On 26 September 2017, a full court of five judges in the Federal Court heard an appeal against the Fair Work Commission’s (FWC) decision to cut penalty rates across five modern awards in the hospitality, fast food and retail industries. The appeal was brought by the Shop, Distributive and Allied Employees Association (SDA) and United Voice (UV).
The hearing was closely watched by both sides of the debate because of its potential impact on many of Australia’s lowest paid workers, and because it represented a significant test of the FWC’s powers under the Fair Work Act 2009 (Cth).
On 11 October 2017, the Federal Court handed down its decision to uphold the previous determination of the FWC and to dismiss the union appeal.
On 23 June 2017, the SDA and UV each separately lodged an appeal against the penalty rates decision asserting that the FWC committed jurisdictional error by misunderstanding its jurisdiction and misinterpreting its duty to conduct four-yearly reviews of modern awards. The unions were jointly represented by Herman Borenstein QC.
UV, which represents affected hospitality workers, applied to the Court seeking that it quash the FWC’s determinations that amended the hospitality and restaurant industry awards. The SDA applied for similar relief in relation to the FWC determinations amending the pharmacy, retail and fast food industry awards.
UV’s application contended that the FWC’s decision involved a jurisdictional error because it misunderstood its jurisdiction and in turn misapplied its duty on three main grounds.
- The FWC erred under section 156 of the Fair Work Act, by varying the relevant awards without first being satisfied that there had been a material change in their operation or effect and therefore did not meet the overarching modern awards objective set out in section 134 of the Act.
- The FWC erred under section 134 of the Fair Work Act by misconstruing the phase “fair and relevant” (when used in the modern awards objective) to mean that the award must be suited to contemporary circumstances, rather than only to the factors prescribed by the objective.
- The Commission erred under section 134(1)(a) of the Fair Work Act in its consideration of the relative living standards and needs of the low paid when making its determinations.
Essentially, if a jurisdictional error could be established on any ground of review relied upon, then the original decision would be quashed and the implemented pay cuts (which commenced being phased in on 1 July 2017) would be reversed, entitling affected workers to back-pay for the period.
The Federal Court rejected the grounds of review, which were presented by the unions and in turn, dismissed the applications.
The Court rejected the argument that the FWC misconstrued its powers under section 156 of the FW Act. The Court did not find that the FWC varied the awards without first satisfying itself of “material change in circumstances” which did not meet the modern awards objective.
The Court found that the FWC’s power is not conditioned upon it being satisfied that a material change had occurred.
The Court rejected the argument that the FWC is required to consider all factors under section 134(1)(a) - (h) as a code in varying any award. The Court stated:
“What must be recognised, however, is that the duty of ensuring that modern awards, together with the National Employment Standards, provide a fair and relevant minimum safety net of terms and conditions itself involves an evaluative exercise. While the considerations in s 134(a)–(h) inform the evaluation of what might constitute a ‘fair and relevant minimum safety net of terms and conditions’, they do not necessarily exhaust the matters which the FWC might properly consider to be relevant to that standard, of a fair and relevant minimum safety net of terms and conditions, in the particular circumstances of a review.” 
The unions had challenged the FWC’s consideration on the relative living standards and needs of the low paid as required considerations in varying the awards. The Court found the FWC had not committed any jurisdictional errors in respect of these arguments.
The unions also argued that the determinations of the FWC were unjust and unreasonable and the Federal Court rejected this on the basis that there was justification. In any event, the Court found that such a challenge was entering the impermissible realm of merits review.
Ultimately, the Court rejected all grounds of review and dismissed the applications.
Implications for workers
The unions’ appeal aimed to protect the take home pay of workers across the country. The cut in penalty rates has likely reduced the pay of over 700,000 workers in the retail, fast food and hospital industries from 1 July 2017.
The decision of the Federal Court has now entrenched the cuts in penalty rates, which will continue to have a detrimental impact on the average Australian household earnings and wage growth in the overall economy.
Australian workers are now coping with high levels of debt and historically low increases in real wages and the FWC’s cuts in penalty rates are leading to an exacerbation of these crises.
The Reserve Bank of Australia (RBA) has held the official cash rate at 1.5 per cent, where it has now been for more than a year. The RBA also announced that wage growth has remained stagnated and that this is placing a big strain on household budgets, leading to a crisis where household debt is now more than 190% of household incomes.
There are also concerns about the applicability of the penalty rates decision to awards in other industries in the future. Recently, the Australian Industry Group filed an application seeking similar variations to the Hair and Beauty Industry Award 2010. 
There are wider concerns that the decision will also hasten mass casualisation towards less secure but high paying casual jobs, which could mean less job security.
The penalty cuts also have a disproportionate impact on female workers, who account for 55% of those affected, according to the McKell Institute. This is particularly problematic in the retail sector. The decision to cut penalty rates is, therefore, also likely to exacerbate the gender pay gap.
 Shop, Distributive and Allied Employees Association v The Australian Industry Group  FCAFC 161 at .