Employee Relations Review February 2009

Industrial relations update

Executive remuneration in Australia: Some current issues

Implementing redundancies? A reminder of your consultation obligations

Pre-employment terms of offer still binding despite contract terms: Summary

Industrial relations update

Late 2008 saw a flurry of activity as the Federal Government pushed forward with its industrial relations reforms. This article:

• provides a brief update on recent developments in the award modernisation process
• foreshadows the key issues likely to be addressed by the much-anticipated transitional legislation, and
• foreshadows some of the possible amendments to be made to the Fair Work Bill.

Award modernisation

The award modernisation Full Bench published 17 priority stage modern awards and its corresponding decision on 19 December 2008. The Commission has indicated that it will be necessary to review or amend these awards—to update references to the National Employment Standard and other references to legislation, and to bring the modern awards in line with any increases made to the minimum wage by the Australian Fair Pay Commission.

Written comments on the exposure drafts on the 24 Stage 2 modern awards and two amended priority modern awards were due on 13 February 2009. The Full Bench sat in Sydney for final consultations in relation to the exposure drafts of the Stage 2 modern awards last week.

Stage 3 is the biggest stage of the process, with 39 industries and occupations to be dealt with. The revised list of Stage 3 priority awards was published on 30 January 2009. The closing date for lodging written submissions, drafts and other proposals concerning the scope, content and transitional arrangements for Stage 3 modern awards is 6 March 2009. Clients who are considering lodging written submissions are invited to contact us.

Transitional legislation

Although the content and implications of the Federal Government’s Fair Work Bill have been widely discussed since late 2008, much of the detail of the government’s Forward with Fairness reform will be in the transitional and consequential legislation, expected to be introduced in late March 2009.

The transitional legislation is likely to deal with the following matters:

• how the National Employment Standards will interact with existing agreements (Ms Gillard recently announced that the NES will apply to all employees when it becomes operational on 1 January 2010, even those covered by an existing agreement)
• the future of enterprise awards
• how will bargaining parties transition from the old laws to the new laws when bargaining is already taking place when the new laws commence
• how employees on individual agreements can transition to collective agreements, and
• the general interaction between the Workplace Relations Act 1996 (Cth) (and the instruments made under it) and the new Fair Work Act – in particular, how will existing Workplace Relations Act agreements be treated? Will they be able to be replaced at any time by agreement made under the Fair Work Act?

We will update clients on the transitional legislation and its impact to your business as soon as it is released.

Possible amendments to the Fair Work Bill

On 25 November 2008, the Senate referred the provisions of the Fair Work Bill to the Senate Standing Committee on Education, Employment and Workplace Relations for report. Submissions were due on 9 January 2009, and the committee will release its report on 27 February 2009.

The committee received over 150 submissions from a number of interested parties, including unions, employers, employer associations and academics.

Submissions from employers and employer groups raised concerns in relation to:

• the expansion of union rights of entry
• agreement coverage—particularly the ability of a union to gain coverage under a agreement that it did not negotiate
• the removal of the 12-month limitation on the transfer of industrial instruments
• the ability of unions to ‘pattern bargain’ when in the low paid bargaining stream, and
• union access to non-member records.

It is likely that, at least in respect of some of these consistent concerns, some amendments to the Bill will be occur before it is passed through both Houses of Parliament. We will keep clients updated of further developments.

This article was written by Natalie Spark, Solicitor, of the Employee Relations team in Melbourne.

Executive remuneration in Australia: Some current issues

What’s happening?

The volume of the voice of shareholders and others on the topic of executive remuneration has been turned up considerably in the last 12 months. Following particular focus in the United States and the United Kingdom on remuneration for executives in the financial services industry, the Australian government has referred this matter to the Australian Prudential Regulation Authority (APRA) for consideration.

The aim of the APRA review is to ensure that remuneration is structured to promote long-term sustainability and avoid perverse incentives. This is despite the fact that in Australia executive remuneration and industry collapses and misadventures have not been as extreme as elsewhere, and the Australian financial system has come through the global economic meltdown in relatively good shape, so far.

While APRA is unlikely to dictate prescriptive limits and requirements, executive remuneration will be subject to more direct scrutiny and comment for the balance of this year at least in Australia, and not just in financial services or at the CEO and group executive levels. Further, the scrutiny will not be just by shareholders, but also by regulators, unions, lenders and employees.

