The application of the modern award system creates many challenges for employers. There is a common misconception that an employer can simply pay above award wages to an award-covered employee in lieu of overtime, penalties, loadings and allowances.
Employers who employ an award-covered employee must comply with all of the terms of the relevant award regardless of the salary paid to the employee, unless one of the following conditions applies:
- The employer has validly entered into an individual flexibility agreement (IFA) with the employee in accordance with the flexibility clause in the award and the provisions of the Fair Work Act 2009.
- Where applicable, the employer has entered into an arrangement
with its employee in accordance with:
- an annualised salary clause under the award;
- a facilitative provision clause under the award; or
- a majority or individual agreement clause under the award.
- There is an approved enterprise agreement that applies to the employee and operates to the exclusion of the award.
- The employee has a guarantee of annual earnings that is more than the 'high income threshold', which is currently $118,100 (gross figure exclusive of superannuation).
Individual flexibility agreements (IFA)
All modern awards contain an individual flexibility clause allowing an employer and an individual employee to genuinely enter into an agreement to vary the application of certain terms of the award to meet the needs of the employer and the individual employee.
The usual terms that the employer and employee may agree to vary involve:
- arrangements for when work is performed;
- overtime rates;
- penalty rates;
- allowances; and
- annual leave loading.
Conditions of an IFA
While IFAs do not need to be formally approved by Fair Work Australia, there are strict requirements that must be adhered to for an IFA to be valid. These are:
- The employee must be 'better off overall' under the terms of the IFA than they would have been if no IFA had been agreed to and all the terms of the modern award applied. Both financial and non financial benefits can be taken into account in determining whether the employee is 'better off overall', and non-financial benefits can include entitlements such as varied and reduced working hours, the provision of gym membership and time off in lieu.
- The employer and the employee must genuinely have made the IFA free from coercion or duress. This means an IFA cannot be a condition of the employee's employment or ongoing employment.
- The IFA must be in writing, include a commencement date, name the parties to the agreement and be signed by the parties. In addition, if the employee is under 18 years of age, the agreement must also be signed by the employee's parent or guardian.
- The IFA must state each clause of the award that is being varied and explain how the term will be varied.
- The IFA must detail how the employee will be better off overall under the IFA. For example, the IFA can compare what the employee would have received under the award, set out what the employee will receive under the IFA, and then describe how the employee will be better off overall, in terms of financial and non-financial entitlements.
- An IFA must state that both the employee and the employer are entitled to terminate the IFA by providing 28 days' written notice to the other party. Generally, if an IFA is terminated, the employee will revert back to the minimum term and conditions under the relevant award or the terms and conditions they received immediately prior to entering into the IFA.
It is the employer's responsibility to ensure that the terms of the IFA comply with the above requirements. Importantly:
- The employer should keep time and wage records for employees who have entered into IFAs.
- At least annually, the employer should also confirm that the employee continues to be better off overall under the IFA. This requires the employer to review the time and wage records for an employee under an IFA and compare what the employee would have earned under the relevant award compared to what the employee has earned under the IFA.
Annualised salary arrangements
A limited number of modern awards provide for annualised salary arrangements that allow the employer to pay the employee an annual salary in satisfaction of certain award terms.
By way of example, the Clerks - Private Sector Award 2010 (Clerks Award) permits the employer to pay an employee an annual salary in satisfaction of the minimum weekly wage, allowances, overtime, penalty rates and annual leave loading.
The annual salary must be no less than the amount the employee would have received under the award for the work performed over the year for which the salary is paid (or if the employment ceases earlier, over such lesser period as has been worked).
The annual salary of the employee must be reviewed by the employer at least annually to ensure that it is meeting the above requirements.
Annualised salary arrangements must be in writing and can be incorporated into an employee's employment agreement.
A limited number of awards also contain facilitative provisions that allow agreement between an employer and employees on how specific award provisions are to apply at the workplace.
Facilitative provisions can not to be used as a device to avoid award obligations nor should they result in unfairness to an employee or employees covered by the award.
For example, the Road Transport and Distribution Award 2010 allows the employer and the majority of employees to agree to vary award provisions in relation to ordinary hours of work, maximum hours, spread of hours, rural distribution operations and rostered days off.
Depending on the award, the facilitative provisions can be entered into by either individual agreement or by agreement with a majority of employees, and the employer.
Any agreement reached under the facilitative provisions should be recorded in writing and kept as a time and wages record by the employer.
Majority or individual agreement provisions
Similar to the facilitative provisions, some awards also contain provisions that allow the employer and a majority of the employees, or the employer and an individual employee, to enter into an agreement to alter prescribed terms of the award. These provisions are very specific and only allow for a limited amount of flexibility. These types of facilitative provisions are usually found within a particular award clause.
For example, the Clerks Award allows the spread of ordinary hours to be altered by up to one hour at either end of the spread of hours by agreement between the employer and a majority of employees concerned or where appropriate, between the employer and an individual employee.
While an enterprise agreement applies to an employee, the terms of a modern award will not apply to that employee.
