Terminating enterprise agreements past their nominal expiry

The Fair Work Legislation (Secure Jobs, Better Pay) Act 2022 (Secure Jobs Act) received Royal Assent on 6 December 2022, significantly amending the Fair Work Act 2009 (FW Act). Our article summarising the changes can be accessed here.

This update is the first in a series of updates taking a closer look at the key amendments introduced by the Secure Jobs Act and focuses on changes to terminating enterprise agreements after their nominal expiry date.  

In this update we explain what has changed, the practical impact of the changes, how employers can mitigate any adverse effects of the changes, and when the changes come into force.

In addition to our series of updates, Norton Rose Fulbright Australia is holding a national seminar series focusing on the key changes to the FW Act. You can express your interest to attend one of the seminars by contacting a member of our team, Atlanta Stoyle at atlanta.stoyle@nortonrosefulbright.com.

Terminating enterprise agreements

An enterprise agreement that passes its nominal expiry date (which cannot be more than four years after an agreement is approved) continues to apply, until it is replaced by another enterprise agreement or terminated in accordance with the FW Act.

In order to terminate an enterprise agreement, an application must be made to the Fair Work Commission (FWC), who then decides whether to approve the termination.

There are two circumstances in which an application to terminate an enterprise agreement can be made:

  • before the enterprise agreement’s nominal expiry date: by agreement between the employer(s) and employees covered by the agreement; or
  • after the enterprise agreement’s nominal expiry date: upon application by an employer, employee or employee organisation covered by the agreement.

The Secure Jobs Act has not changed the circumstances in which the FWC may approve the termination of an enterprise agreement by agreement before its nominal expiry date.

However, since 7 December 2022 the circumstances in which the FWC can approve the termination of an enterprise agreement after its nominal expiry date have significantly changed, with the Secure Jobs Act replacing the general public interest test and FWC discretion under the FW Act with a set of prescriptive conditions which the FWC must have regard to.

When can an enterprise agreement that has passed its nominal expiry date be terminated?

Previous positionNew position
The FWC must approve the termination of an enterprise agreement if it is satisfied that: it is not contrary to the public interest to do so; and it is appropriate to terminate the agreement taking into account all of the circumstances including: the views of the employees, each employer, and each employee organisation covered by the agreement; and the circumstances of those employees, employer/s and organisations – including the likely effect that the termination will have on each of them.The FWC must terminate an enterprise agreement if it is appropriate in all the circumstances to do so, and it is satisfied that one of the following three criteria applies:

1. the continued operation of the agreement would be unfair for the employees covered by it; or
2. the agreement does not, and is not likely to, cover any employees; or
3. all of the following apply:

– the agreement’s continued operation would pose a significant threat to the viability of a business carried on by the employer(s) covered it; and
– the termination of the agreement would be likely to reduce the potential of employment terminations due to redundancy, insolvency or bankruptcy; and
– if the agreement contains terms providing entitlements relating to the termination of  employment, the employer(s) has given the FWC a guarantee of termination entitlements in relation to the termination of the agreement.

The FWC must also consider the views of the employees (unless none are covered), each employer, and each employee organisation covered by the agreement. 

Other than in limited circumstances, if the termination application is opposed it must be heard by a Full Bench of the FWC.

Although the FW Act previously required the FWC to be satisfied it was appropriate in all of the circumstances to terminate an agreement, the FWC had a broad discretion to take into account all of the relevant circumstances. The new requirements remove this discretion, replacing it with a range of prescriptive considerations that impose a higher burden that employers must meet in order to terminate an enterprise agreement.

Assuming that an enterprise agreement still covers employees and its continued operation would not be unfair on employees, an employer seeking to terminate an agreement must now demonstrate a ‘significant threat to the viability of a business’. Inevitably, demonstrating that the continued operation of an enterprise agreement constitutes a ‘significant threat’ will be a high bar for employers to meet, most likely requiring significant evidence in support to be adduced.

In addition, if the enterprise agreement contains terms providing for termination entitlements, employers must provide the FWC a guarantee of employee entitlements (which is explained in further detail below).

The changes will therefore make it more difficult for an employer to terminate an agreement that is no longer commercially viable. Conversely the new provisions will likely make it easier for unions to successfully terminate an agreement that has passed its nominal expiry, where its terms are less favourable than the underpinning modern award (e.g. if base rates of pay are largely consistent with the underpinning award rates, but penalty rates and allowances are less beneficial) on the basis its continued operation would be unfair for employees. 