In this article we discuss:

• concerns that have been raised regarding executive remuneration
• existing protections in respect of executive remuneration
• suggestions that have been made to address these concerns, and
• some of the implications for business of these suggestions.

Concerns about executive remuneration

Many concerns have been expressed about aspects of executive remuneration including:

• the independence of the board of directors or remuneration committee from executives, especially the CEO
• the quantum of base pay, annual bonus and long term incentives compared to average earnings and historical executive remuneration levels
• a perceived lack of transparency between remuneration and performance, due, for example, to complexity or confidentiality
• the short-term focus and/or excessive risk taking induced by some performance hurdles
• the ability for measures of performance to be manipulated, and
• termination benefits provided in circumstances of individual or company underperformance.

Existing protections for shareholders and others

In Australia, corporations legislation, the listing rules of the Australian Securities Exchange and the general law already provide protections and disclosure for shareholders and other stakeholders regarding executive remuneration. These include:

• obligations on directors to act in the best interests of the company
• the prevalence of board remuneration committees (in order to meet their obligations in the context of executive remuneration, boards frequently take external advice regarding the reasonableness of remuneration, together with financial and legal advice)
• the presence of independent directors on boards
• requirements for shareholder approval of some termination payments and the provision of benefits to related parties
• restrictions on the provision of ‘change of control’ benefits
• restrictions on the issue of securities and certain termination payments
• specific disclosure requirements for CEO employment arrangements and general disclosure requirements in respect of remuneration including the requirement for an annual ‘remuneration report’ setting out general policy regarding remuneration and how this is linked to performance, as well as specific information regarding remuneration provided to certain executives, and
• the non-binding vote by shareholders on the remuneration report, or ‘say on pay’.

Suggestions for addressing concerns

The Australian Council of Trade Unions (ACTU) has suggested the following measures to deal with some of the concerns that have been raised regarding executive remuneration:

• binding ‘say on pay’ for executive remuneration
• shareholder approval of senior executive employment arrangements and termination benefits, and
• disclosure by government and institutional shareholders of their voting policy and position on the issue.

Unions may also use the information provision requirements in the new ‘good faith bargaining’ obligations (to commence from 1 July 2009) to seek further disclosure of manager and executive remuneration, thus potentially putting pressure on organisations in this area to take a ‘front page’ approach. That is, unless you would be comfortable for the arrangements to be on the front page of a national daily newspaper, they should not be implemented.

The Australian Council of Super Investors has suggested a requirement for more explanation and transparency of the links between pay and performance.

Other suggestions from various stakeholders include:

• a right of ‘clawback’ of termination and other payments in certain circumstances, such as where future earnings or performance are not achieved
• changes to the tax treatment for employers of executive remuneration above $1 million, and
• limits on termination payments to executives.

In the United States, as a condition of the government-funded assistance programs for financial services industry participants, President Obama has capped executive remuneration and prohibited vesting of long-term equity incentives while debt is owed under the ‘bail out’ package.

Implications for employers

Boards and senior management grapple already with the need to attract the best people to their organisations in the context of an international market for talent. It is said that further regulation in the area of executive pay will make this balancing act more difficult and may lead to underperformance, especially in financial services, because the ‘best people’ will seek employment where additional limits on remuneration do not apply.

The costs for business of having to comply with further regulation in this area must also be considered in circumstances where frequently employers are already required to engage external financial, remuneration and legal advisers for the purposes of setting and implementing executive remuneration arrangements. These costs may be increased, in particular, if restrictions and procedural requirements are implemented in respect of a broader class of executives, that is, not just directors and the most senior executives. Further, costs may vary considerably depending on whether an employer is in the financial services industry or not if further regulation is limited in its application to this sector.

Other practical issues arising from some of the suggestions to address the concerns regarding executive remuneration include:

• executive consent will usually be required before employers can change existing remuneration arrangements with executives, because such change will amount to a variation of their employment contract
• the ability of employers to ‘claw back’ payments made or benefits provided after the employment relationship has ended, and where unencumbered title has previously been provided to assets or funds, will be limited, and
• where executives are dissatisfied with their remuneration, or other aspects of their employment (for example, if a discretionary annual cash bonus is not at the level expected), there are several avenues that may potentially be available to them to seek compensation or damages from their employer, pursuant to the implied duties of good faith and trust and confidence in employment contracts or under the misleading and deceptive conduct provisions of trade practices legislation.

