(3 December 1999)
Employment Conditions Applying to Outsourced Activities
A recent decision of the Full Court of the Federal Court of Australia about the application of public sector employment conditions to government contractors is likely to have implications for some Commonwealth corporatisation and outsourcing programs.
In North Western Health Care Network v Health Services Union of Australia (1999) 164 ALR 147 ('North Western'), the Court decided unanimously that paragraph 149(1)(d) of the Workplace Relations Act 1996 ('the WR Act') operated so that a private entity contracted by the Victorian Government to manage and provide specified mental health services, North Western Health Care Network ('North Western'), was bound by Victorian public sector awards.
The practical effect of the decision was that North Western, in the absence of a later award or certified agreement made under the WR Act, had to provide those of its employees engaged in management and provision of the relevant services with terms and conditions of employment set out in relevant public sector awards rather than general industry awards.
- outlines section 149 of the WR Act
- provides an overview of the Federal Court's decision
- discusses the potential implications of the decision for the Commonwealth
- discusses current developments about the application of section 149 of the WR Act in the context of government outsourcing and corporatisation programs, and
- discusses section 170MB of the WR Act which is similar to section 149, but relates to certified agreements rather than awards.
Section 149 An Outline
Section 149 of the WR Act sets out the categories of persons who are bound by an award made by the Australian Industrial Relations Commission ('the Commission'). In general terms, section 149 of the WR Act operates so that an award is binding on the parties to the industrial dispute which the award settles. However, paragraph 149(1)(d) moves beyond the parties to an industrial dispute and, subject to an order of the Commission indicating the contrary, makes an award binding on:
any successor, assignee or transmittee (whether immediate or not) to or of the business or part of the business of an employer who was a party to the industrial dispute, including a corporation that has acquired or taken over the business or part of the business of the employer.
In essence, this provision operates so that a person or body who takes over a business becomes bound by an award which was binding on the person or body who previously conducted the business.
The purpose of paragraph 149(1)(d) of the WR Act is to ensure that the settlement of an industrial dispute is maintained when the employer party to that dispute transfers its business to another employer. Its application for this purpose has usually arisen in the context of awards made for the settlement of industrial disputes in the private sector. However, the current increase in outsourcing of government services by the Commonwealth and State governments has led to the expression of opposing views about the operation of paragraph 149(1)(d) where activities carried on by a government are outsourced to the private sector. North Western is the first occasion on which the Federal Court has had to consider these opposing views.
The decision in North Western
The outsourcing arrangement considered by the Court in North Western was relatively straightforward. The Victorian Government had for a long time itself managed and provided mental health services in metropolitan Victoria. The Government, in accordance with the provisions of the Health Services Act 1988 (Vic), entered into health service agreements with North Western's predecessors (which are hereafter referred to as North Western). Under the agreements, North Western assumed responsibility for managing and providing mental health services in specified parts of metropolitan Victoria. The agreements were for a fixed period and set out terms on which funding was to be provided to North Western.
North Western became responsible for the patients previously cared for by the State. Medical records, stock and public sector staff were transferred, and leased assets were assigned, to North Western.
The Court decided that by entering into the agreements described above, the Victorian Government had 'transmitted' part of its 'business' to North Western. Consequently, paragraph 149(1)(d) of the WR Act operated so that awards which were made to settle disputes between the State of Victoria and certain classes of its employees became binding on North Western.
The leading judgment in the case was delivered by RD Nicholson J. His Honour considered three main arguments about whether paragraph 149(1)(d) operated to make the relevant public sector awards binding on North Western.
- First, whether the management and provision of mental health services by the Victorian Government to metropolitan Victoria was capable of constituting 'the business' or 'part of the business' of the State of Victoria.
- Second, whether any such business or part of a business had been 'transmitted' to North Western.
- Third, whether the Commission had made any order indicating that relevant public sector awards were not to apply to a transmittee of that business.
Was there a Business?
RD Nicholson J concluded that the provision of mental health services by the State of Victoria was capable of being characterised as a 'business' for the purposes of paragraph 149(1)(d). His Honour concluded that, when considered in their context, the references to 'business' in paragraph 149(1)(d) were to be interpreted in a general rather than legally specific manner. His Honour noted that there was a long history of understanding paragraph 149(1)(d) in this way. Consistent with this conclusion, there was no reason why activities of government could not be characterised as a 'business' for the purposes of paragraph 149(1)(d).
