Federal Court finds agreement scope clauses can have broad application

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8 April 2014

The Federal Court decision in John Holland Pty Ltd v Construction, Forestry, Mining and Energy Union and Fair Work Commission [2014] FCA 286 (27 March 2104) confirms that an employer can enter into an enterprise agreement with a limited number of employees, but with the capacity to apply over time to a wider range of employees.

Background

John Holland Pty Ltd (John Holland) was awarded the contract to build the $1.2 billion Perth Children’s Hospital.  John Holland employed three employees to perform building and construction work, and only expected to employ a total of 25 direct employees at the hospital site (the bulk of the work to be carried out by subcontractors).

On 12 January 2012, John Holland held a meeting with the three employees.  In this meeting, the employees each appointed themselves as bargaining representatives for purposes of negotiating an enterprise agreement (Agreement) with John Holland under the Fair Work Act 2009 (Cth) (FW Act).  On 13 February 2012, the three employees voted in favour of the Agreement and were the only employees covered by the Agreement when it was made. 

At the time of making the Agreement, John Holland was tendering as head contractor for other major government projects in Western Australia and also some private projects.  In this context, it was relevant that:

  • Clause 1.1 stated that the Agreement would bind any John Holland employees “performing building or civil construction work in Western Australia in accordance with a classification specified in this Agreement”.
  • Clause 1.2 of the Agreement provided that if John Holland were to enter into a specific agreement at another project or site in Western Australia, then that other agreement would apply to the exclusion of the Agreement. 

On 13 February 2012, John Holland lodged an application with Fair Work Australia (FWA) (as it then was) under section 185 of the FW Act for approval of the Agreement. The application was opposed by the Construction, Forestry, Mining and Energy Union (CFMEU). 

Decision at first instance

The Agreement was approved on 22 May 2012 by Deputy President McCarthy.  A central issue was whether the three employees covered by the Agreement had been “fairly chosen” pursuant to section 186(3) and (3A) of the FW Act. This involved taking into account whether this group of employees was “geographically, operationally or organisationally distinct.”

McCarthy DP held that the group of employees had been fairly chosen, finding that the three employees were geographically and operationally distinct, but not organisationally distinct.

Full Bench decision

The CFMEU appealed against the decision, and a Full Bench of FWA upheld the appeal and quashed the original decision by Deputy President  McCarthy.[1]

The Full Bench’s reasoning included findings that:

  • The nature of clause 1.2 meant it was impossible to make any definitive finding as to the group of employees covered by the Agreement, and because of this it “was not possible to be satisfied that the group of employees was fairly chosen.”
  • It was important to consider whether the selection of the group of employees was based on criteria that would have the effect of undermining collective bargaining.  The Full Bench stated that “in this case, three employees on one site have bargained and agreed on an agreement with potentially very wide application to other employees who have not engaged in bargaining under Part 2-4 of the Act and will not be given an opportunity to bargain.”

Federal Court decision

John Holland applied for judicial review of the decision of the Full Bench.  The main ground of the appeal was that the Full Bench had erred in asking itself about the possible future size and composition of the group of employees to be covered by the Agreement, rather than identifying the chosen group from a proper construction of the Agreement.

FWC does not have to be satisfied as to the number of potential employees to be covered by an agreement

In allowing the appeal, Justice Siopis of the Federal Court noted that the power to make an agreement under the FW Act resides in the parties to the agreement, and that an agreement is made when the majority of employees covered by the agreement vote in favour of it. 

Justice Siopis found it was significant that section 186(3), which states that the Fair Work Commission (FWC) must be satisfied that the group of employees covered by an agreement “was fairly chosen”, employs the past tense (“was”).  This meant that the conduct of those people who made the Agreement must be examined (i.e. had they acted fairly in choosing the employees to be covered?); and future employees who would potentially be covered by the agreement should not be considered. 

Although section 186(3A) requires the FWC to consider whether the group chosen was geographically, operationally or organisationally distinct, Justice Siopis held that these considerations constituted legitimate business characteristics; and exist to preclude the exclusion of employees from agreement coverage based on extraneous characteristics (e.g. membership of a political party or place of birth).

There was nothing in the language of section 186(3) or section 186(3A) which “conditions the exercise by [the FWC] of the power under s 186(3) to approve an agreement, upon [the FWC] being satisfied as to the number of employees who will, or may, during the term of the agreement, be covered by the agreement.” 

Justice Siopis held that the Full Bench had therefore erred, in stating that it could not assess whether the group of employees was fairly chosen because it was unable to determine how many employees would be covered by the Agreement.

No requirement to consider whether collective bargaining was undermined

Justice Siopis considered section 578(a) of the FW Act, which requires the FWC to take into account the objects of the legislation when exercising its powers.  However, Justice Siopis found that that requirement did not “imbue the words of the statute with concepts which are not to be found in those words when properly construed.”

Applying that approach, Justice Siopis held that there was nothing in the wording of section 186(3) and (3A) which required that the term “fairly chosen” should be construed “in a manner which would not undermine collective bargaining.”  Furthermore, there are specific provisions in Part 2-4 of the FW Act which give the FWC power to withhold approval of an agreement on grounds of inconsistency with the objects of that Part (e.g. section 187(2)).  Justice Siopis found it was significant that there was no similar provision permitting the FWC “to withhold approval on the grounds that it is of the view that the approval of the agreement would undermine collective bargaining.”

Key points for employers

  • There are often significant strategic reasons for employers to propose the making of enterprise agreements with only a select group of employees.  In the resources and construction industries, it has been common for employers to make agreements with a limited number of employees, with the potential to apply to a much larger group of employees over time.
  • The Federal Court decision in John Holland v CFMEU and FWC confirms the ability of employers to enter into agreements in this way. In doing so, however, employers should factor in the possibility of a further appeal by the CFMEU to the Full Federal Court; and a different outcome in the appeal proceedings.
  • Another strategy used by some employers to achieve similar objectives is the inclusion of an “opt-out clause” in an enterprise agreement (i.e. a term providing that an employee may elect not to be covered by the agreement). However, these clauses are now prohibited by section 194(ba) of the FW Act.
  • Finally, from a policy perspective, it is worth noting Justice Siopis’ comments (towards the end of the decision) that: “Plainly, the Full Bench was of the view that there was something wrong with three employees being able to make an agreement which covered work classifications other than their own. However, if there is a lacuna in the Fair Work Act, on which I express no view, then the remedy would appear to lie in legislative amendment.”
  • Given the Abbott Government’s policy position on enterprise bargaining, including the provision of easier access for employers to individual flexibility arrangements and greenfields agreements, it is unlikely that any amendment to the FW Act will be proposed to address the effect of Justice Siopis’ decision. However, if an appeal produces a different outcome, the Coalition Government may propose a legislative amendment to clarify that employers can use the scope clauses in agreements to cover a broader group of employees.

 [1]Construction, Forestry, Mining and Energy Union v John Holland Pty Ltd [2012] FWAFB 7866 (13 September 2012). See our earlier In Brief here.


The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.


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