The how’s and why’s of terminating an enterprise agreement

Recent industrial action and the Federal Government’s Job Summit turns the spotlight back on laws governing workplace rights and responsibilities in collective bargaining. There has been a lot of discussion about the creation of enterprise agreements, with promises to broaden the scope for bargaining and simplifying the agreement-making process.

But what about terminating an enterprise agreement? Far less attention has been given to what happens at the end of the enterprise agreement lifecycle. The Federal Government has promised to ‘ensure the process for agreement terminations is fit for purpose and fair’, but no detail yet as to what that means.

With changes being signalled on the horizon, now is a good time to revisit reasons why an employer may contemplate terminating an enterprise agreement and what to expect in the future.

Yes — enterprise agreements can be terminated, but …

Currently, the Fair Work Act 2009 prescribes a ‘nominal expiry date’ of no more than four years after the agreement is approved. The date is ‘nominal’ because if that date comes and goes then the enterprise agreement does not automatically terminate. The nominal expiry date fixes a time when employers, employees, and employee organisations, are supposed to restart bargaining for a replacement enterprise agreement. 

In setting a ‘nominal’ expiry date, the Fair Work Act 2009 anticipates that termination may not happen at all, or that negotiating for a new agreement may not go to plan towards timely approval, including because of protracted negotiations, protected industrial action or trenchant disagreement.

For some employers, the resources, time, and cost involved in bargaining — often for uncertain productivity outcomes or less then certain industrial peace — raises questions whether the effort is worthwhile. For these employers, the prospect of intractable bargaining disputation instead of productive agreement making is all too much and can lead to ideas of moving to terminate enterprise agreements.

So, when can an enterprise agreement be terminated? There are only two circumstances:

• at any time, if the employer and employees covered by the enterprise agreement consent to the termination; or

• after the nominal expiry date, if an application is made by either the employer, an employee, or an employee organisation covered by the enterprise agreement.

In either instance, a timely application needs to be made to the Fair Work Commission to approve the termination. The termination does not have effect until it is approved by the Fair Work Commission.

Termination by agreement by consent

The Fair Work Commission must terminate the enterprise agreement if is satisfied that:

• the employer took all reasonable steps to notify of the time, date, and method of voting, and employees had a reasonable opportunity to decide whether to agree to the termination; and

• there was a majority of employees who cast a valid vote to approve the termination;

• there is no other reasonable ground for believing that the employees did not agree to the termination; and

• it is appropriate to terminate the enterprise agreement, taking into account the views of the employee organisations covered by the agreement.

It is uncommon that this kind of termination occurs. Employees are presumably “better off” under an enterprise agreement than a modern award, and so it is not likely to be in their interest to terminate an enterprise agreement while it remains operable.

Termination after nominal expiry date

Parties to an enterprise agreement do not always need to consent to its termination. Providing that the agreement is past its nominal expiry date, an application can be made to the Fair Work Commission to terminate.

This kind of application is usually contentious, as one or more parties are likely to benefit from the enterprise agreement remaining on foot. Almost always, the employees and employee organisations want the enterprise agreement to remain, while the employer wants to terminate it.

The Fair Work Commission must terminate the enterprise agreement if it is satisfied that:

• it is appropriate to terminate the agreement taking into account all the circumstances, including:

  • the views of the employees, employer, and the employee organisations covered by the enterprise agreement;

  • the circumstances of those employees, employers and organisations including the likely effect that the termination will have on each; and

• it not contrary to the “public interest” to do so.

Courts have held that the “public interest” refers to matters that affect the public as a whole, such as achieving the objectives of the Fair Work Act 2009, unemployment rates, inflation, and the maintenance of proper industrial standards. It is a broad concept, the boundaries of which may be arguable in any given matter.

While the Fair Work Commission’s discretion is narrow, it nonetheless is an evaluative assessment that turns on the facts of any particular matter. Recently, in Re Community Care and Transport [2022] FWCA 2998, Commissioner Platt initially formed the view that the information provided to the affected employees “did not accurately reflect the effect that terminating the Agreement would have on the employees”. Instead of dismissing the application to terminate, the Commissioner held a conference with the employees and explained the true effect himself. With the benefit of that explanation, the employees still supported the termination.

Why terminate an enterprise agreement?

If an employer wants to terminate an enterprise agreement, it must first be clear as to why that needs to occur. Hasty decisions to terminate an enterprise agreement, can have significant consequences for a business not ready for the pitfalls that lay ahead. 

While not comprehensive, it can assist by beginning to ask questions such as:

• What is the purpose of this organisation’s enterprise agreement? Is it to provide competitive employment conditions? Does the enterprise agreement increase productivity and how? What are the costs associated with the benefits of this enterprise agreement, and can they actually be afforded?

• Has the enterprise agreement served its purpose? If the reasons and conditions offered previously were justified then, are they still justified now?

• What are the consequences of reverting to the modern award? How will this impact the business financially (but also reputationally)? What are the likely consequences for employees? Can any negative consequences be offset by contracts, policies, and undertakings?

Terminating an enterprise agreement can also be part of a bargaining strategy, especially when bargaining is protracted and at a deadlock. In Re Murdoch University [2017] FWCA 4472, the employer applied to terminate its enterprise agreement covering some 3500 employees. There had been 28 unsuccessful negotiation meetings resulting in both parties blaming the other for the stalemate. In terminating the enterprise agreement, Commissioner Wilson commented:

If the Agreement is not terminated there will be no change in the context for bargaining and so no reason to believe the parties will be any more motivated to shift their positions than they have been to date. Considering all of this my conclusion is there is no reason to believe the parties are likely to settle an agreement in the foreseeable future.

Make no mistake, though — this “nuclear” option is high risk. It will almost always be met with strong resistance from the workforce and attract union ire, including by upping the ante with industrial action.

Besides, this option may soon be closed to employers. Industrial Relations Minister Tony Burke has written to the Fair Work Commission, warning of ‘impending’ changes to prevent employers from moving to terminate an enterprise agreement once bargaining for a replacement has begun.

In any event, terminating an enterprise agreement certainly cannot be used to avoid bargaining, as employees and unions can still seek bargaining orders and bring the employer back to the table.

For employers that already have an enterprise agreement in place, there may be an even bigger risk in terminating rather than replacing. If the Federal Government’s proposed multi-employer bargaining is introduced, then returning to the modern award system may not only see the employer dragged back to the bargaining table — it may also see them sitting with their competitors too!

Takeaways and limitations

• If an employer wants to terminate an enterprise agreement, it will need a robust strategy that considers financial, legal, industrial, and reputational matters.

• Enterprise agreements can be terminated at any time by consent, or by application by one party after the nominal expiry date.

• Just because an application to terminate an enterprise agreement is made, there is no guarantee that application will be approved. There are specific and nuanced legal issues that need to be resolved, and applications can turn on their own facts and circumstances.

• There are special steps that apply to terminating multi-employer and greenfield enterprise agreements, which were not mentioned in this article but must be met to effectively terminate those kinds of instruments.

• This article has focused on enterprise agreements made under the federal system. There are different laws and procedures that apply to instruments made under state-based systems.

Authors: Darren Gardner & Joshua Handley