An enterprise agreement is a collective agreement that applies to an enterprise, workplace or class of employees and must be approved by Fair Work Australia. To approve an enterprise agreement, Fair Work Australia must be satisfied that the agreement meets the requirements under the Fair Work Act 2009, which includes the following conditions:
- the necessary pre-approval steps have been taken and the agreement has been 'genuinely agreed to' by the employees concerned;
- the terms of the agreement are not inconsistent with the National Employment Standards;
- the agreement passes the 'better off overall test';
- the group of employees covered by the agreement has been 'fairly chosen';
- the agreement does not contain unlawful terms, such as a term that is discriminatory or breaches the general protections provisions under the Fair Work Act;
- the agreement has a nominal expiry date of no more than four years from the date of approval; and
- the agreement contains a dispute settlement clause and a flexibility clause.
Once an enterprise agreement has been approved, it will apply to those employees that it covers to the exclusion of any award. The enterprise agreement will continue to apply (even after the nominal expiry date) to those employees until it is either replaced by another enterprise agreement or terminated by Fair Work Australia. Generally, if the enterprise agreement is terminated by Fair Work Australia the employees will revert back to the minimum terms and conditions under the relevant award.
Guarantee of annual earnings – high income employee
An award does not 'apply' to a 'high income employee'. However, the employee is still 'covered' by the award. This means that a high income employee is not entitled to award terms and conditions but is still covered by the award and can therefore access the unfair dismissal laws under the Fair Work Act.
In terms of award application, a high income employee is an employee with a written guarantee of annual earnings more than the high income threshold, which is currently $118,100 (gross figure exclusive of superannuation). The high income threshold usually increases from 1 July each year.
Amounts included as earnings for the purpose of the high income threshold are:
- an employee's wages;
- amounts dealt with on the employee's behalf or as the employee directs, such as non-compulsory superannuation contributions; and
- any agreed money value of non monetary benefits, such as an employee's personal use of a company motor vehicle.
Amounts excluded as earnings for the purpose of the high income threshold are:
amounts that cannot be determined in advance, such as a bonus calculated on a percentage of an employee's sales; reimbursements, such as a reimbursement to an employee for travel and accommodation costs associated with the employee's duties; and compulsory superannuation contributions.
Failing to comply with the terms of a modern award
If an employer fails to comply with a term of an award the employer will be in breach of the Fair Work Act. Examples of breach include:
- not providing an employee with all of their award entitlements; and
- failing to properly enter into a valid IFA by failing to
- which award provisions are being varied;
- how the award provisions are being varied; and
- how the employee is better off overall.
In addition, coercing or using duress to procure an employee's agreement to enter into an IFA is not only a breach of the award (which is a breach of the Fair Work Act) it is also a breach of the general protections provisions under the Fair Work Act.
Finally, the Fair Work Act prohibits an employer from knowingly or recklessly making a false or misleading representation about the workplace rights of an employee, which would include, for example, telling an employee that they are not entitled to paid overtime when they are under the award.
A breach of the Fair Work Act can lead to:
- penalties of up to $6,600 for individuals who are involved in a breach and $33,000 for corporations per breach;
- compensation or back pay to employees (plus interest);
- publication of the breaches, which can affect the employer's reputation; and
- an audit by the Fair Work Ombudsman in relation to all employee records and employee payments for the past 6 years.
Recent case examples
In Fair Work Ombudsman v Australian Shooting Academy Pty Ltd  FCA 1064 the employer and its managing director were prosecuted and received penalties of $25,000 and $5,000 respectively for breaching the terms of the relevant award. The court considered this penalty at the lower end of the scale due to mitigating factors. The employer had implemented IFAs for its employees but had breached the modern award and the Fair Work Act because:
- the IFA did not identify the terms of the award that were to be varied;
- the IFA did not detail how each term of the award would be varied;
- the IFA did not include the date of commencement;
- the IFA was not genuinely agreed to by some of the employees as the managing director told one of the employees that he had to sign the IFA or he would not get any further work; and
- the managing director threatened to dismiss one of the employees and applied undue influence over him in order to induce him to enter into the IFA.
In Fair Work Ombudsman v Henna Group Pty Ltd  FMCA 244 the employer, its sole director and the person responsible for paying the employees' wages were prosecuted and received penalties of $160,000 for the employer and $30,000 each for the individuals. In this case, the employer underpaid its employees a total of $16,036.75 over a period of one year. Among other things, the employer failed to pay overtime and penalty rates for weekends and public holidays. The court did not take into consideration that the employer was paying above award wages.
Lessons for employers and persons involved in the application of awards and payment of wages
- Employers cannot simply pay an employee above award wages in lieu of other award terms and conditions (such as overtime or penalty rates) unless permitted to do so by law. There are many ways that employers can lawfully vary some award terms and conditions; however this must be done in compliance with the award and the Fair Work Act.
- An employer must strictly comply with the requirements under the Fair Work Act and the relevant award when entering into IFAs. Failure to adhere to the strict requirements will result in an invalid IFA and expose the employer and individuals to legal claims.
- There are heavy penalties for non-compliance with award terms and conditions for the employer and individuals. The Federal Court is regularly imposing penalties on individuals within the organisation who are involved in making decisions about an employee's terms and conditions.
If employers have any concerns about the award or payment arrangements in place for its employees, they should seek advice immediately to avoid or minimise the risk of legal claims.
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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.