Was there a Transmission?
Having concluded that the provision of mental health services by the State constituted a business in the relevant sense, it was necessary for his Honour to consider whether the State had transmitted that business to North Western. His Honour concluded that the State had transmitted the business to North Western.
In determining that there had been a transmission, his Honour said that it was appropriate to apply a test which focuses on whether the business or the activities carried on by the original employer are still carried on by the new employer, even though that new employer may also carry on other activities. The fact that the new employer carries on the business or activities carried on by the original employer points to a transmission having occurred. The Court did not have any difficulty concluding that the relevant business or activities formerly carried on by the State of Victoria were now being carried on by North Western.
RD Nicholson J also considered that the terms of the agreement made between the Victorian Government and North Western made it apparent that the State regarded itself as divested of the relevant activities for the duration of the agreement. This was a further indication that a transmission had occurred.
In the context of dealing with the issue of transmission, his Honour also expressly rejected an argument to the effect that, because the State of Victoria had at all times retained responsibility for the provision of mental health services, no 'business' had been transmitted to North Western. In his Honour's view, the fact that the Victorian Government as an employer retained continuing functions in relation to the provision of mental health services did not preclude a conclusion that a part of the State's business had been transmitted to North Western. That was sufficient to bring paragraph 149(1)(d) into operation.
Was there an Order to the Contrary?
The relevant public sector awards contained clauses, commonly called 'parties bound' clauses, which identified the parties bound by them. These clauses indicated that the awards were binding only on the State of Victoria in respect of specified employees.
RD Nicholson J rejected an argument that these parties bound clauses constituted orders of the Commission which prevented subsection 149(1) from operating to make the awards binding on a private sector successor, assignee or transmittee to or of the business or part of the business of the State. In his Honour's view, the 'parties bound' clauses were not concerned with displacing the operation of subsection 149(1) and gave rise, at most, to a mere implication that the awards were binding only on public sector employers. As such, the clauses were, in his Honour's view, insufficient to displace the operation of subsection 149(1).
Implications for Clients
Public sector unions may attempt to rely on the decision in North Western to argue that terms and conditions of employment set out in Australian Public Service (APS) awards, for example, the Australian Public Service Award 1998, apply to the employment of persons by private sector bodies, and government corporations or wholly-owned companies, which conduct activities formerly conducted by the APS. There are, however, limitations to this kind of argument and it should not be assumed that North Western has implications for all Commonwealth outsourcing programs.
While North Western confirms that activities conducted by a government can be characterised as a 'business' or 'part of a business' for the purposes of paragraph 149(1)(d) of the WR Act, the question of whether a business or a part of a business has been transmitted will depend on the facts of each particular case. A number of factors have traditionally been considered relevant to determining whether a transmission of business has occurred in any particular case. Factors indicating the occurrence of a transmission include the following.
- The business or activities carried on by the original employer are still carried on by the new employer.
- There is a legal connection between the original employer and the transferee of the business.
- The business is transferred as a 'going concern'.
- The new employer operates the business in much the same way as it was operated previously.
- The physical assets used in connection with the business are transferred to the new employer.
- The goodwill connected with the business is transferred to the new employer.
- The new employer assumes the liabilities and existing contractual obligations of the business.
- The new employer engages the staff previously employed in the business.
- The new employer operates the business from locations the same as those previously used.
In North Western, the Court focussed primarily on the first of these factors. However, the outsourcing process considered in North Western involved an almost entire and immediately effective transfer of a service function from the government to the private sector. The nature and extent of that particular process may have reduced the need for the Court to expressly consider and weigh all of the factors listed above, most of which were inherent in the process.
While an identity between the activities of the original and new employers now appears to be of primary significance, it most probably remains necessary in each case to weigh all existing factors to determine whether a transmission has occurred. However, putting aside the identity of activities test, the presence or absence of any one of the factors listed above would not, of itself, be determinative of whether a transmission has occurred. For example, in Stellar Call Centres, the fact that the new employer employed very few of the original employer's employees did not prevent the Court from finding that a transmission had occurred.
Many Commonwealth outsourcing programs would be distinguishable from the process considered in North Western. All of the factors relevant to the occurrence of a transmission will need to be considered and weighed in each case to determine whether paragraph 149(1)(d) has any application.
