Individual Flexibility Agreements: Bending Backwards Without Bending The Rules

You may have noticed that ‘flexibility’ has become the new buzz word for Australian workplaces. Most of the popular focus has been on the benefits that flexibility provides to workers, rather than employers.

As an employer, you may only just be keeping up with all of the day-to-day issues that come with employing someone such as rostering, leave entitlements, payroll, Award rates and safety compliance, so the thought of introducing another complication in the form of ‘workplace flexibility’ may seem unappealing.

You may therefore be surprised to learn that many SME employers actually use workplace flexibility to their advantage – to overcome complicated payroll processes, to attract and keep good employees, and to take account of attractive incentives that they provide to their employees.

Where do we start?

As with most things in our employment environment, there are rules that an employer must follow when introducing ‘flexible’ employment terms.

In most cases, the appropriate way to introduce flexibility is by entering into an ‘Individual Flexibility Agreement’ (IFA) with your employee. An IFA can be initiated by either the employer or the employee. An IFA effectively overrides the default terms of the Modern Award that would otherwise apply to the employee’s employment terms.

As an overriding principle, Modern Awards are intended as a ‘safety net’ of minimum employment standards and so anything that you introduce to change how the Award works (through your IFA) must result in your employee being ‘better off overall’. This is commonly referred to as the ‘Better Off Overall Test’ or ‘BOOT’.

So why bother with an IFA?

Just because your employee must be ‘better off’ because of introducing flexibility does not necessarily mean that your business must be ‘worse off’.

Most often we see SME employers use IFAs to introduce a flat-rate of pay for their employees, rather than having to regularly calculate the (sometimes complicated) Award provisions relating to penalty rates, allowances and overtime. SMEs also use these terms to create a rostering arrangement that is much more suited to the needs of the business. This results in a win-win for both the business and the employee.

How do we do it?

Unless your workplace is covered by an Enterprise Agreement, the first place to start is the Modern Award that covers your employees. A full copy of the Modern Awards can be found at the Fair Work Ombudsman’s website.

You will then need to look at the ‘Award Flexibility’ clause in the Award, which is usually clause 7. This clause sets out the areas where you can introduce flexibility, and the limitations on what you can do.

If you’ve identified some terms that you’d like to change through an IFA, you should then discuss this with the relevant employee and outline to them how you think it could result in them being better off overall. If the employee is happy with your proposal, then you should prepare a written IFA.

The IFA does not need to be a long, complicated document. It may only be 1-2 pages long. However, at a minimum it must:

  • Identify the clauses of the Modern Award that are being changed and how they are being changed;
  • Include details of how these changes result in the employee being better off;
  • Include details about how the IFA can be terminated and what happens in this situation (usually the standard Award terms will apply); and
  • Be signed by both the employer and the employee (or the employee’s guardian if the employee is under 18 years old).

Copies of the IFA should be kept on the employee’s file and also given to the employee for their records.

Employers can be penalised under the Fair Work Act for failing to ensure that an IFA is made properly. The current maximum penalties are $10,800 for an individual and $54,000 for a body corporate.

Issues to look out for

We have seen IFAs used effectively, but we’ve also seen situations where they have not been done properly. Here’s some of the most common issues we’ve come across and how you can avoid them:

1. Making an IFA a condition of employment

Sometimes we see employment offers being made to candidates only on the condition that the candidate accept the terms of a pre-prepared IFA. Under the Fair Work Act, IFAs cannot be a condition of employment and can only come into effect after an employee has been engaged.

The IFA should be a stand-alone document, separate to the employment agreement. We recommend that if you want to enter into an IFA with a potential employee, you make the employment offer based on terms that align with the relevant Modern Award.

While you can provide the candidate with a written proposal for an IFA as part of this process, you must make it very clear (preferably in the employment offer letter) that the offer is not conditional on them accepting that proposal.

You must always be able to demonstrate that the IFA was made by a genuine mutual agreement and you didn’t pressure the employee into entering the IFA.

2. Failing to put flexibility arrangements in writing

We have come across businesses that have adopted flat pay-rates for their employees, but have not properly documented this arrangement in a written IFA. This actually puts that business at risk of penalties under the Fair Work Act, even if the business is paying the employees an above-Award flat-rate.

At any time that employee could query the arrangement with the Fair Work Ombudsman, potentially leading to a lengthy and complicated audit where the employee’s time records and payslips will be analysed against award rates. If the flat-rate has not properly taken account of Award entitlements such as penalty rates, overtime and allowances, the employer will need to pay compensation to the employee as well as being liable to penalties. Even if it turns out that the employee has not been underpaid, there is going to be a lot of work involved in proving it.

3. Not properly documenting the ‘BOOT’ analysis

Some IFAs just include a brief statement saying something like ‘both the employer and the employee agree that this agreement results in the employee being better off overall’.

In our view, this is not sufficient to satisfy the requirements of the BOOT. The IFA really needs to deal with the detail of how you have reached that conclusion.

This can be a relatively simple exercise for monetary trade-offs such as adopting a flat rate of pay, involving a comparison of the two scenarios (flat pay rate versus award rate) and using the employee’s average work hours. We often recommend that a detailed spreadsheet or other form of analysis be included in the IFA to show the BOOT analysis that you have undertaken. However, you really need to be sure that the data you use is a true reflection of the facts and includes the employee’s likely overtime and out-of-hours work.

It can get a little trickier where non-monetary terms such as hours of work are involved. Where the employee is ‘better off’ because of particular non-monetary factors (i.e. they have requested to finish work earlier so they can pick up their kids from school), these should be documented in the agreement. It is even more important to document the benefit of non-monetary factors if the IFA results in less take-home pay to the employee.

If an employee approaches you with an IFA proposal, always ask the employee to put their request to you in writing, including the detail of the benefit it gives them. This can be incorporated into the IFA and may be handy if there is a dispute later on about whether the employee was indeed ‘better off’ under the IFA.

4. Failing to regularly review accuracy of BOOT

If you have based your BOOT analysis on your employee’s anticipated work hours and the situation changes significantly, the IFA could be at risk of failing the BOOT and therefore being invalid. It’s important to regularly review your employee’s actual work hours (including overtime and any arrangements that would ordinarily result in penalty rates and allowances) to make sure that your IFA remains valid.

In addition, you should have workplace policies in place that require employees to have overtime or out-of-hours work approved by you/ their supervisor. This allows you to either adjust the IFA if it is not likely to satisfy the BOOT or take other steps such as offering time off in lieu.

5. Giving away incentives for ‘free’

Some businesses give generous incentives to their employees, without thinking about how these incentives interact with the relevant Award. In some circumstances, the business intends for these incentives to be in substitution for certain allowances or other entitlements.

If that is the case, this should always be documented in an IFA. A well-documented IFA should go a long way toward preventing misunderstandings and a situation where the employee can ‘double dip’ on incentives later on by claiming that you have not complied with the relevant Award.

IFAs can be useful tools to introduce and record flexibility arrangements for the benefit of both employers and employees. Having a good understanding of the Awards that apply to your workplace (including their flexibility terms) and being attuned to the needs of both your business and your employees are key to achieving a win-win flexibility arrangement.

We can assist you to implement an IFA in your workplace or review any existing arrangements to make sure that they comply with the Fair Work Act. If you would like some help, please contact us by calling 1300 654 590 or emailing us.

The information contained in this post is current at the date of editing – 23 November 2017.

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