Full Federal Court upholds contractor and union rights clauses in ADJ contracting case

17 August 2012

A Full Court of the Federal Court of Australia has rejected an argument that a job security clause in an enterprise agreement, requiring parity of pay and conditions of contractors with existing employees, is an unlawful term because it requires or permits a contravention of the general protections provisions of the Fair Work Act 2009 (Cth) (FW Act).

It is unlikely that this decision will be affected by any amendments that might be made to the FW Act by the current government arising from the recently released review of the FW Act. The Review Panel concluded that the FW Act agreement content rules strike an ‘appropriate balance’ and should not be changed and observed that contractor provisions in agreements that regulate the engagement of contractors, as opposed to prohibiting their engagement, are likely to fall within the matters pertaining formulation of the FW Act.

The clause considered by the Court in Australian Industry Group v Fair Work Australia [2012] FCAFC 108 (14 August 2012) was in the following terms:

The Employer shall only engage contractors and employees of contractors, to do work that would be covered by this Agreement if it was performed by the Employees, who apply wages and conditions that are no less favourable than that provided for in this Agreement.

The clause was challenged on the basis that it was an objectionable term, as defined in s12 of the FW Act. The clause was said to be an objectionable term because it required the employer, ADJ Contracting Pty Ltd (ADJ), to contravene the general protections provisions of the FW Act by taking adverse action against a proposed contractor because the contractor had, or exercised, a workplace right. 

That workplace right was the contractor’s entitlement to pay its employees in accordance with the workplace instrument that applied to the contractor. A workplace instrument, as defined in the FW Act, would include an enterprise agreement or an award that applied to the contractor, but not a common law contract of employment.

The Full Court rejected AiG’s challenge on the following bases:

  • The Court doubted that employers (being the contractors in this case) had ‘workplace rights’ under s341 of the FW Act;
  • Even if employers did have workplace rights, there was no evidence that the consequences of the clause would be adverse in all cases (for example, the contractor’s workplace instrument may provide for more beneficial terms than those provided by the ADJ agreement).  Accordingly, the provision could not automatically be viewed as an objectionable provision by Fair Work Australia in deciding whether or not to approve the agreement;
  • There is nothing in the clause that required ADJ to take any action against a contractor because the contractor was entitled to the benefit of a workplace instrument (which would be required to establish a breach of the general protections).  The clause was concerned with the minimum pay and conditions to be provided by the contractor, not the source of those terms.  Whether the contractor’s pay obligations were under a workplace instrument or some other instrument beyond the purview of the general protections, such as a contract of employment, was irrelevant.

The Full Court also rejected the argument that the clause was an objectionable provision because it ‘permitted’ a contravention of s354 of the FW Act.  Section 354 prohibits a person (here ADJ) from discriminating against an employer (the contractor) because the employer’s employees are covered by a particular type of workplace instrument.  The Full Court agreed with the Full Bench of Fair Work Australia, in one of the decisions which was subject to the appeal, that ‘permitted’ in this context meant ‘authorised’ and the clause could not be said to authorise the relevant discrimination.

Validity of other clauses

In addition to the contracting-out clause, the Full Court approved provisions in the ADJ agreement that:

  • Gave the relevant union a right of entry to assist with representing an employee(s) under the agreement’s dispute resolution procedure, provided that the entry must not be used for any other purpose (this proviso was critical to the validity of the clause); and
  • Required ADJ to promote union membership among its existing and prospective employees. The mere promotion or encouragement of union membership was not a breach of the s350 FW Act prohibition on ‘inducing’ an employee to become or remain a union member.  Depending on how ADJ implemented this agreement obligation, ADJ could potentially breach s350(1), but this would need to be assessed on a case by case basis and should not be assumed from agreement terms which, on their face, did not breach s350.

Employer responses to claims for contracting out clauses

Subject to an appeal, or legislative change proposed by a future Coalition government, the validity of job security provisions which require parity of pay and conditions of contractors with those of existing employees now appears to be beyond challenge.

This needs to be distinguished from the validity of agreement clauses that seek to regulate the terms of contractors who perform work of a kind that will not be performed by any employee covered by the agreement. On the current state of the law, such provisions are not likely to pertain to the requisite employment relationship and therefore are not permitted matters (CFMEU v Brookfield Multiplex Australasia Pty Ltd [2012] FWA 4051).

Employers who have concerns about the inclusion of such provisions in their enterprise agreements will need to establish and implement bargaining strategies in support of their positions.  If faced with such a claim, the good faith bargaining requirements require employers, among other things, to genuinely consider the proposals and provide reasons for their response in a timely manner.

That is not to say that employers are required to accept any such claims or reach a negotiated outcome to settle them. As evidenced by the recent Qantas workplace determination (TWU v Qantas Airways Limited; Q Catering Ltd [2012] FWAFB 6612) Fair Work Australia will be hesitant to award such claims, where to do so would negatively impact on efficiency and productivity, and could not be justified by market conditions, such as industry practice and the requirement to remain competitive.

Nevertheless employers will need to give reasons for their positions and should be aware of industry practice generally or risk adverse bargaining orders being made. The effectiveness of an employer’s response may be bolstered by:

  • economic data personal to the employer, the industry and/or a region more generally;
  • evidence of the negative impact that such a clause would have on the employer’s operations and/or profitability;
  • evidence of the current practices of other employers in the industry to the extent that this shows that competitors are not bound by pay parity or other contracting out obligations (and that such provisions would therefore put the employer at a competitive disadvantage).

If employers are prepared to reach a negotiated outcome at some stage, consideration should be given to providing different protections to existing employees to address the issues of concern, rather than a commitment to pay parity for contractors. Different protections could for example relate to job security, such as a commitment not to make employees compulsorily redundant as a direct use of supplementary labour (also seen in the recent Qantas workplace determination), or a commitment (or aspiration) to reduce or limit supplementary labour.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


Heidi Roberts

Partner. Melbourne
+61 3 9672 3562


Jack de Flamingh

Partner. Sydney
+61 2 9210 6192


John Tuck

Partner. Melbourne
+61 3 9672 3257


Nicholas Ellery

Partner. Perth
+61 8 9460 1615


Stephen Price

Partner. Sydney
+61 2 9210 6236


Professor Anthony Forsyth

Consultant. Melbourne
+61 3 9672 3322