Comments upon Draft Guidance Note 7 Issued by the Fair Work Ombudsman

Transcription

1 Comments upon Draft Guidance Note 7 Issued by the Fair Work Ombudsman ABI submission to the Fair Work Ombudsman May 2010

2 Introduction On 30 April the Fair Work Ombudsman (Ombudsman) issued a draft Guidance Note, Transitional arrangements in modern awards, (GN 7) for comment. Australian Business Industrial (ABI) would like to thank the Ombudsman for the opportunity to comment on GN 7. GN 7 focuses primarily on the model transitional arrangements which were handed down by the Commission in its September 2009 decision (with some slight modifications in subsequent decisions). ABI is aware that the Ombudsman has been consulting with peak organisations about an approach to the model provisions. It welcomes and applauds the efforts of the Ombudsman to both explain and examine its thinking about the model transitional arrangements and its receptivity to user views. ABI also considers that the approach adopted by the Ombudsman in listening to the views of employers and unions is consistent with the award modernisation process (such as items of Minister s award modernisation request (Request)) and the approach taken by the Commission in the award modernisation process, and when making transitional provisions (see, for example, [2009] AIRCFB 800, paras 17-18). ABI wishes to address three issues arising out of GN 7. They are Absorption Equivalent provisions Changes in pay scale classifications after 1 July 2010 Making modern awards and the model transitional provisions ABI believes that the context in which the model transitional provisions were made is key to how they should be read, understood and enforced. The preparedness of the Commission, and Fair Work Australia after it, to listen to the parties (and to allow for industry specific approaches, including in such matters as industry approaches to the translation of classifications into modern awards) is indicative of this. The model transitional provisions were inserted into most modern awards as part of the modernisation process which was undertaken under Part 10A of the Workplace Relations Act 1996 (WR Act). S 576A of the WR Act required the Commission to make modern awards in accordance with the Request and also required of modern awards that they were...simple to understand and easy to apply, and must reduce the regulatory burden on business... (s 576A(2)(a)). The Request also required that awards must be simple to understand and easy to apply, and must reduce the regulatory burden on business... (item 1(a), Objects, Request) and must result in a certain, [stable and sustainable] modern award system... (item 1(e)). While the Request addresses the Commission s obligations in creating modern awards these requirements also apply to their operation and enforcement. This can be seen in the requirement in item 1(e) above that the modern award system is certain [stable and sustainable] and also in item 2 of the Request.

3 Item 2 provides that the creation of modern awards is not intended to...disadvantage employees... (item 2c)) nor...increase costs for employers... (item 2(d)). These terms of the Request were not altered or modified by any of the post March 2008 variations made by the Minister. When it handed down the model transitional provisions the Commission was very conscious of the context of its decision. It said: In considering what transitional provisions should apply the objects found in cll.1 and 2 of the consolidated request are of primary importance. ([2009] AIRCFB 800, para 2) When the Commission created the model transitional provisions the WR Act had been repealed (subject to transitional legislation which continued the effect of some of its provisions) and modernisation was continued by virtue of the Fair Work (Transitional Provisions and Consequential Provisions) Act 2009 (Transitional Act) which had commenced on 1 July This, too, was at the forefront of the Commission s thinking. When discussing Schedule 5, which dealt with the continuation of award modernisation, item 2(5) of the Transitional Act and the WR Act, the Commission said: [...] the most relevant provisions in the current circumstances are those which the legislature has specifically enacted for award modernisation. Those are the provisions in Part 10A of the WR Act and item 2(5) of Schedule 5 to the Transitional Act. To these should be added the terms of cll.1 and 2 of the consolidated request, noting again that cl.1 reflects the terms of s.576a of the WR Act. ([2009] AIRCFB 800, para 11) Item 2(5) of the Transitional Act required the Commission to have regard to the impact of its decision on a variety of economic factors and when making any modern award the likely effects on the relevant industry or industry sector including on productivity, labour costs and the regulatory burden on businesses. The Transitional Act also provided that Fair Work Australia could make take-home pay orders when an employee, outworker or class of employee or outworker suffers a reduction in takehome pay as a result of modernisation. A modernisation-related reduction occurs when an employee or outworker has reduced take-home pay as a result of the modern award coming into effect when the employee s, or outworker s, work has not otherwise changed (item 8, schedule 5, Transitional Act).

