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Where does the nest-egg go? Transmission of business and choice of super

Feature Articles

Cite as: (2006) 80(9) LIJ, p. 44

Transferring a business from one employer to another requires careful consideration of employees' differing entitlements to choice of superannuation fund.

By Evan Mentiplay

Transferring a business from one employer to another requires careful consideration of employees’ differing entitlements to choice of superannuation fund.
By Evan Mentiplay

“Transmission of business” – perhaps the dirtiest three word phrase in the employment law vocabulary. One need only look at the history of overlooked employment issues in transmission situations to know how important they are, with two such instances finishing up in the High Court last year alone.[1]

From 1 July 2005, transmissions of business have required consideration of the choice of fund requirements under Part 3A of the Superannuation Guarantee (Administration) Act 1992 (SGAA). With the introduction of the transmission of business rules to the Workplace Relations Act 1996 (WR Act), and various consequential amendments to the SGAA, we have yet another layer of complexity to deal with in mergers and acquisitions of business.

But, while complex, these obligations can be broken down into a fairly straightforward approach.

Choice of fund

The basic obligation on employers under the choice of fund regime is to provide a Standard Choice Form (choice form) to all eligible employees within 28 days of the employee commencing work: SGAA s32N. This obligation applies to all employers, whether incorporated or not.

For employees eligible for choice of fund, the employer must also determine the applicable default fund, which will generally be the fund named in an applicable federal award, if any.

There are some notable exceptions to the obligation to provide a choice form. Employers must make contributions on behalf of employees covered by the following industrial instruments to the funds named therein and cannot provide choice of fund (SGAA s32C):

  • a state award (but only for unincorporated employers in states other than Victoria);
  • a pre-reform certified agreement;
  • a pre-reform Australian Workplace Agreement (AWA)
  • an AWA made under the WorkChoices regime;
  • a collective agreement (whether union, employee, or greenfields) made under the WorkChoices regime; or
  • a preserved state agreement.

If the employer is incorporated and employs people in a state other than Victoria, prior to 30 June 2006 it was required to make contributions (or part contributions where specified) to a fund named in a notional agreement preserving a state award (NAPSA) that covered its employees. As of 1 July 2006, that obligation is extinguished and those employees must be offered choice of fund. However, the obligation still exists in respect of any contributions on salary earned up to 1 July 2006: SGAA s32C(6A).

It is important to note that under the WR Act, superannuation provisions in all federal awards, NAPSAs and preserved state agreements are preserved and cannot be revoked, amended or changed until 1 July 2008, at which time they will all extinguish.[2] 

In addition, when a new collective agreement or AWA is in force, and it is silent on superannuation, any preserved superannuation term of an underlying award is of no effect: WR Act s349. As a result, an employee will have choice of fund.

Transmission of business rules

Choice of fund becomes rather more complicated in the area of transmission of business, particularly in light of the new transmission of business rules for industrial instruments in Part 11 and Schedule 9 of the WR Act.

The transmission of business rules does not vary the common law definition of “transmission of business”, and so the case law will still be relevant in determining whether or not a transmission has taken place. An analysis of the common law definition of “transmission” will not be covered in this article.[3] 

In brief, the transmission of business rules ensures that the industrial instrument that applied to an employee’s work for the old employer will continue to apply to their employment when transferring to a new employer after a transmission of business.

The “transmitted instrument” will apply for 12 months, unless displaced or replaced in the interim. In addition, the new employer must give any transferring employees a “notice of transmitted instrument”, which explains that an industrial instrument has transferred, and how and when it may cease to apply.

In most cases a transmitted instrument can be:

  • replaced by the employer and employee(s) making a new agreement that supersedes the old instrument;
  • displaced if the transferring employees cease to do work that is covered by the transmitted instrument (either through promotion, redeployment or cessation of employment); or
  • displaced if the transferring instrument is a federal award, and it is revoked by the Australian Industrial Relations Commission under its powers of review and consolidation of awards.

Because of the application of the WR Act, the transmission of business rules applies to all employers in Victoria and the territories, but only to incorporated employers in states other than Victoria.

