“We dont want to pay award rates, cant we just have an enterprise agreement?”  Well no, its not that simple.  An enterprise agreement (EA) is a legislatively sanctioned agreement between an employer and a group of employees which takes the place of an applicable industrial award during its life.  An EA must be negotiated with and approved by a majority of employees and approved by the Fair Work Commission (FWC) which must consider whether employees are better off overall (known as the BOO test) under the proposed EA than the applicable industrial award.  Employees cannot be worse off under an EA than under a benchmark award.  However, an EA can:

a. help an employer to overcome some of the paperwork and technical requirements of modern awards, generally in exchange for greater financial recompense to employees;

b. be a mechanism to help an employer introduce efficiencies into its operations;

c. fix the terms and conditions of all existing and new employees for a specified period which gives the employer increased certainty in financial planning.

But there are several potential disadvantages to keep in mind:

a. the employer is generally locked into an enterprise agreement cycle so that when the EA ends, employees will have an expectation of a further EA (possibly with further financial/non-financial increases in remuneration);

b. even if there is no immediate action by employees or a union to replace the EA on its nominal expiry, the EA continues in force regardless (subject only to the National Employment Standards and minimum award rates);

c. it is not easy to obtain approval for changes to the EA during its term (for instance if changed financial conditions mean it is more difficult for the employer to afford the benefits provided under the EA);

d. the EA process requires a degree of consultation, discussion and engagement with employees and possibly their union/s;

e. breaches of the EA may incur legal action against the employer with possibly significant civil penalties.

Importantly, an employer cannot get to the nominal end of the EA and say “That was an experience but now we’d like to go back to the way it was before”.  An EA can only be replaced by another EA or discharged with the approval of the FWC which is subject to a public interest test.  At AWL, we think most small-medium employers would be better off having a flexible common law contract regime subject to any overriding industrial award conditions but this does depend on the situation of the particular employer.  The starting place is really to sit down with the applicable industrial award and ask whether an EA is really necessary or whether the same outcome can be achieved by other means, such as using a common law contract “set off” clause with an annualised salary arrangement.  Lastly, employers adopt “template” EAs or EAs drafted by unions at their own peril.  It pays to spend some time establishing an EA that suits the particular needs of your business.  Please contact us if you would like us to consider your own situation.