September 2006 page 47

Greenfields could turn into quagmires

David Knoll argues that the Employer Greenfields Agreements are not delivering quite what the Federal Government promised.

David Knoll is a barrister at 9 Selborne Chambers.

In enacting the Work Choices legislation,1 the Australian Government sought to give employers a clean sheet for establishing terms and conditions of employment when setting up a new business or a new division of a business.2 For employers, the idea of a workplace agreement in which the employer could unilaterally set work rules, and which would not require the approval of employees, was likely to be attractive.3

However, on closer analysis, the new Employer Greenfields Agreement fails to achieve its objective. Regardless of where one stands politically on the intent or social impact of Work Choices, the legal risks attendant upon utilising the EGA construct make it unattractive in all but the clearest cases of the employer being a brand new start-up business. That is because the statutory drafting is inadequate and the legislature has missed the opportunity to bring clarity to the unpredictable common law relating to transmissions of businesses.

Limited scope for Employer Greenfields Agreements

In this paper the scope of operation for the new Employer Greenfields Agreement is tested by considering its application to two not-so-hypothetical situations.

Example A: a new music distribution business

Company C has just raised venture capital for a new music distribution business. Its owners have commissioned a central warehouse which will employ between 100 and 150 staff to order, sort, and shelve imported and locally manufactured recorded music on various forms of physical media. The store employees will also pack and send music sold on physical media. Company C understands that not all age groups want MP3 downloads. Older customers prefer CDs and even vinyl records. The promoters of Company C looked into setting up their operation in India, but after Work Choices was enacted, they decided to investigate setting up in Australia to take advantage of the better educated employees available here and the reduced labour costs compared to the pre-Work Choices environment. Company C prepares an EGA and lodges it with the Office of the Employment Advocate.4 It then begins advertising for staff. Is Company C entitled to use the EGA structure?

Example B: a new food manufacturing plant

Company S has a joint venture with Company T, and the joint venture operates a food manufacturing plant. The venture is successful but only just makes a profit. Labour costs are high, in part because award conditions restrict the ability of the joint venture managers to set flexible shifts and to minimise the incidence of penalty rates. Company S and Company T incorporate a new company, Company V. It buys land and builds a new factory. Company S and Company T agree to move their plant and equipment to the new factory, and to rent it to Company V. Company S and Company T decide to give their employees nine months notice that they are closing the current plant. It is implicit that some but not all of the joint ventures employees will apply for jobs with Company V at the new factory. Company V does not want to advertise for new staff until it knows how many of the already trained existing employees of the S and T joint venture will want to work at the new factory. Company V prepares an EGA and lodges it with the Office of the Employment Advocate. Is Company V entitled to use the EGA structure?

Two types of greenfields agreements

One type of greenfields agreement is entered into with a union under s.329 of the Act. The other is the Employer Greenfields Agreement (EGA) governed by s.330. This article is concerned only with the latter type.5 The EGA is, in fact, an instrument created by an employer that operates as a standing offer to employees collectively to accept employment under its terms.6

Under s.101 of the Work Choices Act,7 EGAs, unlike other workplace agreements, have a nominal expiry date of no more than 12 months from the date the agreement is lodged (as opposed to five years with other types of agreement).8 During that year, employees must work under the rules set by the EGA, and only when that first year ends are they permitted to approach the employer to negotiate different terms of employment.9

An EGA is always subject to the Australian Fair Pay and Condition Standards.10 Indeed it is advisable that the agreement say so.

Company V may, however, be too far along the chain of its establishment to qualify for an EGA.

Greenfields agreements apply to ‘new’ businesses

Under s.330 of the Act it is intended that the EGA option be available if an employer proposes to establish or is establishing a “new business”, and the agreement must be made before the employment of anybody under it.

It would appear from s.330 that eligibility for an EGA depends on how far along the establishment phase the business is. Section 330 contemplates that an EGA can relate to any new business so long as it is not yet in operation and has not employed anyone. On that test both Company C and Company V qualify.