What criteria must the FWC consider to approve the termination?

Previous positionNew position
The FWC can approve the termination of an agreement any time after the nominal expiry date, with or without consent of the other party(s).The FWC must have regard to:

– whether the application for termination of the agreement was made at or after the notification time for a proposed enterprise agreement that will cover the same group of employees;
– whether bargaining for the proposed enterprise agreement is occurring; and
– whether the termination of the existing agreement would adversely affect the bargaining position of the employees that will be covered by the proposed enterprise agreement. 

While it has always been difficult for an employer to terminate an enterprise agreement after its nominal expiry in circumstances where the bargaining for a proposed enterprise agreement is occurring, and the termination will adversely impact employees, the new criteria introduced by the Secure Jobs Act impose further limitations. 

Unless employers can satisfy the FWC that terminating the existing agreement would not adversely affect the bargaining position of employees (for example, by providing assurances that it will continue to provide existing beneficial agreement terms and conditions until the proposed agreement is approved), it will now be even more difficult for an application to succeed, once bargaining for a replacement agreement is underway.

What is a guarantee of employee entitlements?

Where an employer applies to terminate an agreement based on criterion 3 above (i.e. its operation will pose a significant threat to the business’s viability, the termination of the agreement will likely reduce the potential for terminations of employment, and the agreement provides for termination payments that are more favourable than what employees would be otherwise be entitled to receive), employers must provide the FWC with an undertaking guaranteeing termination entitlements. 

A guarantee will remain in force until:

  • the end time specified in the guarantee (if any), as approved by the FWC;
  • immediately before another enterprise agreement (with the same or substantially the same coverage as the terminated agreement) comes into force; or
  • 4 years from the day the guarantee is given to the FWC,

whichever is earlier.

Previous statusNew status 
Once the agreement is terminated, absent any contractual entitlement or other agreement, an employee’s entitlement to termination payments (e.g. redundancy and notice of termination) would revert back to the applicable modern award.While a guarantee is in force, if a ‘protected employee’ (i.e. an employee who would have otherwise been covered by the agreement had it not been terminated) is terminated:

– by reason of redundancy (ie at the employer’s initiative because the employer no longer requires the job done by the employee to be done by anyone, except where this is due to the customary turnover of labour); or
– because of the employer’s insolvency or bankruptcy,

the employer must provide any above-award termination entitlements that were provided for under the terminated agreement.

The practical implication of this new provision is to preserve favourable employee termination payments for ‘protected employees’ who are made redundant, or whose employment is terminated because of the insolvency or bankruptcy of the employer.  

In addition to the limited circumstances permitting employers to terminate enterprise agreements after their nominal expiry date, the requirement to preserve favourable termination entitlements will likely further deter employers from applying to terminate such an agreement.

Key takeaways for employers

These amendments significantly alter the circumstances in which employers can terminate enterprise agreements that have passed their nominal expiry date, and in many respects limit the benefits which may have formerly been gained by terminating an agreement. 

We recommend employers considering terminating an enterprise agreement that has passed its nominal expiry date keep the following in mind:

1. Unless it can be demonstrated the agreement’s continued operation would be unfair to employees covered by it, or the agreement no longer covers any employees – employers seeking to terminate an agreement will need to demonstrate its continued operation would pose a significant threat to the viability of their business.

2. Even if an employer can establish the agreement’s continued operation would impact the viability of its business, if the agreement provides above-award termination payments – is there any benefit gained from terminating the agreement given the obligation to guarantee those payments (potentially for up to four years)?

3. If bargaining for a replacement agreement is underway, the employer will need to satisfy the FWC that the agreement’s termination would not adversely affect the bargaining position of employees – will any assurances that may be required undermine the basis for applying for the termination?  

On the flip-side, if an employer has an enterprise agreement that has passed its nominal expiry date, but its continued operation could be considered to be unfair to employees (i.e. it provides for terms and conditions that are less beneficial than the underpinning modern award), there is a risk an employee or the union will make an application to terminate the agreement.

To minimise any unintended consequences that may result from these changes, we recommend employers covered by enterprise agreements that have passed their nominal expiry date review those agreements and consider whether from a strategic perspective it is time to bargain a replacement agreement – particularly if there is a risk another party to the agreement may apply to terminate the agreement.

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