No retrospective wage increases for employees who resigned or retired before the approval of an enterprise agreement

It is not an uncommon scenario that an enterprise agreement is negotiated and retrospective pay increases are stipulated to take effect once it is approved, but prior to its approval by the relevant industrial relations body an employee who would have been subject to the enterprise agreement ends their employment. The issue of whether that former employee is entitled to retrospective pay was contemplated recently by a single Judge of the Federal Court of Australia[1] (the FCA).

Facts

The Independent Education Union of Australia (IEUA) brought this case on behalf of two former teachers (the Applicants) employed by different educational institutions (the Respondents), who contended they were entitled to the retrospective pay increases contained in their respective enterprise agreements (collectively, the Agreements).

The Agreements constituted the latest of a series of enterprise agreements that applied to the Applicants. Both Agreements were approved by the FWC on 25 November 2020 and commenced operation on 2 December 2020. It is the period between 1 July 2019 and 2 December 2020 that the two employees ended their employment with their respective employers.

Relevantly, the Agreements provided for a 2.5% salary increase at the first full pay period on or after 1 July 2019, followed by further annual salary increases. The argument revolved around the Respondents not paying the July 2019 increase (including the superannuation contribution of that increase) to the Applicants. This was due to the Applicants resigning before the Agreements came into operation.

The IEUA contended that employees who were employed prior to 1 July 2019, but had resigned or retired before the Agreements came into operation, were entitled to the benefit of the pay increases. It relied on a history of backpay where, following the approval of past agreements, the Respondents paid employees a lump sum that was equivalent to the amount they would have received if the pay increases in the next agreement had taken effect at the date specified. The IEUA argued this conclusion flowed from a plain reading of the Agreements, ‘applying the rules of construction and a practical approach … consistent with industry reality and common sense’. The IEUA submitted that the Respondents’ approach to do other than apply the ordinary meaning of words required an ‘exercise in illogicality’. It would be wrong to specify a qualification for an entitlement by reference to being employed at a particular date (in this case, 1 July 2019).

The crux of the Respondents’ arguments centred on the statutory provisions of the Fair Work Act 2009 (Cth) (the FW Act) which focuses on those persons employed ‘at the time’. They contended that the Agreements could not apply to employees who were no longer employed when the Agreements came into operation. Therefore, former employees were not entitled to the benefit of wage increases per the Agreements if they had resigned before the Agreement came into operation.

Decision

The FCA firstly noted the legislative provision which stated that employees covered by the proposed enterprise agreement may be requested by the employer to approve an agreement by voting for it. This means that an agreement might be made by approval of less than a majority of the actual employees who would be covered by the agreement. A former employee is not included in this process and, as would be expected, has no right to vote.

The FCA further agreed with the Respondent’s natural reading of the criteria contained in the relevant FW Act provisions. Firstly, an enterprise agreement does not impose obligations on a person, and a person does not contravene a term of an enterprise agreement, unless the agreement applies to the person. This only occurs when the agreement is in operation and will therefore cover the employee. Conversely, an enterprise agreement does not give an employee any entitlement unless the agreement applies to them. In other words, for the agreement to apply, that person must be an employee. Secondly, an enterprise agreement covers an employee if it is expressed in the agreement. If a person is to have an entitlement under an enterprise agreement, both criteria must apply. Importantly, the use of the word ‘employee’ denotes a present relationship.

Applying this to the present facts, the FCA concluded that the focus of the legislation is clearly on those people employed at the time. Simply put, it was held that the ordinary meaning of the words used in the Agreements indicated the application and coverage of the Agreements are limited to ‘employees’. The Applicants were not ‘employees’ at critical times, namely, when the Agreements came into operation.

The decision was made on the basis that the terms of the Agreements must be consistent with the industry context and the statutory requirements which are in place with respect to enterprise agreements. This finding in respect of the interpretation of the legislative provisions proved detrimental to the Applicants’ arguments.

Take Home Messages

This case indicates that former employees are not automatically entitled to retrospective pay increases, however, the issue will ultimately come down to an analysis of the terms of the applicable enterprise agreement. Unfortunately, enterprise agreements are often drafted in unclear terms which can make this analysis difficult.

We recommend that pay increase clauses (and indeed all clauses in an enterprise agreement) be very carefully drafted to ensure that employers are not required to pay former employees retrospectively.

Should you seek further clarification on the interpretation of a clause in your enterprise agreement or on the process of enterprise agreement negotiations, please contact Sathish Dasan on + 61 8 8217 1337 or sdasan@normans.com.au, or Anastasia Gravas on + 61 8 8217 1331 or agravas@normans.com.au or Li-shern Sim on +61 8 8217 1362 or lsim@normans.com.au.

[1] Independent Education Union of Australia v Corporation of the Roman Catholic Diocese of Toowoomba [2023] FCA 64.