Australia: Employee Remuneration and Benefits to increase

Employment law update

Are you aware of, and prepared for, the increases to the superannuation guarantee contribution rate?

Upcoming changes to the minimum compulsory superannuation contribution rate may not only add to the costs of employing staff, but will require a close review of how those changes will work with your existing employment contracts and may require that changes be made to the employment documentation used to hire new staff.

Employers must make the minimum compulsory contributions required by the Superannuation Guarantee (Administration) Act 1992 (Cth) (Act), in order to avoid the imposition of the superannuation guarantee charge.

For a number of years employers have been required to make compulsory superannuation contributions on behalf of "eligible employees" at the minimum rate of 9% of an employee's ordinary time earnings (as defined), up to a "maximum superannuation guarantee contribution base".

Generally those contributions were required to be made on behalf of:

  • employees aged between 18 and 69 years (inclusive) and who were paid $450 or more (before tax) per month, regardless of whether they were employed on a full-time, part-time or casual basis;
  • employees aged under 18 years, who were paid $450 or more (before tax) per month, and who worked more than 30 hours per week, regardless of whether they were employed on a full-time, part-time or casual basis; and
  • individual contractors paid wholly or principally for their labour (subject to various conditions being met).

CHANGE TO THE MINIMUM SUPERANNUATION CONTRIBUTION

From 1 July 2013, the minimum compulsory contribution rate required by the Act for "eligible employees" will increase to 9.25% and employers will be required to make contributions on behalf of employees aged 70 years or over.

There will then be further annual increases to that minimum rate until employers will be required to meet a contribution rate of 12% commencing from the 2019 – 2020 financial year.

The "maximum superannuation guarantee contribution base" for the financial year 2012 – 2013 is $45,750 per quarter or $183,000 per year (and which is indexed annually). Where an eligible employee earns in excess of that maximum contribution base, then an employer is not required to make superannuation contributions on earnings in excess of that maximum contribution base.

INCREASE IN THE MINIMUM SUPERANNUATION CONTRIBUTION RATE AND THE CONCESSIONAL CAP

Since 1 July 2012, all individuals have had an annual concessional contributions cap of $25,000. While it was previously announced by the Federal government that the concessional contributions cap for individuals who have total superannuation balances below $500,000 and who are 50 years old or over would be increased to $50,000, this possible future change has been deferred until 1 July 2014 at the earliest.

Where an employer has been making superannuation contributions on behalf of an employee at the minimum contribution rate but without regard to the maximum contribution base (so that in effect the employer has been making contributions in excess of their obligations under the Act), then it is important to ensure that the employee does not inadvertently exceed the concessional cap.

For example, if an employee is currently earning $275,000 per year (and this is considered to be the employee's ordinary time earnings) and the employer has been making superannuation contributions at the rate of 9% for the entirety of the financial year 2012 – 2013, then the employer will have made superannuation contributions of $24,750 during that financial year. For the financial year 2013 – 2014, if the employer now makes superannuation contributions at the rate of 9.25%, again without regard to the maximum contribution base (and assuming that the base does not increase), then the employer will have made superannuation contributions of $25,438 during that financial year. Contributions which have been made on behalf of that employee which exceed the concessional cap (in this case, $438) will result in the employee being subject to additional taxation.

Employers may wish to discuss this implication with their high income earning employees.

SUMMARY OF MINIMUM COMPULSORY SUPERANNUATION CONTRIBUTION RATES

The minimum compulsory superannuation contribution rates which will apply from 1 July 2013 are set out below:

Relevant financial year Superannuation
guarantee rate
1 July 2013 – 30 June 2014 9.25%
1 July 2014 – 30 June 2015 9.5%
1 July 2015 – 30 June 2016 10%
1 July 2016 – 30 June 2017 10.5%
1 July 2017 – 30 June 2018 11%
1 July 2018 – 30 June 2019 11.5%
1 July 2019 – 30 June 2020 12%

WHAT DO YOUR EXISTING EMPLOYMENT CONTRACTS PROVIDE FOR AND DO THOSE CONTRACTS NEED TO BE AMENDED?

