Australia: New enterprise, existing employees: the High Court says Yes

The High Court has confirmed that an enterprise agreement for a new enterprise can be made with existing employees who have agreed to work, but are not at that time actually working, as employees in the new enterprise.

The High Court’s decision may provide employers with an increased ability to negotiate enterprise agreements for new enterprises with existing employees, rather than as greenfields agreements.

Background

ALDI Foods Pty Ltd (ALDI) operates retail stores in various regions in Australia. Each undertaking in each geographical region is treated as a separate enterprise.

ALDI established a new undertaking in Regency Park in South Australia. During this process, 17 existing employees of ALDI accepted an offer of employment at Regency Park, to commence when the new region opened. Until that time, those employees continued to be employed in their current regions.

ALDI commenced bargaining with those employees for an enterprise agreement to cover the Regency Park region, and a majority of employees agreed to the enterprise agreement. At the time, trading in the Regency Park region had not commenced. The enterprise agreement was subsequently approved by the Fair Work Commission (Commission).

The Shop, Distributive and Allied Employees Association (SDA) and the Transport Workers’ Union of Australia (TWU) appealed the decision to approve the enterprise agreement to the Full Bench of the Fair Work Commission, which was dismissed. The SDA applied to the Full Court of the Federal Court for judicial review of the decisions to approve the enterprise agreement and to dismiss their appeal, and the Full Court upheld the SDA’s contentions and issued the writs of certiorari and prohibition.

ALDI appealed that decision to the High Court.

The issues

The SDA argued that the Commission did not have the power under s 186(2)(a) of the Fair Work Act 2009 (Cth) (FW Act) to approve an enterprise agreement for a new enterprise made with existing employees of the employer who have agreed to work, but are not at the time actually working, as employees in the new enterprise.

Section 186(2)(a) of the FW Act requires the Commission, in order to approve an enterprise agreement, to be satisfied that if, the agreement is not a greenfields agreement – the agreement has been genuinely agreed to by the “the employees covered by the agreement”.

The SDA argued that:

• the enterprise agreement should have been made as a greenfields agreement, because ALDI was establishing a new enterprise and had not employed in that new enterprise any of the persons who would be necessary for the normal conduct of that enterprise; and
• the Commission could not be satisfied that the enterprise agreement had been genuinely agreed to by the employees “covered by” the agreement in accordance with s 186(2)(a) of the FW Act, as no employee could be “covered by” the agreement until it came into operation.

The SDA also argued that the enterprise agreement did not pass the 'Better off Overall Test' (BOOT) required by s 186(2)(d) of the FW Act.

The SDA argued that the Commission failed to properly compare the terms and conditions under the enterprise the agreement and the modern award, but instead considered that the BOOT was satisfied due to a ‘comparison clause’ in the agreement, which created an enforceable right for employees to maintain wages equal to or higher than the modern award.

Key points from the judgment

In a joint judgment by Kiefel CJ, Bell, Keane, Nettle, Gordon and Edelman JJ, with Gageler JJ agreeing, the High Court held that the Commission was entitled to approve the agreement under s 186(2) of the FW Act, but that it had failed to properly apply the BOOT.

Is the enterprise agreement related to a new enterprise required to be made as a greenfields agreement?

The FW Act provides that a single enterprise agreement can be made as either a greenfields or non-greenfields agreement. Relevantly:

• s 172(2)(a) provides that a non-greenfields agreement is made in circumstances where the employer already employs employees who are not then, but will be, covered by the enterprise agreement; and
• s 172(2)(b) provides that a greenfields agreement is an agreement that relates to a genuine new enterprise of the employer where the employer has not employed any of the persons who will be necessary for the normal conduct of that enterprise and will be covered by the agreement.

The SDA argued that there was impliedly a requirement in s 172(2)(b) that a greenfields agreement must be made where the employer has not employed “in that new enterprise” any of the persons who will be necessary for the normal conduct of that enterprise.

The High Court rejected this argument, and unanimously held that:

• section 172(2)(b)(ii) does not require that a greenfields agreement be made where there are no employees employed “in that new enterprise”; and
• an enterprise agreement cannot be made as a greenfields agreement with persons who are already employees of the employer, and must be made under s 172(2)(a) of the FW Act.

What is the meaning of 'covered by' an agreement?

The SDA also argued that the enterprise agreement was, in truth, a greenfields agreement because the employees were not relevantly “employed” for the purposes of s 172(2)(a), as they were not actually doing the work under the agreement. The SDA argued that it is impossible for employees to be ‘covered by’ an enterprise agreement when the relevant work under the agreement has not begun.

The High Court disagreed with this argument, stating that it failed to account for the distinction between the concept of ‘coverage’ and ‘application’, being that:

• an employee is covered by an enterprise agreement when the agreement is expressed to cover the employee; and
• an enterprise agreement applies to an employee if the agreement covers them and is in operation.

The High Court stated that, when the Commission considers whether an enterprise agreement has been genuinely agreed to for the purposes of s 186(2)(a), the question of coverage is not whether the employees voting for the enterprise agreement are actually employed under its terms, but whether the enterprise agreement covers all employees who may in future have the terms and conditions of their jobs regulated by it.

In this regard, the High Court clarified previous inconsistent Federal Court authority¹ in confirming that a non-greenfields enterprise agreement can be made with two or more employees, so long as they are the only employees employed at the time of the vote who are to be covered by the enterprise agreement, even though the enterprise agreement may, in due course, come to apply to many more employees.

What is the Commission required to do to satisfy the BOOT?

The High Court held that the Commission had fallen into jurisdictional error by failing to engage in any comparison between the enterprise agreement and the modern award, further than acknowledging the agreement had a comparison clause.

The High Court held that it is insufficient for the Commission to find that the BOOT is satisfied by the fact only that the enterprise agreement has a ‘comparison clause’.

Accordingly, the High Court quashed the decision of the Full Bench of the Commission and remitted the appeal back to the Full Bench to determine whether the enterprise agreement passes the BOOT.

Key takeaways for employers

1. Employers who establish new enterprises and are seeking to make an enterprise agreement with employees they currently employ in existing enterprises are required to make non-greenfields enterprise agreements under s 172(2)(a) of the FW Act.
2. There may now be increased scope for employers establishing new enterprises to negotiate an enterprise agreement for that enterprise with existing employees, rather than negotiating a greenfields agreement with the relevant union.
3. Employers making enterprise agreements must be careful to not only rely on a comparison clause that ensures that wages in the enterprise agreement will never fall below the modern award in order to satisfy the BOOT under the FW Act. The Commission is required to consider the enterprise agreement as a whole, regardless of the existence of a comparison clause.

1 John Holland (2015) 228 FCR 297; Cimeco Pty Ltd v Construction, Forestry, Mining and Energy Union (2012) 219 IR 139.

This article was written by Sophie Beaman, Senior Associate, Sydney.  For more information or advice on this topic, please contact: