FWAFB 9985
FAIR WORK AUSTRALIA
Fair Work Act 2009
s.604—Appeal of decisions
JUSTICE GIUDICE, PRESIDENT
 These appeals concern three unsuccessful applications for approval of an enterprise agreement. The agreements are known as:
Armacell Australia Enterprise Agreement 2010 (Armacell agreement)
Direct Paper Supplies Enterprise Agreement 2010 (DPS agreement)
Downer EDI Works (Tamworth) Enterprise Agreement 2010 (Downer EDI agreement)
 On 28 October 2010 Commissioner Ryan decided not to approve the agreements. He issued three separate decisions. 1 In each case the applicant employer has appealed. It was common ground the appeals should be heard together.
 All three of the appeals concern the approach to be taken by Fair Work Australia when considering a term in an enterprise agreement which permits the cashing out of annual leave. Two of the appeals also concern the approach to be taken to a term which permits the cashing out of long service leave. A number of other matters arise, although not in all appeals, including the nature of dispute resolution provisions. The subject matter of the appeals is of general importance. In particular a significant number of enterprise agreements provide for the cashing out of annual leave. It is in the public interest to grant permission to appeal.
Cashing out of annual leave
 All of the agreements contain a term which provides for the cashing out of annual leave in circumstances described in the relevant clause. The Commissioner’s decision in relation to the Armacell agreement might be described as the main decision in relation to that issue, in that some views expressed in it were adopted in the other two decisions. It is sufficient to indicate that the Commissioner was of the opinion that the term permitting cashing out of annual leave, in the circumstances before him, would cause the agreement in each case to fail the better off overall test (BOOT). As a consequence he would not give approval to the agreements unless an undertaking was provided by the employer not to give full effect to that term.
 Approval of enterprise agreements is dealt with in Division 4 of Part 2–4 of the Fair Work Act 2009 (Fair Work Act). Section 186(1) provides that the tribunal must approve an agreement if the requirements set out in ss.186 and 187 are met. For the purposes of this appeal, the requirements set out in ss.186(2)(c) and (d) are the important ones. The relevant parts of the section are:
“186 When FWA must approve an enterprise agreement—general requirements
(2) FWA must be satisfied that:
(c) the terms of the agreement do not contravene section 55 (which deals with the interaction between the National Employment Standards and enterprise agreements etc.); and
(d) the agreement passes the better off overall test.”
 Section 186(2)(c) deals with the National Employment Standards (NES) and s.186(2)(d) deals with the BOOT. We shall deal with the NES first. Section 186(2)(c) refers to s.55 of the Fair Work Act. Section 55 is as follows:
National Employment Standards must not be excluded
(1) A modern award or enterprise agreement must not exclude the National Employment Standards or any provision of the National Employment Standards.
Terms expressly permitted by Part 2-2 or regulations may be included
(2) A modern award or enterprise agreement may include any terms that the award or agreement is expressly permitted to include:
(a) by a provision of Part 2-2 (which deals with the National Employment Standards); or
(b) by regulations made for the purposes of section 127.
Note: In determining what is permitted to be included in a modern award or enterprise agreement by a provision referred to in paragraph (a), any regulations made for the purpose of section 127 that expressly prohibit certain terms must be taken into account.
(3) The National Employment Standards have effect subject to terms included in a modern award or enterprise agreement as referred to in subsection (2).
Note: See also the note to section 63 (which deals with the effect of averaging arrangements).
Ancillary and supplementary terms may be included
(4) A modern award or enterprise agreement may also include the following kinds of terms:
(a) terms that are ancillary or incidental to the operation of an entitlement of an employee under the National Employment Standards;
(b) terms that supplement the National Employment Standards;
but only to the extent that the effect of those terms is not detrimental to an employee in any respect, when compared to the National Employment Standards.
Note 1: Ancillary or incidental terms permitted by paragraph (a) include (for example) terms:
(a) under which, instead of taking paid annual leave at the rate of pay required by section 90, an employee may take twice as much leave at half that rate of pay; or
(b) that specify when payment under section 90 for paid annual leave must be made.
Note 2: Supplementary terms permitted by paragraph (b) include (for example) terms:
(a) that increase the amount of paid annual leave to which an employee is entitled beyond the number of weeks that applies under section 87; or
(b) that provide for an employee to be paid for taking a period of paid annual leave or paid/personal carer’s leave at a rate of pay that is higher than the employee’s base rate of pay (which is the rate required by sections 90 and 99).
Note 3: Terms that would not be permitted by paragraph (a) or (b) include (for example) terms requiring an employee to give more notice of the taking of unpaid parental leave than is required by section 74.
Enterprise agreements may include terms that have the same effect as provisions of the National Employment Standards
(5) An enterprise agreement may include terms that have the same (or substantially the same) effect as provisions of the National Employment Standards, whether or not ancillary or supplementary terms are included as referred to in subsection (4).
Effect of terms that give an employee the same entitlement as under the National Employment Standards
(6) To avoid doubt, if a modern award includes terms permitted by subsection (4), or an enterprise agreement includes terms permitted by subsection (4) or (5), then, to the extent that the terms give an employee an entitlement (the award or agreement entitlement) that is the same as an entitlement (the NES entitlement) of the employee under the National Employment Standards:
(a) those terms operate in parallel with the employee’s NES entitlement, but not so as to give the employee a double benefit; and
(b) the provisions of the National Employment Standards relating to the NES entitlement apply, as a minimum standard, to the award or agreement entitlement.
Note: For example, if the award or agreement entitlement is to 6 weeks of paid annual leave per year, the provisions of the National Employment Standards relating to the accrual and taking of paid annual leave will apply, as a minimum standard, to 4 weeks of that leave.
Terms permitted by subsection (4) or (5) do not contravene subsection (1)
(7) To the extent that a term of a modern award or enterprise agreement is permitted by subsection (4) or (5), the term does not contravene subsection (1).
Note: A term of a modern award has no effect to the extent that it contravenes this section (see section 56). An enterprise agreement that includes a term that contravenes this section must not be approved (see section 186) and a term of an enterprise agreement has no effect to the extent that it contravenes this section (see section 56).”
 Section 55(2)(a) provides, relevantly, that an enterprise agreement may include any terms the agreement is expressly permitted to include by a provision of Part 2–2. There is a provision in Part 2–2 dealing with the cashing out of annual leave. That provision is s.93. It reads:
Terms about cashing out paid annual leave
(1) A modern award or enterprise agreement may include terms providing for the cashing out of paid annual leave by an employee.
(2) The terms must require that:
(a) paid annual leave must not be cashed out if the cashing out would result in the employee’s remaining accrued entitlement to paid annual leave being less than 4 weeks; and
(b) each cashing out of a particular amount of paid annual leave must be by a separate agreement in writing between the employer and the employee; and
(c) the employee must be paid at least the full amount that would have been payable to the employee had the employee taken the leave that the employee has forgone.
Terms about requirements to take paid annual leave
(3) A modern award or enterprise agreement may include terms requiring an employee, or allowing for an employee to be required, to take paid annual leave in particular circumstances, but only if the requirement is reasonable.
Terms about taking paid annual leave
(4) A modern award or enterprise agreement may include terms otherwise dealing with the taking of paid annual leave.”
 By force of this provision an enterprise agreement may include provision for cashing out but subject to some conditions, namely: the remaining accrued entitlement must not be less than 4 weeks, each cashing out must be the subject of a written agreement and payment must be at least the amount that the employee would have been paid if the leave had been taken. It was not suggested that the cashing out provisions in the relevant agreements did not comply with those requirements.
 The Commissioner decided, in each case, that the cashing out of leave provision was an obstacle to the approval of the agreement. The process of reasoning was in substance that although the provisions were consistent with s.93, their operation was a matter to be considered when applying the BOOT. On a proper application of that test, according to the Commissioner, the cashing out of annual leave was such a significant disadvantage that the agreement did not meet the requirement in s.186(2)(d).
 Before dealing with those conclusions it is appropriate to refer to the BOOT which is in s.193 of the Fair Work Act. Section 193(1) is an important part of the provision. It reads:
When a non-greenfields agreement passes the better off overall test
(1) An enterprise agreement that is not a greenfields agreement passes the better off overall test under this section if FWA is satisfied, as at the test time, that each award covered employee, and each prospective award covered employee, for the agreement would be better off overall if the agreement applied to the employee than if the relevant modern award applied to the employee.”
