New shutdown rules for 78 modern awards

Changes impact how employers implement annual shutdowns

New shutdown rules for 78 modern awards

The Fair Work Commission (FWC) has varied 78 modern awards as part of the Commission’s four-yearly review of modern awards process by replacing existing shutdown clauses with a new model term. See the full list of varied awards at the bottom of this page.

These clauses relate to an employer’s ability to direct employees to take a period of annual leave where the employer shuts down all or part of its enterprise.

In its decision of 25 August 2022, the Commission had flagged that changes were needed to certain modern awards because the existing shutdown, or “close-down” clauses as they are commonly known, contained in those instruments did not meet the modern award objectives contained at section 134 of the Fair Work Act.

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Why have the clauses been amended?

The Full Bench was particularly concerned that existing clauses provided a “general entitlement to take leave without pay” in circumstances where the employee had not accrued enough paid annual leave to cover the period of the shutdown.

This ability to direct an employee to take leave without pay amounted to standing down an employee without pay, a direction that the Full Bench found can only be given in accordance with the general stand-down provisions located in section 524(1) of the Act or in accordance with an enterprise agreement or contract of employment as required by s. 524(2).

The Commission found the ability to take undefined periods of leave without pay was not provided for in either the National Employment Standards (NES) nor in any modern award and that the existing clauses therefore established an undefined entitlement to leave without pay “by the back door.”

Accordingly, the Full Bench ruled that the Commission had no power to include clauses in modern awards that allowed an employer to require an employee to take leave without pay during shutdown periods.

HR leaders must balance the needs of both the employee and the company when managing extended leave.

Content and impact of the changes

The Full Bench resolved to vary existing shutdown clauses by replacing them with a model term (see paragraph 82 of Commission’s decision of 22 December 2022 for the incoming model term). The model term varies and updates existing shutdown clauses in the following ways:

  • Any mechanism that directs an employee to take leave without pay during a temporary shutdown period has been removed.
  • The circumstances in which a temporary shutdown can occur have been narrowed to where the employer intends to shut down all or part of its operation for a particular period and the employer wishes to require affected employees to take paid annual leave during that period. Certain model terms still preserve the entitlement to shutdown operations in some industry-specific circumstances, including for example when a drilling rig is being repaired in the Hydrocarbons Industry (Upstream) Award 2020.
  • Employers must now provide at least 28 days’ written notice of the temporary shutdown period (or a longer period if the term preserves an existing longer period of notice).
  • If an employee is engaged within the 28-day notice period, notice of the temporary shutdown must be provided as soon as reasonably practicable after engagement.
  • Any direction by the employer to take annual leave must now be in writing and be reasonable.
  • Employees can now only take paid annual leave in accordance with a direction under the shutdown term.
  • The model term allows the employer and employee to agree, in writing, to take unpaid leave during a shutdown period once an employee’s paid annual leave has been exhausted.
  • Where an employee has not accrued enough paid annual leave to cover the period of the shutdown, the employee may take paid annual leave in advance of accruing the entitlement in accordance with the existing “annual leave in advance” term contained in each modern award.
  • The new terms confirm that when calculating the amount of paid annual leave accrued by an employee, any leave taken in advance pursuant to the “annual leave in advance” clause must be taken into account.
  • New shutdown clauses now confirm that periods of annual leave taken for the purposes of a temporary shutdown do not apply for the purposes of the existing excessive leave provisions contained in modern awards.

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Impact for employers

Employers with employees covered by the 78 modern awards impacted by the decision should take the following steps to prepare for and accommodate the incoming changes on 1 May 2023:

  • Review any current procedures and guidelines that govern annual shutdowns and update materials relating to award-covered employees impacted by the changes.
  • Provide additional training to HR managers and business partners regarding how a valid direction to take paid annual leave can be provided to impacted employees. This includes accounting for the updated notice periods and requirements to take paid leave.
  • Update payroll and employee management systems to ensure employees can access leave in advance and ensure that employees’ annual leave entitlements are being properly accrued and accounted for.

Nicholas Ogilvie is a partner practicing employment law with Herbert Smith Freehills in Melbourne and Sydney. Nicholas Lamanna is a solicitor on the employment team at Herbert Smith Freehills in Melbourne.

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