Individual flexibility arrangements

The Fair Work Act 2009 (Cth) (“FW Act”) commenced on 1 July 2009 and replaced the previous Workplace Relations Act 1996 (Cth).  In addition, the Australian Industrial Relations Commission has been conducting a process of award modernisation under which all existing State Awards and Federal Awards will be replaced by “Modern Awards” for employers in the national system from 1 January 2010.  We anticipate that most, if not all, employers will be covered by one or more Modern Awards from 1 January 2010.  The FW Act also enables employers and their employees to make “Enterprise Agreements”, which are collective agreements negotiated between employers and their employees setting out the terms and conditions of employment for employees covered by the Enterprise Agreement.  When Enterprise Agreements are in operation, they displace any Modern Award which would otherwise apply to the employees.

Significantly, the FW Act enables employers and employees to agree to “individual flexibility arrangements” (“IFAs”) under which an employer and an individual employee can vary the terms a Modern Award or Enterprise Agreement provided that the employee’s minimum entitlements are preserved.

This article aims to provide employers with some practical guidance on making IFAs with their employees.

“Flexibility Terms”

The FW Act requires every Modern Award and Enterprise Agreement to include a “flexibility term”.  Where an Enterprise Agreement does not include a flexibility term it will be deemed to include the “model” flexibility term set out in the legislation.

A flexibility term enables an employer and an individual employee to agree on an IFA which varies the effect of the Modern Award or Enterprise Agreement in order to meet the genuine needs of the employer and that individual employee.  The IFA must result in the employee being better off overall than the employee would have been if no IFA had been agreed to.  The IFA must be a separate agreement in writing and cannot form part of an employee’s common law employment agreement.  Generally, the IFA should:

• be signed by the employer and employee (and the employee’s parent or guardian if the employee is under 18 years of age);

• state each term of the Modern Award or Enterprise Agreement that the parties have agreed to vary;

• detail how the application of each term has been varied;

• detail how the IFA results in the individual employee being better off overall in relation to the individual employee’s terms and conditions of employment; and

• state the date the IFA commences to operate.

Once the IFA is properly made it has effect as if it were actually a term of the Modern Award or Enterprise Agreement for the individual employee subject to the IFA.  Both the employer and employee should retain a copy of the IFA after it is made.

An IFA may be terminated by agreement between the parties or by either the employer or employee giving a required period of written notice.  Given the ability of the individual employee to terminate an IFA, we recommend that appropriate provisions be included in both the IFA (and the applicable common law employment agreement) setting out the consequence of the termination of the IFA on the employee’s remuneration.  This is discussed in more detailed below.

Firstly, we would like to point out some minor differences between IFAs made under a Modern Award and an Enterprise Agreement.

IFAs made under a Modern Award

Each Modern Award expressly provides that an IFA can only vary the following terms of the Modern Award:

• arrangements for when work is performed;

• overtime rates;

• penalty rates;

• allowances; and

• leave loading.

It is not possible to make an IFA which purports to vary any other provisions of the Modern Award.

It is important to note that an IFA can only be made after the relevant employee has commenced employment and has become covered by the relevant Modern Award (ie after 1 January 2010).  An employer cannot insist upon an employee agreeing to an IFA as a condition of employment, nor can an employer discriminate against or take adverse action against an employee for refusing to agree to an IFA.

IFAs made under Enterprise Agreements

Unlike Modern Awards, an IFA made under an Enterprise Agreement can vary any of the terms of the Enterprise Agreement that are referred to in the flexibility term contained in the Enterprise Agreement.  For example, if the flexibility term included in the Enterprise Agreement provides that the employer and an individual employee may agree to vary any of the terms of the Enterprise Agreement, an IFA could be made which varies any of the terms of the Enterprise Agreement.  Alternatively, the flexibility clause in the Enterprise Agreement may limit the terms which can be varied under the IFA.

Example of use of an IFA

Many employers will be accustomed to paying their employees an annual salary which reflects an expectation that the employee may work outside standard working hours without any additional payment, such as overtime.  From 1 January 2010, many Modern Awards will provide such employees with an entitlement to be paid overtime and penalty rates if they work outside of standard hours, irrespective of whether or not their annual salary is above the minimum wage rate set out in the applicable Modern Award.  In such circumstances, it may be advantageous for an employer to seek to enter into an IFA with an individual employee under which the employer agrees to pay the individual employee an annualised salary which is paid in satisfaction of the employee’s entitlement to be paid overtime rates, penalty rates, allowances and leave loading under the applicable Modern Award.

Such an IFA could only be made if the IFA adequately details how the IFA results in the individual employee being better off overall than the employee would have been if no IFA had been agreed to, which would require the employer to establish that the annual salary paid to the employee is greater than the annual remuneration the employee would receive if the employee was paid the wage rate and the other monetary entitlements set out in the Modern Award (being overtime rates, penalty rates, allowances and leave loading).

Should an employer wish to use an IFA in this way, we would recommend that the IFA expressly provide that if the IFA is terminated by either the employer or the employee, the employee’s remuneration shall be determined in accordance with the applicable Modern Award.  The employer would then have scope to reduce the employee’s remuneration from the annual salary set out in the IFA to the wage rate (and other monetary entitlements) set out in the Modern Award.

We would also recommend that any common law employment agreement between the employer and individual employee include a similar provision enabling the employer to reduce the employee’s remuneration to the Modern Award rate if the IFA is terminated.  This would provide a contractual basis for an employer to reduce an employee’s remuneration if, for example, the parties had agreed to an annual salary in an IFA which was subsequently terminated by the employee.

Please note there is no requirement for an employer to lodge an IFA with Fair Work Australia or otherwise obtain approval from FWA in order to make an IFA.  However, if an employer does not ensure that an IFA is made in accordance with the FW Act, it may be liable to a civil penalty of up to $33,000.00.