Depending on the approach of individual company boards and regulators, employers should be mindful of potential compulsory or advisory changes to executive employment arrangements and how this will affect their ability to attract and retain talent at the executive level.

In a future edition of Employee Relations Review, we will take a closer look at the initiatives that are being introduced around the world in respect of executive remuneration in the financial services industry.

This article was written by Justine Turnbull, Partner, of the Employee Relations team in Sydney.

Implementing redundancies? A reminder of your consultation obligations

In the current economic climate, many employers may be looking to downsize operations and reduce staff numbers. However where at least 15 employees are likely to be terminated, and where the employer could reasonably be expected to know that one or more of the affected employees were members of a trade union, then employers must remember to consult with unions prior to the implementation of the retrenchment scheme.

Section 668 of the Workplace Relations Act 1996 (Cth) empowers the Australian Industrial Relations Commission (Commission) to make orders where an employer has decided to terminate the employment of 15 or more employees for reasons of an economic, technological, structural or similar nature, and the employer did not, as soon as practicable before the terminations:

• inform each union about the reasons for termination, the number and categories of employees likely to be affected, and the time when the terminations would be carried out, and
• give each union the opportunity to consult on measures to avert or minimise the terminations and to mitigate the adverse effects of the terminations.

The ‘obligation to consult’ requires giving unions an opportunity to be heard and to express their views so that they may be taken into account. Consultation is about providing the unions with a genuine opportunity to influence the employer’s decision about, for example, the method of selection for retrenchment. However, consultation is not the same as joint decision making. There is no obligation on an employer to agree to any proposals put to it by the unions.

Where an employer does agree to consider a proposal by a union during the consultation process, it must ensure that it then gives the union the information it needs to be able to support its proposal, and also gives the union a reasonable timeframe in which to provide any information that the company requires in return. The recent decision of Construction, Forestry, Mining and Energy Union v Oaky Creek Coal Pty Ltd¹ provides a good example of what is required.

Background

Oaky Creek Coal Pty Ltd owns two underground longwall mines: ‘Oaky No. 1’ and ‘Oaky North’.

In December 2008, Oaky Creek announced a restructure due to the deteriorating coking coal market. The proposed changes represented a significant reduction in production at Oaky No. 1.

The effect was that out of the 145 employees employed at Oaky No.1, approximately 50 employees were to be transferred to Oaky North and between 20 and 25 employees were to be voluntarily or involuntarily retrenched.

The company undertook an extensive consultation process with its employees and the CFMEU. During that consultation process, the CFMEU proposed that the opportunity for voluntary retrenchments be extended to employees at Oaky North, which could then minimise the number of involuntary retrenchments at Oaky No.1.

The company agreed to consider the union’s proposal, but placed the obligation on the CFMEU to compile a list of employees from Oaky North who were interested in voluntary retrenchment by 5 January 2009, as the company intended to implement the redundancies by 9 January 2009. However, employees were not prepared to volunteer for retrenchment prior to knowing their payout figures, and most of the employees from Oaky No. 1 commenced a period of annual leave from about 24 December 2008 to 5 January 2009 so were not on site to obtain the payout information.

Findings and implications

In these circumstances, the Commission concluded that the company had not satisfied its obligation to properly consult with the union about voluntary retrenchment. The Commission considered that where voluntary retrenchment is adopted, the opportunity to consult included ‘a realistic opportunity’ for the CFMEU to provide the list of volunteers who would be prepared to accept retrenchment, otherwise there was no opportunity for the union to influence the company in its decision.

The Commission may make whatever orders it thinks appropriate in order to put the employees and unions in the same position as if the employer had complied with its obligation to inform and consult. This may include orders that have the effect of delaying the redundancy process, which can increase the cost of payouts.

Accordingly, it is important for employers to ensure opportunities are provided for genuine consultation prior to the implementation of any redundancy scheme that could affect more than 15 employees.

This article was written by Jennifer Flinn, Senior Associate, and Claudine Umashev, Solicitor, of the Employee Relations team in Brisbane.