4 Absorption At subparas GN 7 provides that over-award payments may be used to offset increases which arise under a modern award when it is clear that the intention underlying the over-award payment is consistent with the benefit it is now intended to offset. ABI does not believe that this interpretation is consistent with the Commission s model transitional absorption provisions. ABI believes the absorption clause applies as it reads and is consistent with the requirement that modern awards are to be simple to understand and easy to apply. In ABI s view the effect of the absorption clause is that provided the employer is paying at least the amount required by the modern award, having regard to the operation of the transitional provisions in the modern award, the employer is satisfying requirements under the modern award and also acting lawfully with respect to the employer s contractual obligations. This is because contracts have been altered by the operation of the absorption clause. (ABI accepts that there may be changes to records keeping and pay slip obligations arising from the changed make up of the employee s overall pay.) Were the usual common law rules of offset intended to operate in the context of new costs imposed by modern awards it is difficult to see why the Commission would have decided to provide for absorption, let alone in the terms that it did In creating modern award and the transitional provision the Commission had three options for dealing with increases because of new penalties or loadings under the modern award where an employee was in receipt of over-award payments. It could have required that that all overaward payments were retained in addition to any increases which may be brought on by the modern award. This was the position proposed by the ACTU ([2009] AIRCFB 800, para 19) and it was not adopted by the Commission on this occasion. Second, the Commission could have decided that normal offsetting rules would apply. This could have been addressed by providing no provision and stating in the decision that it favoured neither the ACTU s proposed no change to current over-award payments nor the employers proposal that over-award payments could be used to offset any increase. This, too, the Commission did not do, either by stating that this is what it had decided, or even by inserting a provision to this effect which was simply understood to be saying just that. Third, the Commission could have determined, that because it was creating new entitlements, some of which might have significant impacts on some employers it would permit absorption where there were over-award payments applying. As outlined above the model transitional provisions were created under the award modernisation process and subject to its rules and context. The Commission inserted the following standard absorption provision into the model transitional provisions:

5 The monetary obligations imposed on employers by this award may be absorbed into overaward payments. Nothing in this award requires an employer to maintain or increase any overaward payment. ([2009] AIRCFB 800, para 19) In this provision the employer is not obliged to maintain, nor increase, over-award payments. The employer is not obliged to reduce over-award payments, and may choose to retain overaward payments in the face of a new increase where the employer wishes to. In the case of an employer which pays an over-award payment because it seeks to match or better the market, the employer may choose to retain or increase the over-award amount. This is not prevented. When it determined the absorption clause the Commission said: We deal first with the issue of absorption. There was a range of views on the issue. Most employer representatives took the view that any increases resulting from a modern award should be capable of absorption into existing overaward payments. The Australian Council of Trade Unions (ACTU) and most unions took a contrary view. They argued that overaward payments should be maintained in all circumstances. Modern awards are concerned with minimum wages and conditions and not with overaward payments. It would not be appropriate, even on a transitional basis, to require an employer to maintain overaward payments. We have decided to provide for absorption. Of course the payments specifically regulated in the transitional provisions are not to be regarded as overaward payments. Those payments are referable to pre-modernisation obligations in award- or agreement-based transitional instruments. The model provisions will include the following:...([2009] AIRCFB 800, para 19) In concluding, inter alia, that modern awards are concerned with minima, the Commission did not say that that it would not deal with absorption specifically (so that the normal rules of contract would apply). In the context of the ACTU proposal to maintain existing over award payments and the proposal of most employers to allow for absorption against over award payments generally, the Commission determined that it would provide for absorption. The Commission then turned to reductions in take-home pay. It extended the capacity in the Transitional Act to make take-home pay orders where there was a shortfall attributable to award modernisation to the operation of the transitional provisions. It did so in case the Transitional Act confines access to take-home pay orders to shortfalls arising from the commencement of modern awards. ABI s proposed reading of the absorption clause is consistent with the statutory protection under the Transitional Act given employees who are being covered by modern awards and subject to the transitional provisions. Take-home pay is the totality of the pay the employee receives to take home. This is what is protected. An employer can avoid the possibility of a take-home pay order by continuing to pay as previously (and this appears to be the object of the provision). As explained in the Explanatory Memorandum: 197. This Division makes clear that the award modernisation process is not intended to result in a reduction in the take-home pay of employees, and provides a mechanism for obtaining remedial orders (take-home pay orders) if there is such a reduction. The scope for take-home pay orders is tightly constrained. The intention is that orders can only be made where: there is an actual reduction in take-home pay - if award rates decrease, but an employee s pay does not decline (because pay is maintained by their employer), an order cannot apply;