Section 323, however, provides the definition of “new business”, and its language is inconsistent with the language in s.330. In this important respect the Act is poorly drafted. Section 323 relevantly limits the term: “new business” to a business that the employer “is proposing to establish”. That is, if the business is past the proposal stage, it does not qualify for an EGA.11

On the s.323 test only Company C qualifies. For Company V, there is real risk that a court would so construe the Act as to find that Company V is too far along the establishment process to qualify for an EGA.

That is because Company V would appear to be more than a proposal, and steps are being taken to establish it and to set up the new factory. Company V, while recently incorporated, is an incorporated version of the hitherto unincorporated joint venture. Consequently, if the wider approach of s.330 governs the question of when an EGA can be made, the EGA was properly lodged at the Office of the Employment Advocate, but if the narrower approach of s.323 operates, the fact that Company V is past the proposal stage would disentitle it from benefiting from an EGA.

Transmission of a business

There is also a real risk that the Federal Court would find that the unincorporated joint venture business has been transmitted to Company V, and that therefore the business of Company V is not a “new business”.

A key argument that needs to be anticipated is that Company V is the transmittee of the S and T business. If the S and T business were to be found to have been transmitted to Company V, there would be no right to enter into an EGA.

Were a court to determine that S and T transmitted their business to Company V, then any objector (for example, a union whose members work for S and T) could argue that a transmitted business cannot be a new business. The explanatory memorandum at paragraph 802 clarifies that the government’s intention is that a new business can arise even where the activities at a new site or new project are not of a different nature to those previously carried on by the employer. While paragraph 799 of the explanatory memorandum suggests that the new provisions were intended to clarify uncertainty arising from the jurisprudence about the definition of a new business, neither the Act nor the second reading speech give guidance on what the government considered to be a new business, nor on what the government considers to be a transmission of an existing business.

And if an employee is an employee of a transmitted business, and starts work at the new factory, within two months after the business has been transmitted, the employee could be deemed to be a transferring employee under s.581.

Section 602 sets out the employers’ obligations to inform employees of a transmission, but the new statute provides no help in determining what constitutes a transmission of business. Part 11 of the Act in turn deals with transmissions of businesses but does not define what a “transmission” is.

Case law leaves questions

The leading case on what constitutes a transmission of business is Minister for Employment and Workplace Relations v Gribbles Radiology Pty Ltd.12 In that case the High Court had to determine whether Gribbles was bound by employee protections that operated at a clinic which it took over from another operator.

Gribbles began to provide radiography services at the Heritage Clinic in Moorabbin, where similar services had previously been provided by Medical Diagnostic Imagining Group (MDIG). It was not contended that Gribbles was an assignee or transmittee of any part of MDIG’s business. MIDG finished a lease of premises and equipment from Region Dell Pty Ltd. After the MIDG lease ended, Gribbles leased the premises and equipment from Region Dell Pty Ltd.

Gribbles employed radiographers who had worked for MDIG at the clinic. Gribbles later terminated their employment, and the Health Services Union of Australia argued that Gribbles was bound by the award that had bound MDIG and had to pay severance packages required by the award, even though Gribbles had not signed on to the award.

Gray J at trial concluded that: “although Region Dell was effectively the controlling party in arranging the provision of radiology services at the Moorabbin clinic, its decision to enter into a contract with Gribbles, instead of MDIG, had the practical effect of transferring the business from one to the other”.13

The full Federal Court agreed, and held as follows: “It is unnecessary to resolve the question of whether there needs to be a direct dealing in an assignment or transmission because, in our opinion, a person can be a ‘successor’ as a result of a transaction involving a succession to a business or part of a business by reason of the conduct of a third party who is not the operator of the business or part of the business. Such a conclusion would be consistent with the ordinary relevant meaning of ‘successor’ and ‘succeed’”.14

However, the High Court overruled the Federal Court. While the case turned on the construction of the now repealed s.149(1)(d) of the Act, the High Court decision is the best available guidance on how the Federal Court should determine whether a business has been transmitted, and therefore cannot be a new business.

