Why ‘start up’ enterprise agreements remain under intense scrutiny

In recent years, some employers have utilised the capacity – originally legitimised in a series of cases involving John Holland[1] and more recently endorsed by the High Court in Aldi[2] – to make an enterprise agreement with a small group of employees, but with a coverage clause that enables the agreement to apply to broader groups of workers in future.

In One Key Workforce Pty Ltd v Construction, Forestry, Mining and Energy Union [2017] FCA 77 (One Key Decision), however, the Full Federal Court (Bromberg, Katzmann and O’Callaghan JJ) (FFC) largely upheld the decision of Flick J at first instance, overturning the Fair Work Commission (FWC)’s approval of this kind of agreement.

In this article, we examine the One Key Decision, where the FFC found that an agreement voted up by a small group of employees - which was not representative of the larger group of employees to whom the agreement would ultimately apply - was not genuinely agreed to in accordance with s186(2)(a) of the Fair Work Act (Cth) 2009 (FW Act).

The One Key Decision is also significant because it shows that the FWC’s approval of an agreement may be open to examination by a Court if the tribunal fails to discharge its obligation to be satisfied that the employer had taken ‘all reasonable steps’ to ensure that the terms and effect of the agreement had been explained to relevant employees.

Background facts

One Key Workforce Pty Ltd (One Key) operates as, amongst other things, a labour hire business which ‘on-hires’ its employees to clients in a range of industries, including the black coal mining industry.

Between March and August 2015, One Key recruited three new employees and in August 2015 initiated the process of approval for a new enterprise agreement (the RECS (QLD) Pty Ltd Enterprise Agreement 2015 (the Agreement)). On 25 August 2015, each of the three employees responded to an email request for a vote and voted in favour of the proposed Agreement. There was no union bargaining representative for the Agreement and no bargaining took place.

The proposed Agreement was submitted to the FWC and was approved on 30 October 2015. At the time, there was no application for leave to appeal from that decision. The Agreement entered into force on 6 November 2015.

Following an application for declaratory relief made by the Construction, Forestry, Mining and Energy Union on 28 November 2017, the Federal Court quashed the FWC’s approval and a declaration was granted that the Agreement was void and of no effect.[3] This decision was appealed by One Key, with the FFC in its decision of 25 May 2018 upholding that of the single judge.

The One Key Decision examined the following two central issues arising from the FWC’s original approval of the Agreement:

1. The requirement to inform employees about the Agreement’s terms

Flick J at first instance held that One Key had failed to comply with the requirements in s180(5) of the FW Act to take all reasonable steps to ensure that the terms of the Agreement and their effect had been explained to the relevant employees.

One Key had provided evidence that it emailed copies of the Agreement to the three employees prior to the vote, and held telephone conversations with them to discuss the content of the Agreement and any questions they had about it. One Key did not, however, provide evidence to the Commission of the content of these discussions.

On appeal, the FFC considered two issues with regard to the FWC’s satisfaction that One Key had complied with the requirements of s180(5).

The first was whether actual compliance with s180(5) was required in order for the FWC to approve the Agreement, or whether the FWC just had to be satisfied (on the evidence provided by the employer) that the subsection had been complied with. The FFC found in favour of the latter approach.

The second issue was whether the primary judge was wrong in his assessment that the FWC had committed a jurisdictional error, in concluding that it was satisfied that the employer had complied with s180(5). The FFC found that Flick J had decided this issue correctly, and concluded that the FWC could not decide ‘whether the steps the employer had taken were ‘all reasonable steps’ unless it knew what the employees had been told before they cast their votes’.[4] This was particularly so with regard to the required consideration of the particular circumstances and needs of specified groups of employees, which must be taken into account under s180(6).

Ultimately, the FFC asked, how could the Commission be satisfied that the Agreement had been genuinely agreed to under s186(2), without having regard to this evidence?

2. Coverage of the Agreement, ‘genuine agreement’ and the ‘fairly chosen’ requirement

Despite ‘yes’ votes from each of the three employees who voted on it, Flick J had found that the Agreement would, in reality, cover a large number of other employees (yet to be employed) and be underpinned by no less than 11 modern awards.

On this basis, the s 188(c) requirement of ‘genuine agreement’ could not have been satisfied, as it lacked ‘authenticity’ and ‘moral authority’.

In reaching this view, Flick J had drawn a distinction between s 186(2)(a) of the FW Act, which provides that the FWC ‘must be satisfied that the agreement has been genuinely agreed to by the employees covered by the agreement’ and s 180(2), which sets out a pre-voting obligation to provide materials to ‘relevant employees’ (i.e. ‘the employees … employed at the time who will be covered by the agreement’). His Honour found that the former was ‘deliberately wider in ambit’ than the definition in s 180(2).

