In this article we provide you with an overview of the Fair Work Commission’s (FWC) recent decision to make changes to the annualised salary provision under 22 awards effective 1 March 2020.

Chances are, if you have employees who are covered by one of 22 modern awards, some or all will likely contain an annualised salary provision and/or ‘Offset’ clause in their employment contract. This clause usually states that the employee is paid over and above the award rate for the award classification of their role and as such their total remuneration is in satisfaction of any penalty, loading and/or overtime rates they are entitled to under their applicable award.

In essence the award changes will place a greater onus on employers to ensure that their employees do not earn below minimum wage overall, when they work any hours above the 38-hour working week, factoring in any overtime payments, loadings and penalty rates.

The change

Effective 1 March 2020, changes to the annualised salary provisions contained within 22 modern awards requires employers to implement a number of administrative processes and potentially contractual changes with respect to award-covered salaried employees.

On the face of it, there are a number of facets to this legislative change that will apply to these award employees.  The high-level overview is as follows:

  • the need for employers to track start, finish and break times;
  • Every 12-month period or upon termination, the employer should undertake an analysis of the employee’s hours worked. If the employer discovers that an employee received less pay on their annual wage agreement than if they had been paid for actual hours worked under the award, the employer is required to pay the employee the difference within 14 days.
  • calculating and record­ing the ​“out­er lim­it” num­ber of ordi­nary hours which would attract award penal­ty rates, and the ​“out­er lim­it” num­ber of over­time hours which the employ­ee may be rea­son­ably required to work in a pay peri­od or ros­ter cycle which would be ade­quate­ly remu­ner­at­ed by the annu­alised salary.
  • The Fair Work Commission (FWC) has created several model ‘annualised salary’ clauses which will apply to three categories of awards. It should be noted that there are subtle differences to these model clauses.  For example, some awards (category 2 and 3) will require that an employee agree to an annualised salary provision whereas other awards (category 1) awards do not.

Understandably, many experts have formed the view that these administrative requirements defeat the purpose of having employees on an annualised salary arrangement.

The risks for failing to comply:

Failure to comply may result in employers being exposed to the risk of underpayment claims and potential penalties for breaches of the modern award. This was recently highlighted by the high profile “George Calombaris’ Made Group”. The Made Group were required to rectify underpayments to employees of close to $8 million.

What you need to do:

Here’s a high-level overview of the general steps required to ensure compliance with this new legislation:

  • Determine if any of your employees are on an annualised salary and are covered by one of the 22 modern awards (see point 2 below) that this legislative change impacts.
  • Note which category the modern award falls under:
    • Category 1 – includes awards which cover employees who work relatively stable hours:
      • Banking, Finance and Insurance Award 2010
      • Clerks – Private Sector Award 2010
      • Contract Call Centres Award 2010
      • Hydrocarbons Industry (Upstream) Award 2010
      • Legal Services Award 2010
      • Mining Industry Award 2010
      • Oil Refining and Manufacturing Award 2010 (clerical employees only)
      • Salt Industry Award 2010
      • Telecommunications Services Award 2010
      • Water Industry Award 2010
      • Wool Storage, Sampling and Testing Award 2010
    • Category 2 – includes awards which cover employees who work highly variable hours and/or hours which would attract penalty rates:
      • Broadcasting and Recorded Entertainment Award 2010
      • Local Government Industry Award 2010
      • Manufacturing and Associated Industries and Occupations Award 2010
      • Oil Refining and Manufacturing Award 2010 (non-clerical employees)
      • Pharmacy Industry Award 2010
      • Rail Industry Award 2010
      • Horticulture Award
      • Pastoral Award 2010
      • Health Professionals Award 2010
    • Category 3 – includes modern awards which currently provide that the annualised salary be an amount not less than a specified percentage above the minimum weekly wage set out in the modern award:
      • Marine Towage Award 2010
      • Restaurant Industry Award 2010
      • Hospitality Industry (General) Award 2010
  • Based on the category of the award(s) as outlined above, determine if you need to seek the employee’s agreement to be paid in accordance with an annualised salary arrangement:
    • Category 1 awards – will not require an employee’s agreement to the introduction of an annualised salary arrangement.
    • Category 2 awards – will require employers and employees to agree on the application of an annualised salary arrangement.
    • Category 3 awards – will require employers and employees to agree on the application of an annualised salary arrangement but only for non-managerial staff.
  • Determine whether to provide relevant employees with revised employment letters and/or contracts as required, we believe it would be prudent to have your employment contracts reviewed.

Employ­ers that are affect­ed by these changes may need to consider altering their pay­roll pro­ce­dures to ensure that they are com­pli­ant.

  • Every 12 months or upon termination, reconcile the actual hours worked against the pay received to ensure that the employee was paid at least the applicable award rate and ensure that your employees annualised salary at least is covered by the applicable award rates (including penalty and over-time rates).
  • If a shortfall is identified, you must pay your employees any shortfall within 14 days.

We have sought our own legal advice on the FWC’s decision. Based on this advice, we formed the view that the FWC deci­sion does, how­ev­er, keep open the pos­si­bil­i­ty of con­tin­u­ing to use com­mon law con­trac­tu­al set-off clauses. However, this may be regarded as a more ‘risky’ approach.

There is a lot to consider here, if you require assistance in navigating these changes and understanding its impact on your business, feel free to give us a call.

Disclaimer: The contents do not constitute legal advice and does not cater for individual circumstances. The information contained herein is not intended to be a substitute for legal advice and should not be relied upon as such.

Nick Hedges is the founder of Resolve HR, a Sydney-based HR consultancy specialising in providing workplace advice to managers and business owners.

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