Gleeson CJ, Hayne, Callinan and Heydon JJ made clear that the purpose of s.149: “ ... and its predecessor succession provisions is, and always has been, to extend the operation of awards beyond those who were parties to the dispute that the award determined. But identifying that purpose does not answer the question that arises in this matter – how far does the extension go? It is only if some a priori assumption is made about the intended reach of the provision that considering its purpose casts light on the question. To reason in that way begs the question. Rather, it is necessary to consider the words of the provision. It is there that the intended reach of the legislation is to be discerned”..15

The High Court’s approach is no more satisfactory than the approach of the Federal Court that it overruled. Both relied on unstated suppositions as the extent to which the transmission provisions were intended to reach.

Relevantly, the “business” was understood by the majority justices in the High Court to refer “to the combination of the activities pursued in the business and the assets that are used in that business” The majority indicated , obiter, that: “[a]n employer, who has acquired the plant and premises with which, and at which, the former employer conducted part of its business, may well be the successor to that part of the business of the former employer, for example, Shaw v United Felt Hats Pty Ltd (1927) 39 CLR 533”.16

It is unsatisfactory to rely on the transfer of physical assets in determining whether the employment arrangements have been transmitted. In the case of Company V, the plant and equipment to be utilised at the new factory would include the plant and equipment that Companies S and T had used. Indeed, it may be that disposing of the old equipment and buying new equipment would make the proposal uneconomic, and it would be strange if a law designed to cut business cost could only be taken advantage of if the employer incurred artificially higher costs just to fit within the new regime.

The High Court also considered to be relevant the transference of business goodwill, on which, in Gribbles, there was no evidence.

The business of Company C has no existing goodwill, but the business of Company V would inherit much of the goodwill attaching to the unincorporated S and T joint venture. That is, Company V, will not need, like Company C, to find its own customers and suppliers and break into a new market. This is a strong indicator that the business conducted by S and T is being transmitted to Company V.

The transfer of goodwill is not, however, determinative. In PP Consultants,17 a bank had closed one of its branches and appointed a pharmacist to carry on a bank agency in conjunction with the pharmacy business. The agency was carried on in premises that combined those in which the banking and pharmacy businesses had formerly been conducted. The court concluded that the pharmacist had acquired no part of the bank’s business, whether by way of succession, assignment or transmission. Although the pharmacist was “involved in banking activities”, and was servicing the bank’s customers it was not, after the change of arrangements, carrying on “banking business”.

The court held that the pharmacist was carrying on the business of a bank agent and that this was distinct from the “business” formerly carried on in the premises by the bank itself. The court found that the business of a bank agent involved a much narrower range of activities and services. To that extent, it was a different “business”, distinct not only in degree but in kind.18

Obiter, the court suggested that “usually” if the business of the “new employer” is identical, the latter may be described as having “succeeded to the business or part of the business of the previous employer”.19 That dictum lines up with the Federal Court’s approach in Gribbles and in Community and Public Sector Union v Stellar Call Centres Pty Ltd,20 but, curiously, did not influence the High Court majority in Gribbles.

Outsourcing

In some respects Company V’s new business is analogous to an outsourcing of the S and T business. It is now well understood that outsourcing arrangements do not inevitably avoid industrial obligations where the work continues as before.

Nothing the High Court said in Gribbles would seem to require a different result. However, the earlier cases often reasoned by reference to a legislative intent to protect employment conditions. The provisions were seen as designed to protect conditions of employment from the deleterious effects of organisational restructuring.21

The Work Choices legislation directly contradicts that approach. It seeks to relieve employers from obligations under the pre-existing regime, and quite clearly does not seek to protect conditions of employment. It remains to be seen how the courts will respond.22 Perhaps now, courts will focus upon the interests of employers in restructuring to increase productivity and profitability, but there is no guarantee of that. Meanwhile, the state of the law regarding transmissions of business remains quite unsatisfactory.

