Bargain Smarter, not Harder: Loaded Rates in Enterprise Agreements

August 15, 2018
Bargain Smarter, not Harder: Loaded Rates in Enterprise Agreements

A decision in June of the Full Bench of the Fair Work Commission (FWC) has confirmed the ground rules for the better off overall test (BOOT), and provided clarity as to when enterprise agreements with loaded wage rates can be approved.  With the impact of the decision now being felt in agreement approvals, we analyse that impact, and identify what employers seeking to implement loaded rates agreements need to be mindful of.

Loaded rates of pay, whereby an employer offers or agrees to pay a higher base wage rate in substitution of penalty rates or other monetary benefits, have been widely adopted by employers through enterprise bargaining, particularly those in the retail, fast food and hospitality industries.  The justification for loaded rates is that the employees are better off overall, even if certain hours of work would result in the employees being paid lower than the hourly rate in the applicable modern award.

However, in a decision handed down in late June this year, the Full Bench highlighted the uncertainty in bargaining for an enterprise agreement containing loaded rates, by emphasising the principle confirmed in Hart v Coles Supermarkets[1] in 2016: that to pass the BOOT, all employees must be better off overall, not just most. While the Coles decision came as a surprise to many employers when first handed down, the wording in s193(1) left the FWC with little room to move, as an agreement can only be approved: “if the FWC is satisfied, as at the test time, that each award covered employee, and each prospective award covered employee, for the agreement would be better off overall”.

In the Loaded Rates Decision, the Full Bench provided clarity, and with it certainty for employers, about the process the FWC will take when assessing the BOOT, including the following:

  • Assumptions as to classes of employees: it is permissible to assume that an individual employee will be better off overall if the class of employees to which the employee belongs are better off overall, in the absence of evidence to the contrary. These ‘classes’ must be carefully identified to ensure that they share a common BOOT outcome, and cannot be artificially selected to avoid the proper application of the BOOT. For example, it would be inappropriate to group all of an employer’s permanent employees into a single class if members of the team worked varying rosters, with some working weekends, others working shiftwork, and others only working ordinary hours. It is likely in these circumstances that the FWC would look at additional classes such as permanent weekend
  • BOOT for existing employees: to undertake the BOOT in respect of existing employees, the FWC must apply the loaded rates structure to the actual roster patterns worked in the business by all of the employees. For this reason, the FWC may require employers, as part of the approval process, to provide information about the working hours of current employers (such as sample rosters). In respect of non-monetary or contingent entitlements offered under the proposed agreement, “a realistic assessment will need to be made about the likelihood of that benefit crystallising”. For example, increased redundancy entitlements may not hold much weight in a BOOT assessment if it is unlikely that the employer will be affecting redundancies while the agreement is in operation. Furthermore, the Full Bench expressed that it is unlikely for BOOT purposes that non-monetary, optional or contingent entitlements will be sufficient to compensate for a significant financial detriment, such as one resulting from a loaded rates mechanism.
  • BOOT for future employees: the BOOT must also take into account whether ‘prospective employees’ are better off overall under the proposed agreement. This necessarily requires consideration of any future employees the employer may hire. For what the FWC have termed a “substantial and mature business”, it may be safe to assume that future employees will be engaged on the same roster patterns already used in the business for existing employees. However, for other businesses, including small and/or growing businesses, some degree of difficulty applies in making predictions as to how new employees will be engaged. On this basis, all possibilities which could arise under the proposed agreement must be considered: for example, the FWC is unable to ignore a provision in a proposed enterprise agreement that permits employees to work night shifts, even if the employer does not currently engage any employees as night shift workers and expresses an intention not to do so in the future, because there is a possibility that it could do so. The only circumstances which may be disregarded as a possibility are those which are physically or legally impossible or would otherwise be caught or restricted by other legislation or industrial instruments – for example, where statute prohibits retail trading or construction work at particular times or days.
  • Potential solutions: the FWC have outlined a few approaches which employers may consider in order to maximise their prospects of passing the BOOT, including inserting a provision into the proposed agreement which restricts rostering patterns. This could include a restriction on when employees can be engaged to work, or a requirement that the hours of work of any employee be balanced between ordinary hours and hours which attract penalty or overtime rates (for example, that at least 70% of hours be worked during the hours defined by the applicable award as ordinary hours).
  • The casual challenge: while the FWC has made it clear that existing roster patterns of a mature business may be applied in the context of prospective employees, it did qualify this in relation to casual employees. The FWC highlighted that it was:

