Can You Have Loaded Rates in Enterprise Agreements?

Employers are struggling to bargain. As enterprise bargaining continues to pose numerous challenges, a Full Bench of the Fair Work Commission (FWC) has ruled on “loaded rates” and how they interact with the better off overall test (BOOT).

One of the requirements for most enterprise agreements is that they pass the BOOT, a test that requires each of your business’ relevant award covered employees and prospective employees to be better off than they would be under the relevant modern award. Loaded rates are higher rates of pay in enterprise agreements intended to incorporate, in part or whole, penalty rates and other monetary benefits that you would otherwise be required to pay employees under modern awards. These wage structures are popular for employers as a means of streamlining payroll while, at the same time (at least previously), maintaining roster flexibility.

An important Full Bench decision from June 2018 provides guidance as to how the FWC will assess an agreement with loaded rates. In this post, we consider two major aspects of the loaded rates decision and the implications for you and your business.

Changing rosters and prospective employees

The crux of the Full Bench decision is that financial comparison is key. This means that your employees will generally have to be financially better off under the enterprise agreement. Non-monetary or contingent benefits won’t generally get an agreement over the line where there’s significant financial detriment.

For your existing employees, finding out whether this is the case will involve an examination of existing roster patterns worked by various classes of employees at the test time. This will usually be done by way of sample rosters, used to compare remuneration under a loaded rates pay structure to the relevant modern award.

However, for any prospective employees, the BOOT “necessarily involves a degree of conjecture”, which varies from case to case. The Full Bench found that in “large, well-established and mature” businesses it may be “safe to assume that any future employees will be employed on a type of roster pattern already applied in the business to an existing class of employees”. However, in other circumstances, such as where the business is small or growing, the basis of employment of prospective employees won’t be as apparent.

The Full Bench also noted that the difficulty in assessment for prospective employees most commonly arises where an agreement covers a broad range of classifications, which aren’t all covered by existing employees at test time.

The Full Bench found (essentially) that in these circumstances, the FWC should consider the worst-case scenario. This means, for example, that “if an enterprise agreement makes express provision for employees to be required to work ordinary hours on weekends, that provision cannot be ignored for BOOT purposes simply on the basis that the employer asserts that it doesn’t currently, and does not intend to, make use of that provision”.

The only (limited) exception to this is where objective evidence (such as regulatory requirements) shows a provision cannot be relied on in a broad sense. For example, if your business is in the retail industry, trading hours may prevent you from opening during certain hours.

Casual and part time employment

The Full Bench essentially found that it would be difficult for a loaded rate to pass the BOOT in relation to a casual employee without guaranteed hours. This is relevant to many casual arrangements you may be using in your business, where employees are engaged on hourly or daily contracts. The Full Bench decision is clear that these “on-call” arrangements aren’t suited to loaded rates because these employees can work at any time (and will therefore be disadvantaged if they only work in penalty periods).

In relation to casual employees with regular and ongoing hours, the Full Bench found it may be possible to construct a loaded rate that could pass the BOOT. This rate could be made in the same way as for full time and part time employees, based on particular prescribed rosters. However, in this case, the nature of employment isn’t “truly casual”, in that the arrangement becomes simply an alternative payment and entitlement system.

In short, loaded rates for casual employees are on very shaky grounds.

Where to from here?

It’s likely to be difficult for employers to rely on loaded rates from here on. The decision suggests loaded rates will be most difficult for small or growing businesses, without relatively regular, established roster patterns.

We expect to see a number of further cases in this space, following on from and based on the recent clarity provided by the Full Bench. You should continue to monitor FWC decisions to see how the Full Bench’s loaded rates decision is applied. However, following the Full Bench’s decision, the application of the BOOT to loaded rates agreements is likely to only be changed by legislative amendments to the FW Act.

This means that you should carefully consider the proposed wage structures in any enterprise agreements that are yet to go to vote. The high bar for passing BOOT and the difficulty of fixing any BOOT deficiencies through undertakings may lead to loaded rates structures (especially completely “flat” remuneration provisions) being untenable for your business.

Practical Law Australia Employment provides detailed guidance on this complex, dynamic area of the law. Our expertly drafted resources help lawyers to decide what questions to ask, what law applies and why. To learn more about Practical Law Australia or request a 7-day trial, visit the website.

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