 The Commissioner’s reasons for decision in Armacell are the starting point. The Commissioner traversed the history of award regulation of annual leave over the last seventy years or so, the relevant terms of the Fair Work Act, and some of the Parliamentary materials relevant to that Act. He made the critical finding that the BOOT is not necessarily satisfied in relation to annual leave merely because the cashing out of leave provision meets the minimum requirements in the legislation, i.e. those in s.93. The Commissioner reasoned that even where the term meets the requirements in s.93 it is still possible for an employee never to take annual leave and that low paid employees might prefer always to cash out their annual leave. Other potentially undesirable results were suggested. The Commissioner also referred to the statistics drawn from Armacell’s leave records which indicate that some employees have very large leave accruals. These statistics reinforced the Commissioner’s view that employees might take too much of their annual leave in cash. The Commissioner took a similar approach in relation to the DPS agreement and the Downer EDI agreement.
 The most important question to be resolved is how ss.186(2)(c) and (d) are to be interpreted in relation to each other. Put simply, if a term in an enterprise agreement providing for cashing out of annual leave complies with s.186(2)(c) because it does not contravene s.55, could that term nevertheless cause the agreement to fail the BOOT under s.186(2)(d)? If the Commissioner’s view is correct, this question is capable of arising whenever a term of an enterprise agreement deals with a matter prescribed in the NES in a way which complies with s.55.
 The first point to note is the terms of the cashing out provision in s.93. While an enterprise agreement may include terms providing for the cashing out of paid annual leave, the matters in s.93(2) are in the nature of protections for employees and could be described as safeguards. Annual leave cannot be cashed out if the leave balance would be less than four weeks, each cashing out must be the subject of written agreement and there must be no discounting of the payment. It seems clear, as a matter of interpretation, that the legislature considered the question of safeguards and that it intended the ones specified in s.93(2) to be sufficient. It would be inconsistent with that intention to hold that the safeguards are inadequate and that more or other safeguards should be applied.
 The Commissioner was concerned that although the relevant term complied with s.93(2), situations could occur in which employees might not take annual leave and the purpose of annual leave might be frustrated. This was an error. Whether the Commissioner’s concern is a valid one is beside the point. The legislation makes it plain that an enterprise agreement may include a term for cashing out providing it complies with s.93.
 There are two other matters which require comment. The first is the submission by the appellants and Ai Group that ss.186(2)(c) and (d) should be read independently of each other. It was submitted that a term of an agreement relating to a matter dealt with in the NES is not relevant to the application of the BOOT unless the modern award also contains a term dealing with that matter in some relevant way. On this submission the terms of the agreement could be divided into those relevant to the NES, in relation to which s.186(2)(c) applies, and those relevant to the terms of the modern award, in relation to which s.186(2)(d) applies.
 This construction relies, among other things, on a particular construction of s.193(1) and the words “better off overall if the agreement applied to the employee than if the modern award applied to the employee”. It was said that those words confine the application of the BOOT to matters dealt with in the modern award.
 On the construction advanced, a more generous agreement term could only be taken into account if the relevant modern award dealt with the standard in question. This would produce anomalous results. To take an example, if an agreement provided for 6 weeks of paid annual leave, the extra leave could only be taken into account in applying the BOOT if the modern award already supplemented the annual leave standard in the NES. It is difficult to imagine that the legislature intended such a plainly unfair result. We think this construction of s.193(1) is too narrow. Where an agreement contains a term in relation to a matter dealt with in the NES and which is more generous than the relevant standard, that term can be taken into account in applying the BOOT.
 The second matter concerns the application of s.55. Section 186(2)(c) requires satisfaction that the terms of the agreement do not contravene s.55. We have set s.55 out earlier. The test established by s.186(2)(c) is to be applied independently of the BOOT. It may be that an agreement which provides for cashing out of annual leave meets the requirements of s.93(2) but nevertheless contravenes s.55. This might occur if, for example, the terms of the agreement resulted in a reduction in the amount of annual leave the NES provides for. It was not suggested that any of the annual leave terms in these agreements contravenes s.55.
 The Commissioner made an error in concluding that terms of the agreements which meet the requirements of s.93 and do not contravene s.55 nevertheless result in the agreement failing to pass the BOOT under s.193. In the circumstances there was no basis for concluding that the agreements failed the BOOT because of the annual leave cashing out provisions.