“difficult to envisage how it would be possible to provide for a loaded rate for casual employees that was capable of passing the BOOT. This is because it would always be possible for the casual employee, in a given pay period, to be engaged to work on a day or at a time which would attract the payment of penalty rates under the relevant award and not to be engaged on any other hours or at any other times. In that circumstance, if the agreement provided for a loaded rate which was less than the highest penalty rate provided for in the relevant award, the employee would necessarily be disadvantaged as compared to the award. This result could only be avoided if the agreement provided for some other benefit to the casual employee which offset the disadvantage, and/or or imposed some restriction on when a casual employee could be engaged to work, and/or required the hours of work of a casual employee to be balanced over time between hours which would attract the payment of penalty rates under the relevant award and hours which would not. Any such additional provisions would amount to a significant departure from the concept of the “on-call” casual.”

Has this changed anything?

Yes and no. The thing that remains the same is that employers must ensure that every award covered employee or prospective employee is better off overall under the proposed agreement than the applicable modern award (with the result that if any employee is not better off overall, the enterprise agreement does not pass the BOOT).  But what has been clarified is the ability to deal with employees in classes, and to rely on well-established rostering patterns.  This may allow some employees in certain circumstances to not be better off overall, provided the class of employees is better off overall.

The rider on this is that if the FWC is provided with information which identifies that an employee will be worse off overall, then the ability to deal with employees as a class evaporates, and the FWC will need to closely examine individual circumstances.  In the past we have seen individual employees, small groups of employees and rival employee organisations provide such information to the FWC, therefore requiring the FWC to focus on individuals.

Making use of this decision

Investing time, resources and energy into the enterprise bargaining, ballot and application processes can prove to be costly waste if your enterprise agreement progresses all the way to the FWC but is unable to pass the BOOT. Employers should plan ahead before they even take a seat at the bargaining table, taking into account the FWC’s recent attitudes towards loaded rates, enterprise agreements and the application of the BOOT, to maximise their prospects of receiving approval.

FCB recommends you consider the following:

  • Get your classes right. As set out above, it is too narrow to group all permanent employees together in a loaded rates agreement: you need to adopt a realistic and reasonable approach to these groupings.  It is very likely that you will be able to group weekend workers together, including those who also work during the week.
  • Undertake comprehensive calculations. Your capacity to demonstrate to the FWC that an agreement with loaded rates passes the BOOT will depend largely on the accuracy and comprehensive nature of the calculations you provide.
  • Provide detailed rostering information. The Loaded Rates Decision confirms that rostering information will be accepted by the FWC, provided that information reasonably characterises classes of employees and is a reliable reflection of the rostering practices in existence within a well-established business.
  • Casuals are different. While you can be confident that loaded rates for permanent employees are still viable, the situation for casuals has not changed.  We believe the decision confirms that casual employees need to be either paid at least the relevant award rate for all hours of work, including penalty rates, or be restricted in the number of hours they can work at times which attract penalty rates.  Communications from the FWC in relation to agreements moving through the approval process have confirmed this.
  • Don’t take no for an answer. The process the FWC undertakes is that agreements lodged for approval are sent to the Member Assist Team, who check pre-approval requirements and conduct a BOOT assessment.  While they naturally take care in the way they undertake these tasks, they are not always right.  If you believe they have mischaracterised an award or agreement entitlement, challenge them on this.

For employers who are new to the bargaining space, or those who are thinking of renewing or re-bargaining for their existing agreements, it is strongly recommended that you seek expert advice before commencement to avoid unnecessary costs at a later stage. Any businesses considering implementing loaded rates into their bargaining strategy can contact FCB’s expert industry teams on 02 9922 5188.

[1] Hart v Coles Supermarkets Australia Pty Ltd and Bi-Lo Pty Ltd [2016] FWCFB 2887