The Fair Work Ombudsman (FWO) has come under fire from industry groups for failing to properly oversee the administration of flexibility clauses in the Fair Work Act. The bottom line is that small and medium-sized businesses need more guidance.

According to FWO, employers and employees can negotiate individual flexibility arrangements (IFA) which can vary some terms in a modern award or enterprise agreement to meet the needs of both parties. It's the employer's responsibility to ensure that the employee is better off overall than if there was no IFA, and both the employee and employer must agree on the terms of the arrangement. The terms must be detailed in writing and signed by both parties.

Flexibility clauses can enable employers and employees to better arrange their working lives to suit individual business needs, such as working hours and rates of pay, and were originally introduced to ease spikes in labour costs resulting from public holidays, weekends and overtime. Under an IFA, employers may opt to pay staff a year-round flat rate, higher than the award wage, in lieu of penalty rates and holiday loading thus allowing businesses to extend their opening hours or to remain open on public holidays.

However, in practice the clauses are "completely ineffective" and a "sham", executive director of the National Retail Association Gary Black told The Australian Financial Review. He criticised the clauses on the basis that they offer poor practicality on an enterprise level, and are poorly administrated by FWO. "An employee or employer can sit down in good faith and devise an agreement that is suitable for both, but there is no way they can know at the time of entering into the agreement whether it is valid." Importantly, there is no requirement for employers or employees to lodge IFAs with FWO, and agreements are generally not approved in advance.

According to Black, if the ombudsman later reviews the individual IFA they may deem the "no-disadvantage" rule to have not been met and declare the agreement invalid, ordering back pay and the higher wage in retrospect. "It's an entirely unworkable agreement, particularly for small businesses. They're just not going to take the risk," he said.

A spokesperson for the ombudsman said if an employer fails to ensure that an IFA is properly made in accordance with the Fair Work Act, they may be liable to a penalty of up to $6,600 for an individual or $33,000 if the employer is a body corporate.

Peter Strong, executive director of the Council of Small Business of Australia, said employers face a dilemma when deciding between a flexible agreement and paying penalty rates, and called for better consultation between the FWO and employers to ensure IFAs are fully admissible and there are no surprises come Sunday.