How enterprise agreements work in Australia

If your business employs staff under a modern award, you have probably heard that an enterprise agreement can replace that award with rules written for your own workplace. Done well, it gives you one set of pay, hours and conditions tailored to how you actually run things. Done badly, it commits you to arrangements that are hard to unwind, and getting them wrong can cost more than the agreement was ever worth.

An enterprise agreement is a collective agreement made under the Fair Work Act 2009 (Cth) (the Act) between an employer and the employees who will be covered by it. The Fair Work Commission (the FWC) must approve it before it has any effect. This guide explains how the system actually runs: who is involved, what every agreement must sit on top of, how one is made and approved, what has to go in it, and what happens after approval.

Who does what in the bargaining system

An enterprise agreement is a negotiation with several moving parts, and each player has a defined role:

• The employer: starts or agrees to bargaining, gives employees formal notices, prepares the draft, runs the access period, requests the vote and applies to the FWC for approval.
• The employees: choose whether to be represented, are consulted about the terms, and vote on whether to approve the agreement.
• Bargaining representatives: each employee can appoint themselves, a union or any other person to represent them in bargaining. In practice this is often a union, but it does not have to be.
• The Fair Work Commission: approves or rejects agreements, maintains model terms, makes bargaining orders, and later handles variations and terminations.

The tension that drives the whole scheme is between employer flexibility and employee protection. The Act lets an employer bargain for bespoke terms, but it only allows that if the outcome stays above a floor set by law. That floor is the subject of the next section.

The safety net every agreement must sit on top of

An enterprise agreement does not exist in a vacuum. Two layers of protection apply to all national system employees, and an agreement cannot go below either of them.

The first is the National Employment Standards (the NES). These are the 11 minimum entitlements set out in Part 2-2 of the Act, covering things like maximum weekly hours, leave, notice of termination and flexible work requests. Section 55 is blunt about this: a modern award or enterprise agreement must not exclude the NES or any provision of the NES. An agreement can add to these entitlements, but it cannot trade them away.

The second is the modern award that would otherwise cover the employees. An approved enterprise agreement replaces the award for the employees it covers, but only because the agreement must leave those employees better off overall than the award would. This is the better off overall test (the BOOT) in s 193 of the Act: the FWC must be satisfied that each award-covered employee, and each reasonably foreseeable employee, would be better off overall if the agreement applied than if the relevant modern award applied.

The BOOT is a global comparison, not a line-by-line one. The agreement can pay less than the award on one item, such as penalty rates, as long as it pays more on others, such as base rates or allowances, so that the employee is better off overall. Working out whether that arithmetic holds is the central technical exercise of the whole process, and it is where most agreements stumble.

The three types of enterprise agreement

Section 172 of the Act sets out the forms an agreement can take:

• Single-enterprise agreements: made by one employer, or two or more related employers, with the employees they employ. Employers carrying on similar business activities under the same franchise count as related employers, which is how franchise networks make one agreement across their stores.
• Multi-enterprise agreements: made by two or more employers that are not all related to each other, together with their employees. These are rarer in the small business context.
• Greenfields agreements: made for a genuinely new enterprise before any employees are hired, between the employer and one or more relevant unions.

Two limits are worth noting. An agreement cannot be made with a single employee, so it only makes sense where there is a genuine group of covered employees. And an employer specified in a single interest employer authorisation can only make the kind of agreement the authorisation covers, which limits how freely a business can switch between agreement types.

How an agreement is made, step by step

The path from idea to approved agreement is a sequence of formal steps, each with its own timing rules.

Starting bargaining and the notice of employee representational rights

Bargaining begins when the employer agrees to bargain or initiates bargaining for the agreement. From that point, which the Act calls the notification time, the employer has 14 days to give each covered employee a notice of employee representational rights (the NERR) under s 173. The NERR must be in the form and content prescribed by the regulations, and it tells employees they have the right to be represented by a bargaining representative.

Once bargaining is underway, the representatives on each side must meet the good faith bargaining requirements in s 228. These include attending and participating in meetings at reasonable times, disclosing relevant information in a timely way (other than confidential or commercially sensitive material), responding to proposals, giving genuine consideration to them, and not engaging in capricious or unfair conduct. Notably, good faith bargaining does not require anyone to make concessions or to reach agreement.

The access period and explaining the agreement

Before employees are asked to vote, the employer must give them access to the draft agreement and any incorporated documents for an access period of at least seven days. The FWC's voting process guidance confirms this is seven clear days before the vote. During this period the employer must also take all reasonable steps to explain the terms of the agreement and their effect to the employees who will be covered, in an appropriate manner taking into account their circumstances. The Act is explicit that this includes employees from culturally and linguistically diverse backgrounds, young employees and employees who did not have a bargaining representative.

The vote

The employer cannot ask employees to vote until at least 21 days after the last NERR was given. Voting can be conducted by ballot or electronically. A single-enterprise agreement is made when a majority of the employees who cast a valid vote approve it. For a multi-enterprise agreement, the test is a majority of the employees of at least one of the covered employers.