Australian Workplace Agreements

The Australian Workplace Agreement (AWA) was introduced as part of the first wave of the Howard reforms. It is an individual contract rather than a collective agreement. Under s.400(6) of the Act, Company C and Company V each could require that an AWA be entered into as a condition of accepting employment. While it is legitimate to require that an AWA be entered into, it is important that pressure amounting to duress not be applied to workers to sign an AWA.23

Under s.597, a transmitted award ceases to operate in relation to a transferring employee if the new employer makes an AWA with the transferring employee after the business has been transmitted. Making an AWA is, therefore, the cleanest way of contracting away from the existing awards.

Section 349 provides that the awards cease to have any effect at all once the AWA operates, although some award conditions are protected and preserved for employees who are found to be transferring from another part of the same business; as may be the case for employees of the S and T joint venture who come to work for Company V.24

Also, subs.7D(2) of s.7C of the Schedule 1 of the Workplace Relations Amendment (Work Choices Act) 2005 (No. 153, 2005) preserves terms of an award or workplace agreement governed by a state law to the extent that those terms relate to occupational health and safety, workers compensation, training arrangements, and matters prescribed by the regulations.25

Under s.335 of the Act, as a general matter, an AWA should contain in it all the terms of the employment including those preserved by the operation of s.349 of the Act and sub-s.7D(2) of s.7C of the Schedule 1 of the Workplace Relations Amendment (Work Choices Act) 2005.

The next advantage of an AWA over an EGA is that an AWA can last for five years, whereas an EGA can only last for one year (under s.352). Moreover, an AWA gives an employer an important piece of leverage. The employer can terminate the AWA on 90 days notice after the nominal expiry date (which is five years after the agreement is made unless an earlier date is specified in the agreement) and if the employee does not agree to a new AWA, the terms and conditions of employment revert to the minimum Australian Fair Pay and Condition Standards, plus protective award conditions.

A caution

The purpose of the Work Choices reforms was to move from a system centred on arbitration to a system centred upon labour agreements. The position will need to be revisited when the High Court renders its decision in State of New South Wales & Ors v Commonwealth (aka Workplace Relations Challenge). Hearings concluded on 1 May 2006. The High Court’s decision is reserved.

Conclusion

While Company C could enter into an EGA, the AWA option may be more practical in any event. It can take advantage of the EGA option precisely because it has not moved beyond the proposal stage of the new business.

It is plain that the start-up of a new factory is also the type of venture that the legislature intended should be able to utilise an EGA structure. However, the legislation as drafted lacks sufficient clarity to make the Employer Greenfields Agreement a reliable option. In the case of Company V, the risk of it being found to be the transmittee of the S and T business is large enough to warrant Company V taking the AWA path. The safer course for Company V would be to enter into Australian Workplace Agreements with each employee.

There is a real need for the Commonwealth Government to consider addressing the flaws in the EGA construct by removing the one-year limitation, and codifying a clear separation between transmissions of business that cannot qualify for an EGA and new business ventures which can.

Endnotes

^{1. A digest of all legislative and related materials can be found at: www.aph.gov.au/library/int guide/law/workchoicesbill.htm#debates .}

^{2. In the course of the Second Reading Speech in the Senate, Senator Abetz said: “Work Choices will introduce greenfields agreements that do not require the involvement of a union.” Senate Hansard: Thursday, 10 November 2005, p.164.}

^{3. The only limit promoted by the government’s Work Choices website was that: “[a]n employer greenfields agreement must be made before the employer employs anyone who is necessary for the operation of the business and will be covered by the agreement.” www.workchoices.gov.au/our plan/publications/WorkChoicesanduniongreenfield sagreements.htm.}

^{4. Importantly, an EGA is “made” when an employer lodges the agreement with the Office of the Employment Advocate under s.333(e). That section cross-refers to s.344 which requires the employer to lodge a declaration with a copy of the EGA annexed and the form of declaration must comply with that set out by the employment advocate in the Government Gazette. The form can be downloaded from the web at www.oea.gov.au/docs/employers /ega/EDF-ega-0306.pdf.}

^{5. The Union Greenfields Agreement is a carry-over from the pre-Work Choices regime.}