Types of transmission

We can identify two consistent types of transmission of business:

  • merger and acquisition situations involving the purchase or sale of a business (i.e. a going concern, run for profit), or a part of a business, that includes the employees as so-called “human capital” in that transaction; and
  • a sale of shares.

In a sale of shares there is no change in employer, and as such the obligations under the transmission of business rules and the choice of fund legislation are not activated. It will only be in the purchase or sale of a business (or part of a business) that the complexities arise.

Small transmissions in the nature of sale of business are manageable in terms of the interaction of the choice of fund legislation and transmission of business rules. However, most companies of a moderate to large size employ a variety of types of employees, and have various operational parts of the business, often in different locations in Australia. These varying employee classifications and locations mean that a different industrial instrument may apply to different employees of the one employer, or an employee may have no industrial coverage (such as independent contractors or senior managers).

If various types of employees are transferring, the situation becomes more complex.

The first steps

Determine whether there has been a change in employer

You must determine whether there will be a legal change in employer as a result of the transmission of business. There will not be a change in employer if there is merely a sale of shares in the employer. There must be a purchase or sale of a business, or part of a business, in which the employees are employed.

Ensure the original employer was contributing correctly

Because any applicable industrial instrument will transfer to the new employer, the new employer can usually continue the superannuation contribution practice of the original employer – but only if the original employer got it right. The new employer should work out whether the original employer was making contributions correctly. A failure to do this will expose the new employer to liability under the superannuation legislation from the transmission date.

Determine the status of the employee

You must also determine the status of the employee. As highlighted above, most large-to-medium businesses have a variety of types and classes of employees. The class and location of employees will determine whether the transmitted industrial instrument applies, or whether another industrial instrument applies, and therefore how choice of fund applies. A change in the status of an employee may mean that a relevant industrial instrument no longer applies.

Once these steps are complete, it is necessary to look at the fine details of each industrial instrument to determine a new employer’s choice of fund obligations.

Impact of industrial instruments

State awards

Where an unincorporated employer acquires employees from another unincorporated employer covered by a state award, those employees will generally continue to be bound by that award because such awards operate as a common rule in the state. If the award contains an obligation in respect of superannuation, the new employer will not need to offer choice of fund.

The exemption from providing choice under a state award applies even where only part of the employee’s superannuation entitlement is paid according to the award. This is to accommodate state awards that specify only a 3 per cent contribution rate. The employer can contribute the remaining 6 per cent how it chooses, in compliance with the SGAA.

There is no transmitted instrument where employees transfer from an incorporated employer to an unincorporated employer in a state other than Victoria. Those employees will become bound by the relevant state award, and the superannuation provisions therein in conjunction with the SGAA.

Notional agreements preserving state awards

Where transferring employees are covered by a NAPSA (which will only occur in transmissions between incorporated entities in a state other than Victoria), those employees will have had choice of fund from 1 July 2006.

Because there is a change in employer, the new employer must offer choice of fund within 28 days of starting employment. The exception provided in s32NA(10) of the SGAA does not apply, as it only applies to the old employer.

Certified agreements, pre-reform AWAs, preserved state agreements and workplace agreements

An applicable pre-reform certified agreement (CA), pre-reform AWA, preserved state agreement, or post-reform collective agreement or post-reform AWA (workplace agreement) will transfer with the employees from one employer to a new incorporated employer, or to an unincorporated employer in Victoria or the territories, and will continue to be binding for 12 months, unless revoked or displaced as described above.

During the time the transmitted agreement is in force, the new employer will be bound by whatever superannuation provisions are contained in that agreement. Unless the transmitted instrument is silent on superannuation, there is no obligation to provide these employees with a choice form within 28 days of commencing employment.

An employer must be making the full 9 per cent contributions required by the SGAA in order to be exempt. For AWAs and post-reform agreements, this will not be an issue. An old pre-reform CA that has not been terminated or a preserved state agreement may specify a lower contribution rate, and the difference is subject to choice of fund. In that case, the new employer must provide a choice form.

