Australia: Two years on: are you effectively dealing with modern awards?

It has been almost two and a half years since the new modern award system was introduced on 1 January 2010.

Employers, some of whom have employees that are covered by a modern award for the first time as a result of the wider reach of the new system, have had time to familiarise themselves with the new system, and have had to determine how to meet their obligations in a commercial manner.

Here are our top tips for dealing effectively with the application of modern awards to your workforce:

1. Enter into high income guarantees

Employers can exclude the operation of modern awards that cover employees earning over $118,100 per year ($123,300 from 1 July 2012, indexed annually) by guaranteeing their annual earnings. This amount excludes payments that cannot be determined in advance (e.g. commissions, bonuses or overtime), reimbursements and compulsory superannuation contributions.

The guarantee takes the form of a written undertaking by the employer, which an employee may agree to. Importantly, an employer can make the acceptance of a guarantee a condition of an employee accepting employment. If the undertaking is given, and accepted by the employee, and certain other requirements are met, the employee becomes a "high income employee" and the relevant modern award will not apply to the employee. However, the relevant modern award will still cover the employee, allowing the employee to claim the protection from unfair dismissal available under the Fair Work Act 2009 (Cth).

2. Enter into individual flexibility agreements ("IFA")

IFAs between employers and individual employees allow for limited variations to an applicable modern award in order to meet the genuine needs of employers and individual employees, at the same time as ensuring minimum employee entitlements and protections are not undermined.

IFAs can only vary arrangements for when work is performed (such as working hours), overtime rates, penalty rates, allowances, and leave loading. No other provisions of modern awards can be varied by an IFA, and an employer cannot ask a prospective employee to agree to an IFA as a condition of employment. In contrast, if an enterprise agreement allows an IFA to be entered into, the only restrictions on what provisions may be varied by an IFA will be any restrictions contained in the agreement itself, which will specifically stipulate what provisions can be varied.

However, since an IFA varying a modern award can generally be terminated by either the employer or employee giving as little as 28 days written notice to the other, an IFA's ability to provide long term certainty for working arrangements is somewhat limited.

3. Pay annualised salaries

Some modern awards, such as the Banking Finance and Insurance Award 2010 and the Clerks – Private Sector Award 2010, expressly allow for the payment of annualised salaries in place of minimum wages, allowances, overtime rates, penalty rates, and annual leave loading provided for in the modern award, subject to certain requirements being met. This includes that the annual salary must be no less than the amount the employee would have received under the modern award for the work to be performed. Further requirements apply, so seek advice to make sure they are met.

4. Keep track of variations to modern awards

Modern awards are regularly varied by Fair Work Australia ("FWA"). For example, and as we wrote in our Employment Law e-alert of 1 June 2012, the minimum wage panel of FWA recently determined that from the first full pay period on or after 1 July 2012 there will be a 2.9% increase in hourly modern award minimum rates of pay across the board.

FWA is currently in the process of conducting a review of all modern awards (see tip number 9 below). This will likely result in variations to many modern awards.

It is important to regularly check for variations, and to ensure that you are referring to the most current version of the modern award.

5. Check if there are any restrictions relating to superannuation contributions

Some employers are unaware that many modern awards stipulate specific or default superannuation funds into which an employer's superannuation contributions must be deposited.

Where your organisation has employees covered by different modern awards, be sure to check the restrictions relating to superannuation contributions in each modern award, since the restrictions can differ. Do not assume that complying with the provisions relating to superannuation contributions in one modern award will mean that you have complied with the requirements in each modern award applicable to your workforce.

Getting this right from the start can prevent breach of the relevant modern award(s), not to mention sparing your organisation the administrative hassle of changing superannuation contribution arrangements to accord with the modern award requirements.

6. Understand and comply with the transitional provisions

Certain monetary entitlements under most modern awards are subject to transitional provisions, which smooth out the difference between pre-modern and modern award entitlements over a four year period (from 2010).

For example, many awards phase-in or phase-out certain monetary entitlements in instalments of 20 per cent per year, depending on whether the entitlement under the modern award exceeds, or is less than, the equivalent premodern award entitlement.

The operation of these transitional provisions ends on the first full pay period after 1 July 2014, at which point the modern award entitlements must be paid in full.

Although intended to be easily applied, in practice, employers often encounter difficulties in applying transitional provisions, so specialist advice is recommended.

7. Include an "absorption" clause in employment contracts

Many transitional provisions in modern awards also allow monetary obligations under that modern award to be absorbed into over-award payments made by an employer. However, the scope of those provisions is limited, in that it only applies to monetary obligations under the relevant modern award, and those transitional provisions will end on 1 July 2014. It is therefore good practice to ensure that a properly drafted "absorption" or "off-setting" clause, which is broad in coverage and includes any other payments legally owed to the employee, is included in your organisation's employment contracts.

8. Do not unwittingly incorporate modern awards into employment contracts

Generally, a modern award is not taken to be automatically incorporated into the employment contract of an employee covered by the modern award. However, where a modern award is expressly referred to in a written employment contract, there may be a risk, depending on the language used, that the terms of that modern award may be incorporated, or turned into contractual obligations. If this is successfully argued, it could give an employee additional grounds on which to base a claim for breach of the relevant modern award, as well as potentially widen the available remedies. If in doubt as to the language required, seek advice.

9. Modern Award Review 2012: Have your say

FWA is currently conducting the first review of modern awards since they commenced. The 2012 review is dealing with applications to vary most awards, and the review process is a good opportunity to deal with modern award conditions that operate unfairly, inconsistently or inflexibly, and to manage concerns about modern award coverage.

Participation in the review process will also allow employers to engage on issues of concern to business, such as the need to maintain and expand annualised salary provisions, bring minimum engagement provisions into line with practical limits, and to include flexibility in superannuation funds into which contributions can be made. At the same time, unions are also engaging on these, and their own concerns.

Although the deadline for applications to vary a modern award has passed, participation in hearings for existing applications is still possible. We recommend you participate to ensure the review process is a success for your business.

Strengthened employment and workplace relationS capability in new South waleS

Hunt & Hunt is pleased to welcome Brett Feltham, Partner, who has joined the partnership of Hunt & Hunt. Based in our Sydney office, he heads up the employment and workplace relations practice in New South Wales. Brett and his team have expertise in all aspects of employment and workplace relations, and also specialise in employee remuneration and benefits.

Brett is joined by Shawn Skyring, Special Counsel, who is based in our North Ryde office, and by Mandi Xu, Associate, and Georgos Papanastasiou, Lawyer, both of whom are based in our Sydney office.

Brett and his team expand Hunt & Hunt's national employment and workplace relations practice. Please contact us below if you have any queries.

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.

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