^{6. Carlill v Carbolic Smokeball Co [1893] 1 QB 256. The EGA is consequently included in the s.4 statutory classification of “collective agreement”.}

^{7. Workplace Relations Act 1996 as amended by the Workplace Relations Amendment (Work Choices) Act 2005.}

^{8. Pursuant to subs.352(1)(a), an EGA can last no longer than a year. Many employer organisations had lobbied for employer greenfields agreements to last five years.}

^{9. The Act provides that they may take protected action in support of a new agreement.}

^{10. The Australian Pay and Classification Scales, which form a statutory instrument, will be set by an Australian Fair Pay Commission. It is important that the workplace agreement established by Newco allow for the scales to operate.}

^{11. It is a condition under s.323(b) that the business, project or undertaking constitutes seeking to enter into an EGA be either a single business or part of a single business. Both Company C and Company V would appear to meet that requirement. Section 322 attempts to define the term: “single business”. Relevantly, the combination of S and T to establish the Company C business falls within in s.322(2). Also sub-s.322(3) provides that a geographically distinct part of the single business or a distinct operational or organisational unit within a single business can qualify for an EGA.}

^{12. (2005) 214 ALR 24.}

^{13. Gribbles Radiology Pty Ltd v Health Services Union of Australia [2003] FCAFC 56 at [22].}

^{14. [2003] FCAFC 56 at [38].}

^{15. 214 ALR 24 at 29.}

^{16. 214 ALR 24 at 33.}

^{17. (2000) 201 CLR 648.}

^{18. 214 ALR 24 at 43.}

^{19. Ibid.}

^{20. (1999) 92 IR 224.}

^{21. See e.g., Community and Public Sector Union v Stellar Call Centres Pty Ltd (1999) 92 IR 224; Australian Rail Tram & Bus Industry Union v Torrens Transit Services Pty Ltd [2000] FCA 1683 per Mansfield J at [65]-[67]; Employment National Ltd v CPSU (2000) 173 ALR 201 at [127] per Beaumont J; Patrick Cargo Pty Limited & Transport Workers Union of Australia (AIRC, Munro J, Duncan SDP, Roberts C, PR920391, 24 July 2002 unreported).}

^{22. The jurisprudence of the Australian Industrial Relations Commission does not clarify any of these issues. Pelican Point Complete Scaffolding Contracting Pty Limited Power Station Enterprise Bargaining Agreement 2003-2004, AIRC, O’Callaghan SDP, PR931021, unreported; In Pals Playford v Refurbishment and Maintenance Contract Agreement AIRC, O’Callaghan SDP, PR924609, unreported , the AIRC rejected the proposition that a labour hire company which puts employees out to work at different sites can ever qualify as a new business under the old s.170LL. On the other hand, in Burnel Technical Services Offshore Pty Limited Bayou – Darwin Pipeline Agreement 2004, AIRC, Acton SDP, Leary DP, Cribb C, PR950406 unreported, a full bench of the AIRC held that where an employer was establishing a new mine, it would constitute a new project and therefore qualified as a “new business”.}

^{23. Shanka v Employment National (Adminis tration) Pty Limited (2000) 97 FCR 186, 191. Unlike the first wave of reforms, the Work Choices legislation removes the “no-disadvantage” test. An AWA is nevertheless subject to the Australian Fair Pay Conditions Standard, and pursuant to s.173 it is not permissible to contract out of the Standard.}

^{24. There are also matters which may not be included in an AWA and these are set out in ss.356-366, for example: annual leave arrangements that depart from those provided under the Act; encouraging or discouraging union membership; allowing for industrial action; disclosure of details of workplace agreements; remedies for unfair dismissal; discriminatory provisions; and any matter that does not relate directly to the employment relationship. This is an area in relation to which the law remains unclear despite the High Court’s decision in Elec trolux Home Products Pty Ltd v Australia Workers Union (2004) 221 CLR 309.}

^{25. At time of writing there were no items in this category. It also provides for state laws to be excluded, subject to certain exceptions.}