Australia: Modern award rates - are you compliant?

Modern awards commenced on 1 January 2010. Most modern awards contain transitional provisions that allow employers to phase in minimum rates of pay and certain penalties and loadings (Rates) over a four year period from 1 July 2010 to 30 June 2014.

The transitional process has caused much confusion for employers and has resulted in many employees being underpaid or overpaid. To assist employers with the transitional process, set out below is a step by step guide to calculating transitional Rates. The transitional Rates will apply to all national system employees regardless of whether they were employed by the employer before 1 January 2010.

Calculating minimum rates of pay

The transitional minimum wage rates between 1 July 2010 and 30 June 2014 are calculated as follows:

Step 1: Determine the applicable rate of pay in the pre-modern award instrument (which is usually an old State award) as at 30 June 2010.

Step 2: Determine the equivalent wage rate in the modern award as at 30 June 2010. Note that the classification structures may have changed (i.e. a level 1 employee may now be a level 2 employee).

Step 3: Calculate the difference between the two wage rates in steps 1 and 2. This is called the transitional amount. The transitional amount will remain the same for the entire transitional period (i.e. until 30 June 2014).

Step 4: Calculate the relevant proportion of the transitional amount, which is:

• from 1 July 2010 – 80%;
• from 1 July 2011 – 60%;
• from 1 July 2012 – 40%;
• from 1 July 2013 – 20%.

For the pay period from 1 July 2011, the applicable percentage is 60% of the transitional amount. This is called the adjustment amount.

Step 5: Determine the applicable rate of pay in the modern award as at 1 July 2011.

Step 6: Subtract or add the amount in step 4 (the adjustment amount) to the rate of pay in step 5 (the current modern award rate).

Subtract the adjustment amount from the modern award rate if the modern award rate is higher than the rate in the pre-modern instrument.

Add the adjustment amount to the modern award rate if the modern award rate is lower.

Transition of loadings and other penalty rates

The same calculations apply to loadings and other penalty rates contained in the transitional provisions if there is an equivalent entitlement in the pre-modern award instrument and the modern award.

An entitlement is "equivalent" if it applies:

• for the same purpose (e.g. Saturday penalty rate);
• for the same time period; and
• in the same way (i.e. at the same frequency (e.g. per hour) and as a percentage of the same amount).

If an entitlement in a modern award has no "equivalent" to an entitlement in the pre-modern award instrument, then the entitlement can be phased in. If an entitlement in a pre-modern award instrument has no "equivalent" to an entitlement in the modern award, then the entitlement can be phased out. The transitional entitlement rate is calculated by multiplying the relevant penalty or loading rate by the following percentage:

Consequences of underpayment

Underpayment of wages (whether unintentional or otherwise) is a breach of the Fair Work Act 2009 (Cth) and may result in:

• fines of up to $6,600 for individuals and $33,000 for corporations for every breach;
• an investigation and prosecution by the Fair Work Ombudsman;
• back payment of wages for up to six years including interest; and
• publication of the breach, which can include naming and shaming the employer.

It is important that employers conduct an audit to ensure that they are paying employees correctly. If there are any underpayments identified, employers should immediately rectify the issue by back paying employees. This includes employees who have since left the employer.

Failure to rectify underpayments can result in directors and officers being prosecuted and held personally liable for any underpayments. For example, in Fair Work Ombudsman v Aussie Junk Pty Ltd (In Liquidation) & Anor [2011] FMCA 391 a director was personally fined $72,000 for being "wilfully blind" to the employment obligations his company owed to employees. In Fair Work Ombudsman v Security Protection Services Pty Ltd & Ors [2010] FMCA 252 two directors were personally fined $136,900 for underpaying 47 employees engaged in the security and watching services industry.

These cases demonstrate that prosecution is not simply a technical risk but a real risk for employers and directors if they fail to pay their employees correctly.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.