6 award modernisation is the operative or immediate reason for a reduction in take-home pay These provisions are not intended to allow FWA to review entitlements in modern awards generally. Rather, the intention is to allow FWA to deal with cases in which an employee suffers a reduction in their take-home pay, for working the same hours or performing the same quantity of work, due to the award modernisation process. (pp Explanatory Memorandum, Transitional Act) Absorption is an option which is available to tribunals when creating a new entitlement and absorption clauses are themselves terms of the instrument they are part of. The reading of the absorption clause in GN 7 suggests an asymmetry in the Commission s approach to paras 2(c) (disadvantaging employees as provided under the Transitional Act) and 2(d) (not imposing additional costs as it was providing under the absorption clause) when it was writing the clause fully cognisant of the Transitional Act and item 8 of schedule 5. Finally, ABI should comment upon the fact that this approach to absorption is not one which is supported by the ACTU. To the best of ABI s knowledge it is not an agreed position between the parties. The lack of agreement does not make ABI s position incorrect, but clearly an agreed position is to be preferred. It is ABI s view that although there does not appear to be agreement from the ACTU on how absorption should be understood during the transition the approach that ABI proposes does not appear to be an approach the ACTU is implacably opposed to. It would be surprising if, given the position it adopted in consultations leading to the Commission s 2 September decision, the ACTU would readily agree to ABI s proposed reading.

7 Equivalent Provisions The bulk of the model transitional provisions are found at Schedule 1 of the modern awards containing them. A.1.2 provides that a transitional percentage arises when there is a difference in a penalty or loading in the relevant transitional minimum wage instrument or award-based transitional instrument and an equivalent provision in the modern award. This is primarily dealt with at para 9 in GN 7. Sub-paragraphs 9.1 and 9.2 deal with the situation of a penalty or loading under the modern award where there was no penalty or loading in the pre-modern award entitlements or there was one which is identical to the one in the modern award. At sub-paragraphs 9.3 and 9.4 GN 7 deals with circumstances where there is a difference between the penalty/loading in the pre-modern award entitlement from that in the modern award and sets up two different approaches to phasing depending on whether the old and new penalty/loading is equivalent or not. Sub-paragraphs 9.6 and 9.7 identify the Ombudsman s view of what is meant by equivalent provisions ; that is, it must be for the same purpose for the same time periods paid at the same frequency and as a percentage of the same amount. In other words, for there to be equivalence only the percentage can differ between the two penalties/loadings. In ABI s view this is an over restrictive view of equivalent. The consequence of a pair of penalties/loadings being equivalent or not is significant. Whereas equivalent penalties/loadings are to be phased up or down, when the penalties/loadings are not equivalent they must be both phased up (the new penalty/loading) and down (the old penalty/loading) - a complicated calculation. This is not a reading which gives effect to the requirement that modern awards be simple to understand and easy to apply. It will serve to confound the vast majority of employers. ABI accepts there may be situations where the differences between the pre-modern award entitlement and the modern award entitlement are too different for them to be equivalent. ABI also accepts, and agrees with, the approach of retaining a monetary penalty to be phased (rather than a transitional percentage) where the pre-modern award entitlement is expressed as monetary amount which cannot be reduced to a single percentage penalty or loading. It notes the definition of transitional percentage: The difference between two equivalent loading/penalty rates. This will not always be a percentage amount.. In ABI s view equivalent provisions exist when the penalty/loading is 1. for the same purpose (a different shift penalty because the nature of shift in a particular span has been defined would constitute the same purpose, ie., it is a shift penalty) 2. paid at the same frequency and as a single quantifiable percentage for all employees attracting the penalty or loading. A consequence of this approach would be that the situation where there is an afternoon shift in both the pre-modern award entitlement and the modern award, but the time commencement and/or finishing time changes, as for example between the Clerical and Administrative

8 Employees (State) Award [NSW NAPSA] and the Clerks Private Sector Award 2010 would be equivalent. The effect of this is that, depending on the employees rostered hours before the commencement of the modern award, the employees 1. may now be on afternoon shift (moving from zero shift penalty to 15%) 2. may remain on afternoon shift (moving from 17% shift penalty to 15%) 3. may now be on afternoon shift rather than (non-permanent) night shift (moving from 20% shift penalty to 15%) Using the broader definition of equivalent the employer is phasing a transitional percentage of % (or +3% p.a.) % (or - 0.4% p.a.) % (or - 1% p.a.) A broader reading of equivalent provision will take many complicated calculations out of the system and confine them to more unusual situations. It does not seem to misread the model transitional provisions. ABI s broader reading of equivalent provisions also appears consistent with the approach adopted at sub-paragraphs GN 7 which deals with loadings and penalties for casuals. In the example of penalties and loadings which are equivalent the total penalty+loading in the pre-modern award entitlement is the same as under the modern award but under the pre-modern award entitlement the employee is entitled to a casual loading of 25% and a penalty of 25% of the classification rate. Under the modern award the casual employee is entitled to penalty of 50% which is annotated as being inclusive of the casual loading. The broader approach to equivalent provisions would also assist in the case of casuals working a span which attracts a separate penalty or loading. When a casual works in a span of hours which attracts a separate penalty or loading the resulting penalty/loading has been usually addressed one of in three separate ways There is a specific penalty/loading which applies and the casual loading does not apply The casual loading and the other penalty/loading both apply calculated against the classification rate (that is, the penalties/loading percentages could be added) The casual loading and the other penalty/loading both apply but the other penalty/loading is calculated against the loaded casual rate (that is, the penalties/loading percentages are to be compounded) In its priority awards decision the Commission decided to award a standard casual loading and that generally the standard casual loading and any other penalty/loading should both be calculated on the classification rate (that is, the percentages could be added to ascertain the applicable percentage for that span of hours). This is consistent with the requirement that modern awards are simple to understand and easy to apply. The Commission said In all the circumstances we have decided to confirm our earlier indication that we would adopt a standard casual loading of 25 per cent. We make it clear that the loading will compensate for annual leave and there will be no additional payment in that respect. Also, as a general rule, where penalties

