Fairness Test may spell end of AWAs

New rules about compensation for the loss of conditions may prompt SMEs to drop workplace agreements and revert to their pre-WorkChoices regime. By PETER VITALE of VECCI.

By Peter Vitale

The Federal Government has now disclosed the details of the new “Fairness Test” to be applied to all AWAs and collective workplace agreements, and employers should be warned: AWAs may no longer be worth the trouble.

The new test, set out in the Workplace Relations (A Stronger Safety Net) Bill, is essentially a revival of the “no-disadvantage test”, which applied prior to the WorkChoices changes in March 2006.

Like the old test, the Workplace Authority (formerly the Office of the Workplace Advocate) will decide whether an AWA or collective agreement is fair by comparison to either to an award, which binds the employer, or to an award designated by the authority as appropriate.

Under the new test, the Workplace Authority director has to determine whether any AWA or collective workplace agreement made since 7 May 2007 provides fair compensation to employees for the loss of conditions such as penalty rates, shift loadings, leave loadings and allowances.

These are somewhat misleadingly known as “protected award conditions”, misleading because under WorkChoices any workplace agreement could completely exclude or modify those conditions. In theory that will still be possible, but agreements cannot operate if they don’t provide employees with significant and valuable compensation for the loss of those conditions.

The likely effect of the changes to WorkChoices is that SMEs will stop using workplace agreements in big numbers. Although many SMEs have found AWAs a simple way of reducing or smoothing out the spikes in costs represented by traditional penalties and loadings, those benefits may be less obvious under the Fairness Test.

The indications are that employers will be returning to their pre-WorkChoices spreadsheets to ensure that employees are not any worse off.

The new system differs from the old no-disadvantage test in a couple of ways. The new test does not apply where employees are earning more than $75,000 as a base salary, not including penalty rates, loadings and so on. So employers can effectively annualise pay rates for those employees.

Another subtle difference from the old no-disadvantage test is that it there is a more rigid test to be applied to AWAs than there will be for collective agreements. In the case of calculating fair compensation for employees losing protected award conditions, employees will have to be compensated dollar for dollar. But in the case of collective agreements, the Workplace Authority can take into account whether the compensation is fair “on balance” and “in its overall effect”.

If an agreement fails the test, the employer has one chance to rectify it. Employers will have up to 14 days to make appropriate amendments, or give undertakings to the Workplace Authority, based on the authority’s advice as to how the agreement can pass the fairness test.

If the agreement is still not right, it ceases to have effect and employees revert to whatever terms and conditions previously applied, such as a pre-WorkChoices certified agreement. Interestingly, an employer not previously bound by any award will be deemed to be bound by whatever award is designated by the authority during the process. An employee must be paid compensation for any period the employer did not comply with the fairness test.

The lesson for SMEs wanting to implement AWAs or workplace agreements is to take a deep breath. Entering an agreement now, which does anything other than comply with pre-existing award conditions, can risk failing the fairness test and lead to a significant back payment or penalties.

Peter Vitale is a solicitor, the General Manager of Workplace Relations Services at VECCI and a principal at CCI Victoria Legal.

See more articles by Peter Vitale here.