Pre-employment terms of offer still binding despite contract terms: Summary

• A recent decision² of the Federal Magistrates Court of Australia (Court)held that oral representations regarding redundancy payments made in the course of pre-employment negotiations formed part of an employee’s contract of employment.
• According to the Court, the oral representations were not revoked even though the employee later signed a new contract of employment which contained an ‘entire agreement’ clause.

Background

Kathryn McRae was employed by Watson Wyatt Australia Pty Limited in a senior position from 2000 to 2007. In the course of negotiating her employment contract in 2000 in a telephone conversation, the managing director of Watson Wyatt told Ms McRae that, in the event of her position being made redundant, she would receive a severance payment no less valuable than the ‘industry standard’ of three weeks’ pay for each year of service. Ms McRae also claimed the managing director represented that:

• Watson Wyatt always looked after its staff
• Watson Wyatt had a very generous redundancy policy compared to the industry standard
• in the unlikely event that her position was made redundant, she would be ‘well looked after’, and
• Watson Wyatt did not include the redundancy policy in contracts of employment.

Ms McRae made notes of this telephone conversation.

On 18 July 2000, Ms McRae signed a written contract of employment. This contract did not contain any terms as to redundancy or an ‘entire agreement’ clause.

In December 2003, Ms McRae was promoted. On 6 February 2004, as a result of her promotion, Ms McRae signed a new contract of employment. This contract included the following clause:

‘[T]his letter sets out the entire agreement with you regarding the terms and conditions of your employment with the company.’

On 14 August 2007, Ms McRae’s employment was terminated as a result of the redundancy of her role. Ms McRae was initially offered a termination payment equivalent to three months’ notice (consistent with the notice provisions in the first contract) plus one month’s severance payment. Watson Wyatt later offered Ms McRae an extended superannuation benefit, in addition to the notice and severance benefits previously offered, but subject to her releasing Watson Wyatt from any potential claims. Ms McRae did not accept these offers.

The claim

Ms McRae claimed that the oral representation made by the managing director on 12 June 2000 in relation to severance pay either constituted an express term of her employment agreement or an enforceable warranty. 
Watson Wyatt denied the existence of this alleged arrangement, or alternatively, said that this arrangement had been superseded by the second contract in 2004, because the 2004 contract did not contain any provisions regarding the alleged arrangement and constituted ‘the whole agreement’ between the parties.

Decision

Federal Magistrate Raphael held that:

• Contracts of employment can be partly oral and partly written. Employment arrangements are frequently not committed to writing and it is not unusual for some terms of an agreement to be left out of the written contract. This was the case with the first contract, which did not contain an ‘entire agreement’ clause.
• On the evidence, Ms McRae had been given assurances of a redundancy payment by the managing director when she took up employment with Watson Wyatt. The second contract (which contained the ‘entire agreement’ clause) did not negate the managing director’s assurances, as the real effect of this contract was only to note Ms McRae’s new position following her promotion.
• The representation made by the managing director formed an oral term of Ms McRae’s employment contract because the words used by the managing director in his representation were intended to, and did, constitute an offer of an additional oral term that Ms McRae would receive a severance payment of no less than three weeks’ pay for each year of service, which offer was accepted by Ms McRae.
• In the circumstances, the statement by the managing director that ‘[w]e do not put redundancy terms into the contract’ was not intended by the managing director, nor understood by Ms McRae, to mean that the arrangement did not constitute a contractual term.
• Ms McRae was entitled to damages based on three weeks’ pay for each year of her service with Watson Wyatt. Ms McRae was awarded $106,615.38 in damages plus interest.

Implications for employers

Employers should be aware that oral representations made by management, senior employees or other agents (for example, recruiters) in the course of negotiations with a prospective employee may, in certain circumstances, form part of the employee’s contract of employment.

Employers should also take care drafting ‘entire agreement’ clauses in contracts of employment. Unless appropriately drafted, these clauses may not be sufficient to exclude an employer’s previous oral representations from being incorporated into an employment contract.

This article was written by Justine Turnbull, Partner, and Justin Fung, Solicitor, of the Employee Relations team in Sydney.

Endnotes

1. [2009] AIRC 33]
2. McCrae v Watson Wyatt Australia Pty Ltd [2008] FMCA 1568

More information

For information regarding possible implications for your business, contact a member of the Employee Relations team.