On the basis of the High Court’s decision in Aldi Foods v SDAEA,[5] the FFC determined that Flick J was incorrect in making this distinction – rather, ‘the employees’ referred to in s 186(2)(a) and s 180(2) are the same employees. However, in the FFC’s view, the primary judge concluded correctly that the requirement for ‘genuine agreement’ imposes a standard of authenticity on employee approval of an agreement: ‘the word ‘genuinely’ in the phrase ‘genuinely agreed’ [in ss 186(2)(a) and 188(c)], indicates that mere agreement will not suffice and that consent of a higher quality is required’.[6] Further, ‘authenticity … goes to the heart of the matter’ under s 188(c), requiring more than simply an absence of fraud, coercion or duress in the bargaining process.[7]

The FFC then considered the objectives of the FW Act bargaining framework, noting its preference for collective rather than individual bargaining and that collective bargaining is intended to overcome the power imbalance in the employment relationship. Their Honours stated that:

‘An enterprise agreement made early in the life of an enterprise with two or three employees and before the employment of the much larger workforce necessary to operate the business of the enterprise is, in terms of the process by which it was made’, far more likely to reflect characteristics akin to individual bargaining than collective bargaining.’[8]

This did not mean that agreements could not be made with one or two employees, or that a small group of employees could not fix employment conditions in an agreement for a larger group later to be employed: ‘Enterprises come in all shapes and sizes’.[9] However, according to the FFC, the FW Act is concerned with agreement-making that undermines or subverts its stated preference for collective bargaining.

This is exemplified by the ‘fairly chosen’ test in s186(3), which seeks to avoid the workforce ‘being broken up into artificial employee groupings with the consequence that the workforce … is unable to bargain as a single collective’.[10] Alongside this, the FFC noted that the Explanatory Memorandum to the Fair Work Bill stated, in respect of s188:

‘where an agreement covers a large number of classifications of employees in which no employees are actually engaged there may be a question as to whether the agreement has been genuinely agreed.’

The FFC also outlined its concern that the ‘legislative objective of achieving ‘fairness through an emphasis on enterprise-level collective bargaining’ could be undermined if the employees who vote on the agreement have no basis for appreciating its nature and terms’.[11]

Their Honours rejected One Key’s submission that the primary judge had erroneously considered that voting by a small number of employees is inherently wrong. Flick J had, in fact, recognised that agreements such as these may be valid, although at the same time there may be questions about the genuineness of their approval. The FFC considered that this was the correct approach to the issue.

The FWC had made a jurisdictional error in failing to consider how the three employees could have had a sufficient appreciation of the appropriateness of the terms and conditions in the One Key Agreement, given the disparate occupational classifications and industries it covered. This should have informed the FWC’s consideration of whether the Agreement had been ‘genuinely agreed’ to. Therefore the Agreement should not have been approved.

The implications of the decision

The One Key Decision does not spell the death knell for the ‘start up’ agreement model made with a small number of employees.

Both the FWC and the Courts at all levels accept that enterprises come in all shapes and sizes, and that to outlaw employers from embracing this model in appropriate circumstances is not supported by the current regulatory framework. Further, the legitimacy of the model was once again endorsed by a Full Bench of the FWC as recently as Thursday 7 June 2018.[12] The Full Bench in this case was at pains to distinguish the One Key Decision outcome from the ‘facts’ with which they were confronted, which pointedly, established a business rationale to support the ‘start up’ agreement model involving three employees and no evidence of the employer seeking to undermine the collective bargaining regime.

What the One Key Decision does demonstrate is that, despite the ‘Change the Rules’ campaign being run by the ACTU and affiliated unions, the current regulatory framework is capable of dealing with employer excesses in the agreement making space.

The facts in the case were telling:

• three employees with very confined employment experience (and 2 of whom were casual);
• a ‘scope’ defined by classifications which drew upon the operation of 11 modern awards; and
• no bargaining!

Given these circumstances, it is not surprising that the FFC found that the ‘protective’ agreement making provisions in the FW Act had been compromised by the employer and that the three employees did not have the requisite informed or genuine understanding of what they were approving. The relevant protective provisions seem to revolve around the concepts of a ‘fairly chosen scope’, the requirement for ‘genuine agreement’ and the ‘better off overall test’.

In the One Key Decision, there was more than enough evidence of the employer adopting an agreement making model that was designed to undermine or subvert the collective bargaining regime enshrined by the FW Act.

The lesson is clear: employers should not impermissibly overreach in implementing their agreement making strategies.

The other point of immediate relevance for employers is the heightened standards to which employers will now be held by the FWC in ensuring the obligation to explain the terms of any proposed agreement to employees is appropriately discharged. We are already seeing the FWC pressing employers for more information at the approval stage of the explanatory steps undertaken and being unwilling to simply approve the proposed agreement on the content of the accompanying statutory declaration.

This (not unexpected) vigilance from the FWC may ultimately result in further delays in the processing of proposed agreements, but can also be viewed as a necessary evil in countering the squeaky wheels in the union movement to the effect that the ‘rules are broken’.