Significantly, in this context there remains an argument that no 'business' is transmitted for the purposes of paragraph 149(1)(d) when what the Commonwealth outsources is only the performance of functions which are ancillary to the conduct of its core activities or business. Applying this argument, the outsourcing of cleaning services, for example, would in most circumstances be unlikely to involve the transmission of a business in the relevant sense. The correctness of this kind of argument is a matter which the Federal Court has left for future determination.
It should also be noted that some awards applying in the public sector may contain clauses which a court would interpret as displacing the operation of subsection 149(1). Awards of that kind would not apply to private sector successors, assignees or transmittees to or of the Commonwealth's business.
An application for leave to appeal against the Federal Court's decision in North Western has been filed in the High Court. This means that the High Court may shortly decide to hear an appeal against the Federal Court's decision. The recent change of government in Victoria has, however, cast some doubt on whether the application for leave to appeal will proceed.
Additionally, the Federal Court (constituted by Einfeld J) has reserved judgment in a matter concerned with whether paragraph 149(1)(d) operates to make a range of APS Awards binding on a wholly-owned Commonwealth company which operates in the Commonwealth employment services market previously occupied by the Commonwealth Employment Service (which was an APS body). Technical arguments about the specific terms of relevant APS awards have been put to the Federal Court and those arguments may result in the Court distinguishing North Western and deciding that paragraph 149(1)(d) does not operate to make the APS awards in question binding on the wholly-owned company.
Section 170MB Certified Agreements
Section 149 of the WR Act relates only to the binding effect which awards may have. It says nothing about the persons on whom a certified agreement is binding. This does not mean, however, that certified agreements are incapable of binding successors, assignees or transmittees to or of the Commonwealth's business.
Section 170MB of the WR Act provides for certified agreements to be binding on successors, assignees or transmittees in specified circumstances. It is drafted in terms which are very similar to those of paragraph 149(1)(d). However, it has a narrower effect than paragraph 149(1)(d) in some respects. For example, some certified agreements cannot bind an unincorporated successor, assignee or transmittee. More generally, many of the factors discussed above as being relevant to the operation of paragraph 149(1)(d) would also be relevant to determining whether, in any particular case, section 170MB is brought into operation.
The Need to Seek Advice
The determination of whether a government outsourcing program gives rise to the transmission of a business or a part of a business almost invariably involves a high degree of complexity. The law in this area is also in a stage of development. It would therefore be prudent to seek legal advice about the operation of paragraph 149(1)(d) in the context of any proposal to outsource activities currently undertaken within the APS.
For further information please contact Leo Hardiman, Senior General Counsel, Office of General Counsel on (02) 6253 7074 or any of the following lawyers:
(02) 6253 7085
(02) 6253 7098
(02) 9581 7474
(03) 9242 1386
(07) 3360 5700
(08) 9268 1102
(08) 8205 4231
(08) 8943 1400
(03) 6220 5474
1. CPSU, The Community and Public Sector Union v Stellar Call Centres Pty Limited (3 September 1999, unreported decision of Wilcox J); Finance Sector Union of Australia v PP Consultants Pty Ltd (10 September 1999, unreported decision of Wilcox, Ryan and Madgwick JJ).
2. See George Hudson Ltd v Australian Timber Workers' Union (1923) 32 CLR 413.
3. While each of Spender and Madgwick JJ made some independent remarks about the operation of paragraph 149(1)(d) of the WR Act, their Honours expressed substantial agreement with the reasons of RD Nicholson J.
4. This test was formulated by the High Court in a slightly different context: see Re Australian Industrial Relations Commission; Ex parte Australian Transport Officers Federation (1990) 171 CLR 216 at 229-30 per Mason CJ, Gaudron and McHugh JJ.
5. See generally, Punch and Irving, Successor Provisions in the Industrial Relations Act 1988 and Union Eligibility Rules in Australian Labour Law Reporter, page 80,041.
6. It also placed a primary focus on the first of the factors in Stellar Call Centres and PP Consultants.
7. See, for example, Crosilla v Challenge Property Services  2 IR 448.
8. The Full Court in North Western, and Matthews J at first instance in PP Consultants, cited the Crosilla case with apparent approval. However the Full Court in PP Consultants said that it found it 'unnecessary to comment on the correctness of Crosilla'.
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The material in this briefing is provided for general information only and should not be relied upon for the purpose of a particular matter. Please contact AGS before any action or decision is taken on the basis of any of the material in this briefing.