Annualised Salaries – Important New Requirements

New provisions in certain awards take effect from 1 March 2020: will your salary arrangements stand up to scrutiny?

On 1 March 2020 important new requirements regarding annualised salaries will come into effect for employers who are subject to 18 modern awards. The affected awards include the:

Banking, Finance and Insurance Award 2020;
• Clerks – Private Sector Award 2010;
• Manufacturing and Associated Industries and Occupations Award 2010;
• Pharmacy Industry Award 2010; and
• Pastoral Award 2010.

A full list of awards affected by the new requirements are listed below.

Annualised salaries – a refresher

A common practice among employers of award-covered employees is to pay an annual salary to their staff members that is intended to compensate the employee for all monetary benefits they are entitled to under the applicable award. These are sometimes referred to as “all-inclusive” salaries. Such arrangements are particularly prevalent where patterns of work are fairly regular.

However, there is a misconception among some employers that, so long as the amount that is paid to the employee under the annual salary arrangement is more than they would receive if paid strictly in accordance with the award, the arrangement will stand up to scrutiny. Unfortunately, that is generally not the case.

While there are a number of ways in which employers can implement a valid annualised salary arrangement, the simplest solution will typically be to have a carefully drafted award set-off clause in their employment contracts. As the name suggests, an award set-off clause allows employers to offset any amounts payable under an applicable award (such as overtime or loadings) by what the employer has paid to the employee in excess of their minimum award entitlements. So long as the amount paid in excess of the minimum award rates is greater than the amounts not paid, the award set-off clause will provide a sound defence against a claim for underpayment. The Fair Work Commission (FWC) has frequently recognised the validity of these arrangements. Set-off arrangements can also operate in relation to employers subject to enterprise agreements.

However, as of 1 March 2020, a number of modern awards will impose some prescriptive documentation, record-keeping and audit requirements with respect to annualised salary arrangements. Affected employers who continue to adopt annualised salaries without observing these are at risk of breaching the Fair Work Act 2009 and may be exposed to significant civil penalties.

What do the changes require?

The key components of the new requirements are in three areas.

1. Documenting the arrangement upfront – Under the new provisions, affected employers will be required to document the annualised wage that is payable, which of the provisions of the applicable award are satisfied by the annualised wage, how the annualised wage has been calculated, and the maximum amount of ordinary hours subject to penalty rates or overtime hours that can be worked in a given pay period before an additional amount will be payable. Under some awards, the documentation simply requires written notice to the employee. Under others, the employer and employee must record the arrangement in a written agreement (e.g. the employment contract).

2. Record keeping – The awards will now require affected employers to keep records of the starting and finishing times of work, including any unpaid breaks taken. The record must be signed by the employee or acknowledged as correct in writing (including by electronic means) in each pay period or roster cycle.

3. Annual review – The awards will also require affected employers to conduct reviews every 12 months (and on termination of employment) to check that the amounts paid under annualised salary arrangements are in fact equal to or greater than what the employer would have been obliged to pay the employee had they been paid strictly in accordance with the award. Obviously, keeping good records is essential to be able to do this.

As has always been the case, an employer who identifies that the amount they have paid is not enough to satisfy award obligations will be required to back-pay employees to rectify this.

Why does this matter?

No matter how well businesses pay their employees, if their annualised salary arrangements are not properly implemented they may have difficulty defending an underpayment claim at a later date. We find too frequently that generous and well-meaning employers are let down by their documentation and exposed to underpayment claims, even where the employee has been paid significantly more than they would have ordinarily received under the applicable award.

The good news is that getting annualised salary arrangements right is not difficult; it just takes some care in setting up the arrangement and then ensuring good records are kept.

Award set-off clauses should be non-negotiable for any employer covered by a modern award or enterprise agreement. In its decision which imposes the new award requirements, the FWC made clear that the new provisions do not seek to invalidate such arrangements.

Then, the employer must keep records to show that the salary paid is indeed sufficient to cover all of the specific amounts that would otherwise be payable under the applicable award or enterprise agreement. Employers will achieve this by keeping the records prescribed by the new annualised salary provisions.

Awards subject to new changes

1. Banking, Finance and Insurance Award 2020
2. Clerks – Private Sector Award 2010
3. Contract Call Centres Award 2010
4. Hydrocarbons Industry (Upstream) Award 2020
5. Legal Services Award 2010
6. Mining Industry Award 2010
7. Oil Refining and Manufacturing Award 2020
8. Salt Industry Award 2010
9. Telecommunications Services Award 2010
10. Water Industry Award 2020
11. Wool Storage, Sampling and Testing Award 2010
12. Broadcasting and Recorded Entertainment Award 2010
13. Local Government Industry Award 2010
14. Manufacturing and Associated Industries and Occupations Award 2010
15. Pharmacy Industry Award 2010
16. Rail Industry Award 2010
17. Pastoral Award 2010
18. Horticulture Award 2010

Author: James Remington