Cashing out of long service leave
 The Armacell agreement and the DPS agreement both contain terms providing for the cashing out of long service leave. The term in the Armacell agreement is cl.37.5. It reads
“An Employee who has been employed by Armacell for no less than 7 years may apply in writing to cash in their long service leave entitlement (or part thereof) in exchange for payment. Armacell may, in its discretion, grant this application.”
 The term in the DPS agreement is cl.32.5. It reads:
“An Employee who has been employed by Direct Paper Supplies for no less than 7 years may apply in writing to cash in their long service leave entitlement (or part thereof) in exchange for payment. Direct Paper Supplies may, in its discretion, grant this application.”
 In relation to the Armacell agreement the Commissioner noted that the agreement applies in Victoria and that if the term of the agreement did not apply the Long Service Leave Act 1992 (Vic) would govern the entitlements of employees to long service leave in that State. The Commissioner pointed out that under that statute cashing out of leave is prohibited (s.74) and employees may not work during long service leave (s.78). If the agreement were to be approved the term would permit an employee and an employer to agree to cash out long service leave even before the employee had accrued an entitlement under the State legislation. The Commissioner found that similar circumstances applied in relation to the DPS agreement. In both cases he concluded that the term permitting cashing out of long service leave runs counter to the purpose of long service leave and caused the agreement to fail the BOOT.
 We were informed on the appeal that the Armacell agreement, if approved, would apply to employees not only in Victoria, but also in New South Wales, Queensland and Western Australia. Some of the employees were previously covered by the long service leave provisions in Part IV of the Metal, Engineering and Associated Industries Award 1998 (metal industry award). 2 The other employees were previously covered by the long service leave legislation of the relevant State. The position in relation to employees covered by the DPS agreement is unclear.
 It is necessary to summarise some aspects of the manner in which long service leave is regulated in Australia. Section 26 of the Fair Work Act provides that it applies to the exclusion of State and Territory industrial laws. It is not necessary to set the section out. Section 27, however, provides that a number of State and Territory laws are not excluded by s.26. In particular s.27(1)(c) provides that State and Territory laws in relation to specified “non-excluded matters” are not excluded. Section 27(2)(g) deals with long service leave. It reads:
“State and Territory Laws that are not excluded by Section 26
(2) The non-excluded matters are as follows:
(g) long service leave, except in relation to an employee who is entitled under Division 9 of Part 2-2 to long service leave;
 In order to ascertain whether an employee is entitled to long service leave under Division 9 of Part 2–2 it is necessary to have regard to s.113. Section 113, which is in Division 9 of Part 2–2, provides in part that a long service leave provision in a federal award or State reference transitional award that was in operation immediately before 1 July 2009 or, for a Division 2B State reference employee, immediately before 1 January 2010, is preserved for the benefit of an employee.
 While the relevant terms of ss.26 and 27 are cast in the negative, it is clear enough that the NES does not create a general entitlement to long service leave. The position can be contrasted with that applying in relation to annual leave where the NES contains a standard which applies to all employees. Speaking generally, where an employee would have had an entitlement to long service leave under a federal award if that award had continued to apply there is an entitlement under the Fair Work Act. All other cases are governed by the relevant State legislation. State long service leave laws are not excluded by the operation of the Fair Work Act unless an employee is entitled to long service leave in accordance with a relevant federal award or State reference transitional award operating immediately prior to 1 July 2009 or 1 January 2010 as the case may be.
 We were told that some of the relevant State laws permit cashing out of long service leave in certain circumstances. Cashing out is only permitted under the metal industry award in very limited circumstances.
 Dealing first with the position of employees to whom State long service leave laws apply, it is necessary to further examine the manner in which the Fair Work Act interacts with such laws. Section 29 is relevant. It reads:
(1) A modern award or enterprise agreement prevails over a law of a State or Territory, to the extent of any inconsistency.
(2) Despite subsection (1), a term of a modern award or enterprise agreement applies subject to the following:
(a) any law covered by subsection 27(1A);
(b) any law of a State or Territory so far as it is covered by paragraph 27(1)(b), (c) or (d).
