BOOT.

The Court overturned the Full Bench decision and remitted the matter to FWA. 

Construction, Forestry, Mining and Energy Union v Deputy President Hamberger [2011] FCA 719