Legal Briefing No. 52

Number 52

(3 December 1999)

Employment Conditions Applying to
Outsourced Activities

Background

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.

The Federal Court has affirmed and applied the North
Western decision in two subsequent cases concerned
with private sector employment arrangements.[1]

This briefing:

  • 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[2].
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[3]. 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[4].
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[5].

  • 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[6].
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[7].
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[8].

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.

Current Developments

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:

Canberra

Peter Lahy

(02) 6253 7085

Margaret
Byrne

(02) 6253 7098

Sydney

David Durack

(02) 9581 7474

Melbourne

Martin
Bruckard

(03) 9242 1386

Brisbane

Glenn
Owbridge

(07) 3360 5700

Perth

Graeme
Windsor

(08) 9268 1102

Adelaide

Sarah Court

(08) 8205 4231

Darwin

Rick Andruszko

(08) 8943 1400

Hobart

Peter Bowen

(03) 6220 5474

Notes

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 [1982] 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'.

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

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.

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