FWC approval

The employer then applies to the FWC, which must approve the agreement if the requirements in s 186 are met. The FWC must be satisfied that:

• the agreement was genuinely agreed to by the employees (for non-greenfields agreements);
• the terms do not contravene s 55, meaning the NES is not excluded;
• the agreement passes the better off overall test;
• the group of employees covered was fairly chosen, taking into account whether it is geographically, operationally or organisationally distinct where it does not cover all employees;
• the agreement contains no unlawful terms;
• it specifies a nominal expiry date no more than four years after the day of approval; and
• it includes a term providing a procedure for settling disputes about matters under the agreement and the NES, with employee representation.

If the FWC has concerns, it may accept written undertakings from the employer to address them rather than rejecting the agreement outright. Once approved, the agreement takes effect for the employees it covers, and it continues to operate until it is terminated or replaced.

What must go in the agreement

The Act prescribes several terms that every enterprise agreement must contain:

• Coverage: who the agreement applies to.
• A nominal expiry date: no more than four years after approval.
• A dispute resolution term: a procedure that allows the FWC or another independent person to settle disputes about matters arising under the agreement and about the NES, and that allows employees to be represented in that process.
• A consultation term: requiring the employer to consult employees about major workplace change likely to have a significant effect on them, and about changes to regular rosters or ordinary hours of work. If the agreement has no consultation term, the FWC's model consultation term is taken to be part of it.
• A flexibility term: allowing an individual employee and employer to agree an individual flexibility arrangement that varies the agreement's effect for that employee, to meet their genuine needs, provided the employee is better off overall. Again, if the agreement omits it, the model flexibility term applies.

Beyond those, an agreement may deal with the permitted matters in s 172(1): matters pertaining to the relationship between the employer and its covered employees, deductions from wages authorised by the employee, and how the agreement will operate. The Act does not, however, allow agreements to include unlawful terms, and the FWC will not approve an agreement that contains them.

Where the scheme bites: pitfalls and edge cases

The most common failure point is the BOOT. Broad rolled-up rates that bundle penalties, allowances and overtime into a single hourly figure often fail the test because the employer cannot show the comparison stacks up against the award for every classification and roster pattern. The BOOT also looks at reasonably foreseeable employees, not just the current workforce, so an agreement drafted around today's staff can fail if it clearly disadvantages a category of employee the business is likely to hire.

The pre-approval steps are the second most common trap. A NERR in the wrong form, an access period that is too short, or an explanation that did not take employee circumstances into account can all delay approval or see an application refused, and the process then has to start again.

A few edge cases are worth knowing about. If the agreement does not cover all of the employer's employees, the excluded group must be fairly chosen, and the FWC must weigh whether it is geographically, operationally or organisationally distinct. An agreement cannot cover a single employee. And once an agreement is approved, protected industrial action cannot be organised or engaged in before its nominal expiry date has passed.

Life after approval: variation, expiry and termination

Approval is not the end of the story. Passing its nominal expiry date does not end an enterprise agreement: it keeps operating until it is terminated or replaced. That means a four-year nominal expiry is not a four-year commitment; it is the point at which the parties can start the bargaining cycle again, and the FWC has powers to facilitate new bargaining for an expired agreement.

During the life of the agreement, an employer can vary it, but a variation requires employee approval and FWC approval in much the same way as the original agreement. For smaller adjustments, the flexibility term allows individual flexibility arrangements with individual employees, which vary the agreement's effect for that employee only, as long as the employee remains better off overall.

Termination is a formal process. Once an agreement has passed its nominal expiry date, an employer, an employee or a union covered by the agreement can apply to the FWC to terminate it, and the FWC decides whether to do so. Terminating an agreement is a significant step: if it is terminated, the underlying modern award applies again, which can change pay rates and conditions substantially.

Where a lawyer earns their keep

An enterprise agreement is one of the few workplace documents where the legal work is concentrated at the front end. Before bargaining starts, a lawyer can audit your award coverage, identify the classifications and roster patterns the agreement must accommodate, and model the BOOT so you know whether your proposed structure can pass before you invest in drafting it. That early modelling is where the money is saved: it is far cheaper to adjust a proposal on paper than to run a failed approval or defend an underpayment claim later.

During the process, a lawyer typically prepares or reviews the NERR, checks the access period and the explanation steps, negotiates with unions or other bargaining representatives, and responds to the FWC's queries or drafts undertakings where approval is at risk. After approval, the work shifts to implementation: configuring payroll to the agreement's classifications and rates, and planning the variation, replacement or termination application when the agreement approaches its expiry date.

Why enterprise agreements live or die at the approval gate

The approval decision is where the value of an enterprise agreement is actually realised or lost. An agreement that clears the BOOT and the pre-approval steps gives you a stable, tailored rulebook for years. One that does not leaves you with a failed application, a demoralised workforce and a bargaining process that has to run again. The mechanics are unforgiving: the NERR timing, the seven-day access period, the 21-day gap before voting and the four-year expiry cap are all fixed by the Act, and the BOOT arithmetic has to be defensible on paper before the FWC ever sees it.

If you are considering an enterprise agreement, the practical question is not whether one is a good idea in the abstract. It is whether your proposed pay and rostering structure can pass the BOOT, and whether you can run the process without stumbling on the formal steps. A focused review of your draft against the award and the pre-approval requirements, done before you issue the NERR, is a relatively small cost compared with the price of getting the process wrong.