The way in which superannuation contributions are dealt with in employment contracts can vary substantially, and many employers adopt different remuneration approaches between various levels of employees. For example, an employer may offer a "total remuneration package" to its executive level employees and allow them the flexibility to package various items by way of salary sacrifice, while adopting a simpler method of providing other employees with a salary plus complusory superannuation contributions.

As discussed below, the different remuneration approaches will result in different potential flow-on effects for an employer.

Where an employment contract provides that an employee is to be paid a total remuneration package (or similar) inclusive of mandatory superannuation contributions

  • Wording of this type is common, particularly in relation to those contracts entered into with executive level employees.
  • Usually the contract provides that an employee will receive a total remuneration package amount and that that amount may be made up of various components including a base annual salary, superannuation contributions to be made by the employer at a minimum level required to avoid the imposition of a charge under the Act, any voluntary superannuation contributions which the employee elects to contribute, any benefits or packaged items which the employee elects to receive via a salary sacrifice arrangement, and any fringe benefits tax for which the employer becomes liable by reason of those components.
  • Where this approach is used, then strictly speaking, increases in the minimum superannuation contribution rate will be "absorbed" into the employee's total remuneration package and no specific amendment will need to be made to the contract to deal with those increases. As a result, there will be no increase to the employee's total cost to their employer.
  • Having said that, in our view it is likely that an employee in those circumstances will seek to negotiate an increase in their total remuneration package so as to ensure that the level of their cash salary (or at least non-superannuation components of their package) remains unchanged post 1 July 2013. Employers will need to keep this in mind as they commence any discussions with those employees as part of an annual remuneration review process.
  • As there will be annual increases in the minimum superannuation guarantee rate until the 2019 – 2020 financial year, employers may wish to consider appropriate strategies to adopt so as to potentially avoid the same discussions and negotiations each year with affected employees. For example, consideration could be given to adopting a standard position each year, such as an increase in the total remuneration package by at least an amount referrable to the increased compulsory superannuation contribution. Doing this will, of course, have the effect of increasing the compulsory superannuation contribution to a level greater than the increase in the total remuneration package.
  • Employers should document any agreed position reached in relation to an employee's total remuneration package, either by way of a letter to the employee confirming that position or by issuing a new contract to reflect that position (see our comments below on reviewing standard employment documentation).
  • Where a total remuneration package approach is used for employees covered by the terms of modern awards or enterprise agreements, if it is proposed that increases in the minimum superannuation contribution rates will be "absorbed" into the employee's total remuneration package, care should be taken to ensure that the employee's cash salary/wages do not fall below any minimum wage entitlements contained in those awards or agreements.

Where an employment contract provides that an employee is to be paid a salary/wage plus the minimum superannuation guarantee contributions required to avoid the superannuation guarantee charge

  • Where an employment contract contains this type of wording, then no specific amendment will need to be made to the contract to deal with the increase in the minimum superannuation contribution rate. The current wording is flexible enough to properly deal with the proposed increases.
  • Importantly, the employer will need to make contributions on behalf of the employee at the new increased rate.
  • Employers should consider communicating this increased benefit to their employees.
  • While the employee's salary/wage will remain the same (subject to any annual review/increase), there will be an increase to the employee's total cost to their employer.

Where an employment contract provides that an employee is to be paid a salary/wage plus mandatory superannuation contributions at the rate of 9%

  • Where an employment contract contains this type of wording then the employer will not be able to simply contribute at the rate that the contract states. It is not possible to "contract out" of the requirements of the Act, and the employer will need to make contributions on behalf of the employee at the new increased rate.
  • While the employee's salary/wage will remain the same (subject to any annual review/increase), there will be an increase to the employee's total cost to their employer.
  • Employers should consider communicating this increased benefit to their employees.
  • While the contract will no longer specify the correct superannuation contribution rate, it is not imperative that the employer amend the existing contract or issue the employee with a new contract (see our comments below on reviewing standard employment documentation).