The exemption from choice of fund provided by these transmitted instruments only lasts until the earlier of the following occurs:

  • the 12 month transmission period lapses, the transmitted agreement is not replaced, and the employee is not capable of being covered by any other industrial instrument in the workplace that would provide an exception to choice of fund;
  • the transmitted agreement is replaced during the transmission period with a new collective agreement or AWA that is silent on superannuation; or
  • the employee is promoted or redeployed during the 12 month transmission period such that their employment is no longer capable of being covered by the transmitted instrument, or any other industrial instrument in the work-place that would provide an exception to choice of fund.

At that time, the new employer’s obligations change:

  • in practical terms, it will probably be required to change the employees’ default fund because no such default fund will be specified, at which time the new employer must give the transferring employees a new choice form; or
  • it must abide by any request of a transferring employee to provide a choice form; and
  • subject to the exceptions in the SGAA, it must abide by any notice of chosen fund.

Federal awards

Federal awards will transfer to a new employer as a result of a transmission of business, and continue to apply to employees for a period of 12 months. If the new employer was already a direct respondent to the federal award, there will be no transmission of the award, but the employees will still be subject to the award in their new employment.

Employees covered under a federal award are eligible for choice of fund and must be given a choice form within 28 days of commencing employment.

Common rule awards in Victoria

Employers in Victoria, bound by Victorian common rule awards, were not bound by the superannuation provisions in those awards.[4] Employers who are subject to these awards must provide a choice form within 28 days of a transferring employee commencing employment.

Default funds

A final area to be aware of is the default fund. If there is a transmitted instrument containing a binding exception to choice of fund, default will generally not be an issue. However, the three situations where a default fund will be an issue are where the transmitted instrument:

  • is a federal award;
  • is a NAPSA; or
  • lapses, or is revoked or replaced.

With federal awards, the default fund is the fund named in the award. If no fund is named, the employer can choose any default fund: SGAA s32Z.

As NAPSAs are “a Commonwealth industrial award” for the purposes of the SGAA, the exemption in the SGAA that applies to federal awards will also apply to a NAPSA: SGAA s6 and s32Z. However, employees covered by a NAPSA have choice of fund as of 1 July 2006. As a result, employees can choose any eligible choice fund they want. Employers, however, must still maintain the fund in the NAPSA as the default fund for such employees until 1 July 2008.

If the transmitted instrument has lapsed or is revoked, and the employee is not capable of being covered by any other industrial instrument in the workplace that would provide an exception to choice of fund, the employee will be eligible for choice of fund. Unless the employer wants to continue to contribute to the fund named in the transmitted instrument, the employer will need to change the employee’s default fund. At this time, the employer must give the employee a choice form. If there is no applicable federal award or NAPSA, the default fund will be whatever the employer chooses.

If the transmitted instrument is replaced, the superannuation provisions of the replacement agreement will apply. If the replacement agreement is silent, any underlying industrial instrument is of no effect (in contrast to the former provisions of the WR Act, where an agreement prevailed only to the extent of any inconsistencies). The employer must therefore provide the affected employees with a choice form, and is free to choose any default fund.

Conclusions

It is important that current and prospective employers pay particular attention to choice of fund when proposing any kind of business restructure. Even something as simple as a promotion may involve choice of fund issues. The transmission of business rules add a further layer of complexity.

The good news is that we only have two more years before the superannuation provisions preserved from old awards are swept away. At that time, only issues relating to post-reform workplace agreements will remain.


EVAN MENTIPLAY is a lawyer in the Workplace Relations group at Deacons. He has previously practised in superannuation and financial services law.


[1] Amcor Ltd v CFMEU & Ors [2005] HCA 10; Minister for Employment & Workplace Relations v Gribbles Radiology Pty Ltd [2005] HCA 9.

[2] Workplace Relations Act 1996, s527(5), Schedule 6 subclause 22(6).

[3] See: PP Consultants Pty Limited v Finance Sector Union [2000] HCA 61; Amcor v CFMEU note 1 above; Minister for Employment v Gribbles note 1 above.

[4] See Note 2 in all Victorian Common Rule Declarations.

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