New annualised salary requirements pose a choice for employers

6 February 2020

Many employers currently pay an annual salary to all or some of their employees who are covered by a modern award.  It is common in those circumstances for an employee’s contract of employment to contain a provision which provides that the salary includes payment for all and any entitlements the employee may have (including entitlements arising under an award) in respect of their employment.  These “common law” contract salary clauses, if properly drafted, have been held to be effective in permitting the total salary to be applied against individual award entitlements such as minimum wages, overtime and allowances.  Generally, an employer will meet its legal payment obligations provided that the total salary equals or exceeds the total entitlements calculated under the terms of the relevant award.

Some awards also contain annualised salary clauses.  The effect of those clauses is that an employer may pay an annual salary to an employee in satisfaction of specific provisions of the award provided that the salary does not disadvantage the employee (over the course of a 12 month period) and provided the employer undertakes a review each year to ensure the salary amount is appropriate having regard to the hours worked by the employee.

On 1 March 2020, new annualised salary clauses will be inserted into 22 modern awards.

The new clauses impose additional obligations on employers who wish to obtain the benefit of the award annualised salary exemption.  In particular, employers must:

  • notify employees of the specific clauses of an award that will be satisfied by the annualised salary, and how the salary has been calculated by reference to assumptions about hours they will work that would otherwise attract overtime or penalty rates;
  • keep records (which employees are required to counter-sign) of employees’ starting and finishing times and breaks in respect of each pay period; and
  • undertake a reconciliation every 12 months and upon termination of an employee’s employment for the purpose of comparing the annual salary paid to the amount the employee would have received for the hours they worked under the award.

Employers will continue to have a choice whether to pay an annual salary in accordance with the agreed terms of an employee’s contract of employment, or to bring themselves within the scope of the annualised salary provisions contained in the applicable award.

The Fair Work Commission has confirmed that after 1 March 2020 employers are not legally required to comply with the prescriptive requirements associated with paying an annualised salary under an award.  Rather, an employer will not qualify for the annualised salary award exemption if they do not comply.  Employers will still be able to use a common law contract which provides for an annual salary that “buys out” the entitlements under the award to the same extent that they do now.

The main risk for employers if they adopt this option is the same as it is now, namely, ensuring that:

  • the total annual salary equals or exceeds the employee’s award entitlements, failing which they will be in breach of the award and exposed to claims for underpayment of wages or entitlements;
  • they are able to prove this if faced with an allegation of underpayment.

Where the total “common law” salary of staff is substantially higher than what an employee would earn under an award (taking into account hours worked) this risk is relatively low and the employer may therefore decide that it is not worth the additional administrative time and expense associated with bringing themselves within the award annualised salary exemption.  On the other hand if there is only a small margin for error when comparing the strict award entitlements to the annual salary amount the risk of breach is higher and therefore the employer may be more likely to decide that the time and cost of complying with the new award annualised salary requirements is warranted.

Employers who opt to bring themselves under the award provisions will need to ensure they strictly comply with the new record keeping and reconciliation requirements or face breaching the terms of the award. 

If you would like advice about the suitability of your existing employment arrangements please contact our team of expert employment and industrial relations lawyers.

 

This article provides general comments only.  It does not purport to be legal advice.  Before acting on the basis of any material contained in this article, we recommend that you seek professional advice.

 

Authors:

Paul Dugan, Principal in our Disputes Team

Contact
Email: pdugan@dmawlawyers.com.au
Direct Telephone:  +61 8 8210 2266

 

Kylie Dunn, Senior Associate in our Disputes Team

Contact
Email: kdunn@dmawlawyers.com.au
Direct Telephone:  +61 8 8210 2286