9 apply the penalties and the casual loading are both to be calculated on the ordinary time rate. ([2008] AIRCFB 1000, para 50) This rule applies to most but not all modern awards. The situation is more diverse for premodern award arrangements. Using the clerks example referred to above, a casual clerk moving from the afternoon to night shift (because his/her shift ends after 11:00pm and by midnight) would be facing a change from the current nominal 17% shift penalty Modern award: casual loading 25%; shift penalty 15% Pay scale/napsa: nominal casual loading 20%; shift penalty 20% on loaded casual rate (effective shift penalty 1.2 x 20% = 24%) This approach does not give rise to a different casual loading for each span of hours and allows a direct comparison, and therefore a stable phasing arrangement, for the applicable shift penalty. It is similar to the approach to calculating the casual loading when the pay scale/napsa provided 1/12 th for annual leave. Thus, because it s a NSW pay scale the phasing arrangements become Casual loading: from 30% to 25% Shift penalty: from 24% to 15% It seems to ABI that all parties have difficulties with the narrowness of the notion of equivalent currently employed in GN 7.

10 Changes in pay scale classifications after 1 July 2010 ABI understands that the Ombudsman takes the view that where there is an entitlement under a pay scale, such as a service based increment, which would have applied at a date after 1 July 2010 had the pay scale continued to apply, that increment would be recognised because it would alter the transitional amount (the difference between the pre-modern award entitlement and the modern award classification rate). If ABI correctly understands the Ombudsman s view, this approach does not easily accord with the calculation principles outlined at sub-paragraphs GN 7. These sub-paragraphs seem based on the idea that a transitional amount is able to be calculated for an employee on the difference between the employee s rate under the pay scale as at 1 January 2010 and the modern award classification rate as at 1 January This is how these provisions would generally be understood although it may not exactly be the meaning intended. In any case, the transitional amount stays the same each year (GN 7, sub-para 8.24) although it is phased against a modern award rate which is increased by successive annual wage review increases. In fact, as ABI understands the intent of these sub-paragraphs of GN 7, changes which occur during the period 1 January 2010 and 1 July 2010 are relevant to the calculation of the transitional amount. It may be that sub-paragraphs might be amended to better accommodate, and draw attention to, this fact. The three key ideas here are that the transitional amount is based on the difference between the employee s classification rate under the pay scale and the modern award as both instruments were at 1 January (ie prior to any variation which Fair Work Australia might make or a state tribunal might purport to make); the transitional amount is based on the employee s individual entitlement under the pay scale immediately before the rate alters on the first pay period on or after 1 July 2010 (ie if the employee s personal circumstances were such that (s)he was entitled to an increment or classification change under the pay scale during the period 1 January and 1 July, the post-increment/classification change rate is the rate in the pay scale for the transitional amount calculation); the transitional amount is based on the employee s individual entitlement under the modern award scale immediately before the rate alters as a consequence of the annual wage review on the first pay period on or after 1 July 2010 (ie if the employee s personal circumstances were that (s)he was entitled to an increment or classification change under the modern award during the period 1 January and 1 July, the post-increment/classification change rate is the rate in the modern award for the transitional amount calculation). However, after the first pay period on or after 1 July the pay scale rate is not continued. The employee s rate is now the modern award rate plus or minus 20% of the transitional amount which has been established. The transitional amount stays the same each year although the proportion of it which is added or subtracted changes and the modern award classification rate against which the addition or subtraction is made changes (GN 7, sub-para 8.24). If this is so it would seem that an increment or classification change which might have occurred after 1 July under the pay scale, had it continued to apply, is of no effect. Conversely, an increment or

11 classification change which is provided by the modern award after 1 July would have effect. The employee s rate from the date of increment/classification change under the modern award would now be based on the new rate plus or minus the relevant proportion of the transitional amount. Contact Officer: Dick Grozier Director Industrial Relations Australian Business Industrial Ph: (02) dick.grozier@australianbusiness.com.au

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