Where an employment contract provides for a superannuation contribution rate higher than 9%

  • Where an employment contract specifies a superannuation contribution rate higher than the minimum superannuation contribution (despite the increase from 1 July 2013), then no specific amendment needs to be made to the contract to deal with the proposed increases.
  • Where in the future the proposed increases exceed the higher contribution rate stipulated in the contract, then the issues referred to immediately above will become relevant.
  • Where an employee has been traditionally provided with a higher superannuation benefit, an employee in those circumstances may seek to negotiate an increase in their total remuneration package or salary so as to maintain this increased benefit. Employers will need to keep this in mind as they commence any discussions with those employees as part of an annual remuneration review process.

DO YOUR STANDARD/TEMPLATE EMPLOYMENT CONTRACTS NEED TO BE AMENDED?

We recommend that employers periodically review their standard employment documentation, including employment contracts and HR policies, to ensure not only that they remain compliant with the Fair Work Act 2009 (Cth) and the National Employment Standards, but also to ensure that they reflect best practice, including as that practice changes over time in response to market trends and developments arising from case law.

The proposed superannuation changes should be reflected in standard employment documentation and any changes to the approach taken to remuneration (in light of the issues raised above) may also need to be implemented. At the same time, employers may wish to review and amend their standard employment documentation to:

  • take into account the proposed changes to the Fair Work Act in relation to parental leave and flexible working arrangements (see our earlier article);
  • respond to the issues arising from the Court's findings on the implied term of mutual trust and confidence in Barker v Commonwealth Bank of Australia [2012] FCA 942 (see our earlier article); and
  • properly respond to workplace bullying complaints, including as a result of the proposal for the Fair Work Commission to be able to hear workplace bullying complaints (see our earlier article).

OTHER MATERIAL CHANGES

Employees aged 70 or over

Currently, where an employer employs an employee who is aged 70 years or over, there is no obligation to make compulsory superannuation contributions under the Act on behalf of such employees.

From 1 July 2013, the upper age limit for paying superannuation for eligible employees will be removed, so mature age workers can keep building their retirement savings. This means there will no longer be a maximum age for superannuation guarantee eligibility, and if an employer has employees aged 70 years or older they will need to make superannuation contributions on their behalf from 1 July 2013.

Default superannuation funds

For some time, employers have been required to offer many (if not all) of their employees with the potential to choose which superannuation fund their employer superannuation contributions will be paid into. Where an employee does not choose a fund, then their employer must contribute superannuation contributions for that employee into the fund the employer has identified as their employer-nominated fund (which is also referred to as a "default fund").

From 1 July 2013, superannuation funds will be allowed to start providing a new type of superannuation account called "MySuper".

From 1 January 2014, if an employee has not completed a choice of fund form, their employer will be required to make superannuation contributions into a fund that offers a MySuper account. For almost all employers, it is expected that their existing default fund will offer a MySuper product, but employers should seek specific information from their current provider.

Employers will also need to carefully consider how this new requirement may interact with existing requirements within modern awards and enterprise agreements in relation to superannuation funds.

WHAT DOES THIS MEAN FOR EMPLOYERS?

As a result of the changes outlined above to the superannuation regime, employers need to:

  • ensure that they make superannuation contributions at the correct rate from 1 July 2013 and continue to meet the future minimum superannuation contribution rate increases;
  • take into account the effect of higher superannuation contributions on budgeting and for operational purposes including the costing of assignments and projects;
  • discuss with any high income earning employees the effect of the increased superannuation rate, and contractual superannuation entitlements that are in excess of the minimum rate, on the concessional cap;
  • review, and in light of the above comments amend as necessary, any standard employment contracts and HR policies to take into account these changes and so as to reflect best practice;
  • communicate the increased benefit to employees, where applicable;
  • prepare for discussions with employees on a "total remuneration package" and that those employees may seek increases to at least maintain their cash (or nonsuperannuation) portion of their package;
  • review whether they employ any employees aged 70 or over and commence making superannuation contributions on their behalf from 1 July 2013;
  • review their default superannuation fund arrangements with their current provider to prepare for the introduction of MySuper accounts as part of their default fund; and
  • ensure that payroll systems (or their outsourced payroll provider) and other HR forms/processes are set up to comply with these changes.

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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