Common law employment contracts and the new “Fair Work” laws

Clients will no doubt be aware of the passage through parliament of the Labor Government’s new industrial relations laws. On Friday evening, the Senate passed the Bill. The Fair Work Act 2009 will commence on 1 July 2009.

This legal alert focuses briefly on the enhanced role for common law contracts provided for under the new legislation. In so doing, we discuss the new modern awards and the phasing out of individual statutory agreements.

Modern awards

Modern awards form the basis of the Government’s new regulatory framework. They are intended to operate in addition to, and provide the substance of, minimum standards otherwise provided for in the new NES, or National Employment Standards.

The creation of these new awards is now a major focus of the Australian Industrial Relations Commission.

Traditionally, awards do not impose obligations on employers (and the employer cannot be held to have contravened a provision of an award) unless the award applies to the employee. Equally, an employee not bound by an award has no right to any entitlement provided by it.

Under the new legislation, modern awards are stated not to apply “to employees … at a time when an employee is a high income employee”. “High income employee” is defined to mean an employee who is guaranteed to earn an annual rate of earnings in excess of the high income threshold. According to the explanatory memorandum for the Bill, the high income threshold will be $100,000 per annum for full time employees, indexed from 27 August 2007 and then annually from 1 July each year.

This means that employees with an annual income of $100,000 or more will effectively contract out of award protection, provided they are not covered by individual statutory agreements. In those circumstances, the legislation also requires employers to give notice in writing to employees.

Phasing out of individual statutory agreements

The centrepiece of the new system is a return to a focus on collectivised agreement making. Critically, individual statutory agreements (such as AWAs – Australian Workplace Agreements) are no more (although transitional arrangements prolong the life of AWAs in certain circumstances, and make provision for another type of transitional individual statutory agreement – the “Individual Transitional Employment Agreement”, or ITEA).

Ultimately, this means that for the “high income employee”, absent a individual statutory agreement, a common law employment contract will necessarily regulate the employment relationship.

Common law employment contracts 

Until now, the only form of individual agreement under the federal system able to exclude award regulation has been an individual statutory agreement, such as an AWA.

Existing award employees earning over $100,000 will now be able to contract out of the award system. It appears that high income employees who negotiate any variation to their terms and conditions will not be award protected from that point, and in reality employees whose incomes fluctuate may drop in and out of award coverage.

Common law employment contracts have traditionally been the source of terms and conditions which have added to the framework of minimum entitlements provided for under legislation or in statutory agreements. They are also the source of obligations implied into contract. Under the new system, common law contracts have emerged for some employees as the predominant source of rights and obligations (rather than the sole source, because the National Employment Standards will still apply to all employees).

This increased role for common law contracts means that it is more important than ever to ensure that contracts are drafted so as to protect your interests, particularly in those areas with an enhanced litigation risk.