It isn’t uncommon for enterprise agreements to contain clauses that state pay rises apply from a specific date which may be before the time the agreement is approved by the Fair Work Commission (FWC) and formally commences operation. However, what isn’t common is retrospectively back-paying former employees who worked under the enterprise agreement but resigned before it commenced.

However, following the recent case of Murtagh v Corporation of the Roman Catholic Diocese of Toowoomba [2023] FCAFC 172 the position has changed. The Full Court of the Federal Court found that two Catholic school teachers were entitled to pay raises contained in newly approved enterprise agreements, despite both teachers resigning from their employment before the enterprise agreements took effect.

Here our experts explain the position as it was before this FWC decision was handed down, why businesses must get enterprise agreements right, and share the important lessons from this case.

Explaining the position as it was before this FWC decision

For example, an enterprise agreement may state that a pay increase applies from the first full pay period on or after 1 July 2023, despite the agreement not coming into operation until 30 October 2023. The generally accepted position has been that if an employee was employed as of the date of the retrospective pay increase, but was no longer employed as of the date the agreement came into operation (in this example, 30 October 2023), then the employee wouldn’t be entitled to any retrospective pay rise applicable from 1 July 2023 to the date of termination of employment.

Background

Mr Murtagh was a teacher at the Roman Catholic Diocese of Toowoomba (Toowoomba Catholic Education) until his resignation on 6 December 2019.

Mr O’Mara was a teacher at Downlands College, Toowoomba (Downlands College) until his resignation on 31 December 2019.

On 2 December 2020, new enterprise agreements came into operation covering both schools, (collectively the Agreements). Each of the Agreements provides for staged salary increases, the first of which was expressed to be operative as of the first full pay period on or after 1 July 2019.

Importantly, the commencement date clause of the Agreements contained a specific reference to the retrospective application stating that:

“Where this Collective Enterprise Agreement specifies an earlier operative date in relation to a particular provision, then that provision shall operate from that date for all applicable employees employed at that earlier date.”

Neither Toowoomba Catholic Education nor Downlands College paid the 1 July 2019 salary increase to any teachers, including Mr Murtagh and Mr O’Mara, who were employed as of 1 July 2019 but had finished employment before the Agreements came into operation on 2 December 2020.

Mr Murtagh and Mr O’Mara instituted proceedings in the Federal Court claiming that their former employers, Toowoomba Catholic Education and Downlands College, had contravened the Agreements and had thereby contravened s 50 of the Fair Work Act 2009 (Cth) (FW Act), by failing to pay them arrears of the salary increase and the related superannuation contribution.

The decision at first instance

Toowoomba Catholic Education and Downlands College argued that they weren’t obligated to pay Mr Murtagh and Mr O’Mara the 1 July 2019 salary increase because they weren’t employed at the time the Agreements came into operation.

The Court agreed with the employers, stating that an enterprise agreement doesn’t impose obligations on a person, and a person doesn’t contravene a term of an enterprise agreement unless the agreement applies to the person. Section 52 of the FW Act states that an enterprise agreement applies to a person if:

1. the agreement is in operation; and
2. the agreement covers the employee and employer; and
3. no other provision of the FW Act provides, or has the effect, that the agreement does not apply to the employee or employer.

As noted in s 52 of the FW Act, an enterprise agreement can only apply to a person if the agreement is in operation and will cover the employee. Section 53 of the FW Act confirms that an enterprise agreement covers an employee if the agreement is expressed to cover them.

The Court held that if a person is to have an entitlement under an enterprise agreement, then the agreement must both apply and cover the employee. Since the FW Act uses the word employee in its language, the Court found this to refer to a present employment relationship.

Therefore, the Court concluded that the focus of the legislation is clearly on employees who were employed at the time the agreement came into operation. Simply put, it was held that the ordinary meaning of the words used in the Agreements indicated the application and coverage of the Agreements are limited to employees. Mr Murtagh and Mr O’Mara weren’t employees at the time when the Agreements came into operation, so were, therefore, not entitled to receive the salary increase that was applicable from the first full pay period on or after 1 July 2019.

The Court dismissed Mr Murtagh and Mr O’Mara’s case for back payment of the 1 July 2019 salary increase.

Appeal

Mr Murtagh and Mr O’Mara appealed the decision, and the Full Court of the Federal Court allowed the appeal finding in favour of Mr Murtagh and Mr O’Mara.

The Full Court found that before the Agreements came into operation on 2 December 2020, the Agreements covered Mr Murtagh and Mr O’Mara up to the times of their resignations since the coverage clause of the Agreement extended to all applicable employees defined in the section, (which included Mr Murtagh and Mr O’Mara).

When the Agreements came into operation, the entitlement to staged pay rate increases for work performed by employees covered by the Agreements commencing on 1 July 2019 crystalized. The Full Court referred to the FW Act explanatory memorandum which states that “the terms of an agreement can only have any effect when an agreement commences operation. However, this does not preclude an agreement from including a term that has retrospective effect (e.g., a backdated wage increase).”

The Full Court concluded that it made no sense to construe “applicable employee” as meaning anything other than those employees covered by the agreement as of a given operative date, in this case, 1 July 2019, since neither Agreement contained an express provision to discriminate in terms of coverage as between employees who were employed as at 1 July 2019 but who ceased employment before the Agreements came into operation and those who remain employed when the Agreements came into operation.

The Full Court further stated that “On and from 2 December 2020, Toowoomba Catholic Education and Downlands College, as employers covered by the respective agreements, came under an obligation to pay back pay to “applicable employees” at the first pay period after that date. Those “applicable employees” included Messrs Murtagh and O’Mara, because they fell within the class of “applicable employees”, and each had performed work on and from 1 July 2019.”

The Full Court ordered Toowoomba Catholic Education and Downlands College to make the applicable back payment to Mr Murtagh and Mr O’Mara.

What are the takeaway lessons for employers?

This case confirms that an employer may be liable to apply enterprise agreement entitlements retrospectively to employees to whom the agreement doesn’t apply at the date of operation, but to whom the agreement covered at the relevant time any entitlements with retrospective application are agreed to come into effect. Following the Full Court’s decision, coverage and commencement clauses need to be carefully reviewed and scrutinised to assess whether there may be a potential risk of unforeseen retrospective application of backdated pay increases for employees who may have finished employment before the commencement of a new agreement.

To avoid liability to backpay retrospective salary increases to employees who have resigned from their employment as of the date the agreement comes into operation but were employed at the relevant time the salary increase is retrospectively said to apply, an enterprise agreement must be appropriately drafted to ensure the coverage provision provides a specific carve-out for such circumstances.

Of course, the most certain way to ensure there’s no potential for an increase to apply retrospectively is to confirm that the initial pay or salary increase only applies from the date the agreement comes into operation, and not a retrospective date. To provide an amount of compensation reflective of any amount of backpay that would otherwise apply, the agreement could provide a lump sum payment to be made to employees employed at the time of commencement (which wouldn’t be referenced to any early date of application).

About our author

Zaynab Aly is a Senior Workplace Relations Consultant at Citation HR. She has a particular interest in the retail industry and regularly provides advice on workplace matters to find solutions for clients.