Lauren Townsend

Fair Work Commission Full Bench gives green light to ‘helpful’ pay reconciliation clauses in enterprise agreements

Lauren Townsend

13 July 2021

Employment Policies

The Fair Work Commission Full Bench has demonstrated a degree of pragmatic flexibility in applying the better off overall test (the BOOT) to a Commonwealth Bank of Australia Group (CBA Group) enterprise agreement – the Commonwealth Bank Group Enterprise Agreement 2020 (the Agreement). The Full Bench has indicated that it will accept a ‘reconciliation clause’ in the Agreement as a remedy to financial BOOT concerns.  The reconciliation clause is designed to compensate employees for any under payments compared to the underpinning award, over a six month period.[1]

The trouble for CBA Group started when CBA Group put the Agreement to an employee vote even though the deal did not yet have the endorsement of the Finance Sector Union (FSU).  The vote was successful by approximately a two-thirds majority of employees voting.  However, the FSU objected to the approval of the Agreement on several grounds, including on the basis that the Agreement did not pass the BOOT as required by section 186(2)(d) of the FW Act.

Underpinning the FSU’s BOOT concerns was section 193 of the FW Act, which provides that the way in which the BOOT is passed is by the FWC being satisfied that, at the time the application for approval of the enterprise agreement is made, ‘each award covered employee, and each prospective award covered employee, for the agreement would be better off overall if the agreement applied to the employee than if the relevant modern award applied to the employee’.

In this case, the Agreement’s ‘reconciliation clause’ required CBA Group to undertake automatic six monthly reconciliations (or more frequently, for example if the employee’s employment terminates), comparing the difference between what an employee earned under the Agreement compared to what the employee would have earned under the relevant award during the same period.  If there was a shortfall in pay under the Agreement, a top up payment would be made so that the employee is paid an amount which is equal to what their award entitlements would have been, within 49 calendar days.  Employees had a right under the clause to request more frequent reconciliations.

After receiving feedback about the FWC’s concern that the clause would not leave employees financially ‘better off’ under the Agreement (as required by the BOOT if loaded rates are used in enterprise agreements)[2], CBA Group added to the operation of the clause by providing undertakings that each employee eligible for a top up payment under the reconciliation clause would receive that payment plus a 5% additional payment.

Before making a decision about whether that undertaking cured its concerns, the Full Bench considered whether individual financial BOOT issues raised by the FSU or the FWC would cause employees to be systemically worse off under the enterprise agreement, until they received a period top up payment under the reconciliation clause.

The Full Bench considered that this analysis of the ‘nature and extent of variations above and below the safety net[3] was relevant to the question of whether a reconciliation clause was appropriate at all – and, if it was, the appropriate quantum of additional payment – to make up for what it called the ‘late payment detriment’ (being the period between when the employee would have received payments under the award and when they receive the reconciliation payment).

In this case, the Full Bench was satisfied, from the modelling presented to it on the BOOT concerns, that it was unlikely there would be regular shortfalls giving rise to payments under the reconciliation clause.

In so finding, the Full Bench held:

[85] The BOOT does not require employees to be better off under an agreement than under the relevant award in each pay period, or over any particular units of time. It requires that they be better off overall. In our view, the overall nature of the assessment may bring into consideration temporal elements, such as fluctuations in pay. Although the test is conducted as at the ‘test time’, the Commission is required to consider the employee’s possible working arrangements under the Agreement over its life. (Plainly, the test is not confined to working arrangements on the day of lodgement of the application; as most applications are filed on a weekday, the Commission would then be precluded from considering weekend work.) The BOOT analysis, although anchored to the award as at the test time, looks to the working arrangements under the agreement generally, beyond the date of lodgement of the application, and beyond the pay cycle. There is no reason why an employee who earns less under an agreement than the award in one period, but more in another, may not be better off overall under the Agreement than the Award, subject to appropriate safeguards (for example, that a reconciliation is conducted if an employee ceases to be covered by the agreement, as is the case in the present instance).

As to whether a 5% additional payment was sufficient to offset the ‘late payment detriment’ in those circumstances, the Full Bench held:

[87] In the present case, we consider that if the shortfalls identified in various models were to materialise, even on a regular basis, the detriment would comfortably be outweighed by the operation of the employer-initiated reconciliation provision which confers an additional 5% payment on top of any shortfall. It is an incontrovertible fact that any affected employees will under clause 41 be entitled to receive more pay than under the Award. The margin will compensate not only for the ‘shortfall’ against the notional Award-based amount but also for any ‘later payment detriment’. In this regard, it is a prominent feature of the current economic climate that interest rates are very low. Five percent is a significant amount. Employees will be better off overall under the Agreement than would have been the case under the Award. This is our evaluative judgement, taking into account our assessment of the various ways in which employees might undertake work under the terms of the Agreement.

Taking this into account (among other relevant BOOT considerations), the Full Bench was satisfied that the Agreement as amended by undertakings, passed the BOOT.  The Full Bench also said there is ‘nothing wrong’ with reconciliation provisions provided that they contain appropriate safeguards, and are in fact ‘helpful’ in circumstances where employees’ wages under an enterprise agreement only exceed award entitlements by a small margin.[4]

This decision is important for employers who may have shied away from attempting to include reconciliation clauses in enterprise agreements as a way to cure BOOT issues after the 2017 decision of the FWC Full Bench Beechworth Bakery,[5] in which the Full Bench overturned a decision to approve an enterprise agreement containing a reconciliation clause, finding that it did not resolve BOOT concerns.

It is now very clear that reconciliation clauses can successfully be used to get enterprise agreements over the line where ‘underpayments’ compared to the award could from time to time occur in respect of some employees.  Such clauses will, however, likely need to contain automatic review periods which oblige the employer to undertake an analysis for each employee, a mechanism for employees to request more frequent reviews, and a penalty payment (of sorts) to compensate any employee who has been adversely affected.

This is by no means a small matter, and will require appropriate processes and mechanisms to be put in place to ensure that the time worked by employees is captured accurately every day, and an ability to use that data to calculate the award payment entitlements (including to base rates of pay, overtime, loadings and penalties).

In addition to the BOOT benefits, another silver lining of this approach is that the analysis can be extended to ensuring all pay entitlements under the enterprise agreement have been met during the period, thereby giving employers an opportunity to identify and rectify any inadvertent underpayments in a reasonably timely manner, which in turn will minimise the risk of systemic long term underpayments under an enterprise agreement going undetected.

For some employers who have been concerned that the enterprise agreement system no longer works for them, this decision might provide a practical way forward.

Please let our Employment, Workplace Relations and Safety team know if you would like any help navigating the enterprise agreement system.

Author

[1] Commonwealth Bank Group Enterprise Agreement 2020 [2021] FWCFB 3635.

[2] Loaded Rates Agreements [2018] FWCFB 3610.

[3] Paragraph [86] of the CBA Group judgment.

[4] Paragraph [89] of the CBA Group judgment.

[5] SDA v Beechworth Bakery Employee Co Pty Ltd [2017] FWCFB 1664.