(3) Despite subsection (2), a term of a modern award or enterprise agreement does not apply subject to a law of a State or Territory that is prescribed by the regulations as a law to which modern awards and enterprise agreements are not subject.”
 While s.29(1) provides that as a general rule enterprise agreements prevail over State laws to the extent of any inconsistency, s.29(2) provides an exception in relation to a term of an enterprise agreement which is inconsistent with, relevantly, a law of a State or Territory covered by s.27(1)(c). Section 27(1)(c), as we have already noted, refers to non-excluded matters, one of which is long service leave. 3
 The effect of these provisions is that in the event of inconsistency between a term of an enterprise agreement dealing with long service leave and State long service leave legislation the latter prevails. Accordingly, to the extent that a term in an enterprise agreement purports to permit cashing out of long service leave in circumstances where it would not be permitted under the relevant State legislation, the term is of no legal effect. In the cases in point, if the term in either the Armacell agreement or the DPS agreement purports to permit an employee to cash out long service leave in circumstances where the relevant State law does not permit it, the State law prevails and the term of the agreement is of no effect.
 Two other matters require comment. The Commissioner took the cashing out provisions into account in applying the BOOT and sought an undertaking. Given the operation of s.29(2), we do not regard this issue as one on which an undertaking could be given under s.190. Perhaps more fundamentally, no issue arises concerning the application of the BOOT. A term of an enterprise award which purports to reduce an entitlement under State long service leave legislation has no legal effect in any event. Secondly, whether or not provision for cashing out of long service leave can be regarded as supplementation is a question which does not arise in this context. It is simply a question of whether there is any inconsistency between the term of the agreement and the State legislation.
 We deal now with the position of employees to whom a federal long service leave award may apply as a result of the operation of s.113(1). As we understand it the metal industry award does not generally provide for cashing out of long service leave, at least not to the extent permitted by the Armacell and DPS agreements. Accordingly, in that respect, the term contravenes s.55, contrary to the requirement in s.186(2)(c). We add for completeness that in our view a term which permits cashing out of long service leave cannot be characterised as a supplementation of the NES pursuant to s.55(4). Cashing out of leave generally cannot be regarded as an additional or supplementary provision. We point out by analogy that, despite provision for supplementation of the NES in s.55(4), the legislature deemed it necessary to include separate provisions dealing specifically with cashing out of annual leave (ss.92-4).
 The next question is whether the terms in the agreements which purport to permit cashing out of long service leave render the agreements incapable of certification. Leaving aside employees who may have an entitlement under the metal industry award, inconsistency with State legislation is not a matter referred to in ss.186 or 187. Those provisions require Fair Work Australia to approve an agreement if the specified conditions are met. In our view these sections must be given effect to regardless of the presence in the agreement of a term which is inconsistent with State legislation. Section 192(1), which in other circumstances might confer a discretion to refuse approval, does not apply. It provides that approval may be refused if Fair Work Australia considers that compliance with the terms of the agreement may result in a person contravening a law of the Commonwealth. A State law is not a law of the Commonwealth. There are provisions of the Fair Work Act indicating a clear distinction between the Commonwealth, a State and a Territory. 4 Accordingly there is no discretion to refuse approval under that section. We conclude that while agreements may contain long service leave terms which are inconsistent with State legislation that is not a basis upon which approval can be refused.
 In relation to employees with an entitlement to long service leave arising from the terms of the metal industry award, the situation is different. If, as we have concluded, there is a long service leave term in the agreements which is inconsistent with the long service leave term of the metal industry award, the requirement in s.186(2)(c) has not been met. That situation is capable of being dealt with by an undertaking under s.190. An appropriate undertaking would be that the employer in question undertakes that in relation to an employee entitled to long service leave under the terms of the Metal, Engineering and Associated Industries Award 1998 the employer will not consent to cashing out of long service leave other than in accordance with the terms of that award.
 An issue arose concerning the nature of the dispute settlement provisions in the Armacell agreement and the DPS agreement. In each case the Commissioner indicated some concern that the dispute settlement provision did not include access to arbitration “as a right”. In each case the employer proffered an undertaking in relation to arbitration. Probably because he regarded the undertaking as resolving the issue, the Commissioner did not deal with this point in his decisions.
 This issue was dealt with by a Full Bench in Re Woolworths Ltd trading as Produce and Recycling Distribution Centre (Woolworths). 5 The Full Bench decided that access to arbitration is not an essential element of a dispute settlement procedure and that it is not a prerequisite to approval that the procedure guarantee access to arbitration. We see no reason to depart from those conclusions. The dispute settlement provisions in the two agreements are of the kind required by s.186(6) and are not an obstacle to the approval of the agreements. We deal now with the consequences of our decision so far in relation to each of the appeals.
Disposition of the appeals
 We deal first with the Armacell agreement. The Commissioner found that the terms in the agreement providing for the cashing out of annual leave, long service leave and personal leave, taken together created “a culture of cashing out rather than the taking of paid leave”. 6 The Commissioner noted he had sought undertakings in relation to the cashing out of annual leave and long service leave (although not personal leave) which Armacell had not been prepared to provide. He also noted that a number of other undertakings had been offered. For reasons we have given the Commissioner’s decision was made in error in relation to the cashing out of annual leave and at least partly in error in relation to long service leave. The decision must be quashed.
 The Commissioner decided not to approve the DPS agreement because it provided for the cashing out of annual and long service leave. 7 Like the decision in relation to the Armacell agreement, this decision must also be quashed.
 The Commissioner declined to approve the Downer EDI agreement because it contained provision for cashing out of annual leave. 8 This decision was also erroneous and must be quashed.
 We deal now with the question of undertakings. Before considering what undertakings may be appropriate if the agreements are to be approved, it is necessary to make some observations about the application of the BOOT.
 The BOOT, as the name implies, requires an overall assessment to be made. This requires the identification of terms which are more beneficial for an employee, terms which are less beneficial and an overall assessment of whether an employee would be better off under the agreement. The approach adopted by the Commissioner includes an identification of terms which might, on his view of the term, be less beneficial for an employee. There is nothing on the face of the Commissioner’s decision to indicate what account if any he took of any terms which might be more beneficial for an employee. He obtained a large number of undertakings from all three employers in relation to terms which he considered undermined existing entitlements. It may be that if we applied the BOOT ourselves we might come to different conclusions to the Commissioner in relation to the number and nature of the undertakings required. To follow that course, however, would require each of the applications to be considered afresh with the necessary delay that would entail.
 In the circumstances we think the appropriate course is to indicate that we are prepared to approve the Armacell agreement and the DPS agreement on the basis of the undertakings provided by the employer in documents dated 13 September 2010 and 15 September 2010 respectively, subject to two things. The first is that we would release the employer from the undertaking given in relation to arbitration in connection with the dispute settlement provision. The second is that the employer provide an undertaking in the terms we specified earlier in relation to the cashing out of long service leave. We are prepared to approve the Downer EDI agreement on the basis of the undertakings given by the employer in the letter dated 20 July 2010.
 Should this course not be acceptable to the employers or any of them or the relevant bargaining representatives we consider that the application for approval would need to be considered afresh by a member of this bench. This is primarily because we are not in a position to apply the BOOT without more information concerning those terms of the agreement which might increase current entitlements and benefits. If that course were followed we would also release the employer from any undertakings which we consider unnecessary.
 Upon notification by the employer and the relevant bargaining representatives that the course we propose is acceptable, and provision of the undertaking in the case of the Armacell and DPS agreements, we shall approve the agreement. We ask the employers and bargaining representatives to notify us by 10 January 2011. If these arrangements are unacceptable the application for approval will be referred to a member of this Full Bench for determination.
M Mead with S Smith for the Australian Industry Group and Armacell Australia Pty Ltd, Wilmaridge Pty Ltd as Trustee for the O’Neill Family Trust t/a Direct Paper Supplies and Downer EDI Works Pty Ltd.
D Mujkic for the National Union of Workers.
T Clarke for the Australian Council of Trade Unions.
1 Armacell agreement:  FWA 8283; DPS agreement:  FWA 8314; Downer EDI agreement:  FWA 8333.
4 e.g. ss.62(4)(c), 109(1)(a), 109(3)(a)(ii), 111(6), 130(1), etc.
5  FWAFB 1464.
6  FWA 8283 at paras 67 and 68.
7  FWA 8314 at para 25.
8  FWA 8333 at para 13.
Printed by authority of the Commonwealth Government Printer
<Price code C, PR505463>