Australia: Implementing Fair Work Act annualised salary notifications and high income guarantees

January is the time… to implement Fair Work Act annualised salary notifications

Minimum entitlements now in operation

From 1 January 2010, the new safety net of minimum entitlements comprises two planks:

  1. National employment standards (NES) - which are 10 legislated minimum conditions of employment
  2. Modern awards - 122 in all, which apply as a common rule to all employees in an occupation or industry as scoped in the award. Modern awards commence operation on 1 January 2010 - with wage rates commencing from 1 July 2010 and a transition period for minimum wages.

Managing modern awards

Modern award compliance by employers is about identifying applicable awards and ensuring that employee entitlements are met.

This can occur by clause-by-clause compliance with the one-size-fits-all award, or another solution to manage modern award coverage:

  1. Annualised salary notifications (where permitted by certain modern awards);
  2. High income guarantees in employment contracts;
  3. Individual flexibility agreements;
  4. Payments in employment contracts specifically applied to meet award payment obligations - during or across pay periods;
  5. Enterprise agreements.

Which solution suits a particular group of employees will depend on a range of factors.

Annualised salary notifications

Certain modern awards (such as the Clerks - Private Sector Award 2010) permit annualised salary notifications:

  • An employer may pay an employee an annual salary in satisfaction of modern award entitlements to wages, allowances, overtime and penalty rates, and annual leave loading
  • Where an annual salary is paid the employer must advise the employee in writing of the annual salary that is payable and which of these 5 award payment entitlements are to be satisfied by payment of the annual salary
  • The annual salary must be no less than the amount the employee would have received under this 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 the compensation is appropriate having regard to the award provisions which are satisfied by the payment of the annual salary.

We have developed template annualised salary notifications for inclusion in Fair Work Act-compliant employment contracts or otherwise provided in writing to employees.

High income guarantees

A high income guarantee agreed with an employee overrides modern award coverage and operates as an enforceable guarantee.

  • The high income threshold (HIT) is currently $108,300 (indexed) (or a pro-rata amount for part-time employees)
  • For testing against the threshold, income includes salary and fixed payments but does not include SGC 9% superannuation contributions and variable payments such as incentives and bonuses
  • Employers should give notice of the consequences to an employee of accepting, and must give genuine choice in light of these consequences.

Norton Rose has developed template high income guarantee annexures to employment contracts which:

  • meet Fair Work Act requirements, to override the relevant Modern Award during any period for which the annual rate of the guarantee of annual earnings exceeds the HIT
  • deal with any subjective question about whether (or which) modern award applies
  • provide for commencement of the guarantee of annual earnings and its continuing operation during employment
  • state theeffect of the guarantee of annual earnings, and
  • provide for employee acknowledgement that no improper pressure was imposed to secure agreement.

All modern awards permit individual flexibility agreements

In accordance with the model flexibility clause in all modern awards, the employer and employee may agree on an individual basis to vary the application of modern award terms regarding overtime rates, penalty rates, when work is performed, allowances and leave loading. For an individual flexibility agreement (IFA):

  • There must be genuine agreement, without coercion or duress or offer as a condition of employment
  • The employee must be better off under the IFA
  • The IFA must be terminable on 28 days
  • There must be no "penalty" for an employee terminating the IFA and reverting to full Modern Award coverage.

We have developed template individual flexibility agreement annexures to employment contracts.

Modern award content

Many clients have asked how the content of modern awards was determined and why some modern awards are more "employer friendly" - for instance permitting annual salaries (to override obligations to pay overtime, penalty rates, allowances and leave loading) and salary packaging (to permit non-cash payments below the base award rate of pay). The answer is that, as in all industrial matters, the AIRC was heavily influenced by the submissions of affected parties as well as by conditions typically paid in certain industries.

Application for variation of modern awards can still be made.

New contract templates

Employers should introduce new contract templates for:

  • managerial and executive employees (new and existing) which are consistent with the NES
  • award-covered employees which are consistent with modern awards and the NES.

These should be used for new employees, as well as existing employees – perhaps timed to be entered with their next discretionary pay increase or bonus.

Recommended changes

  • Amend the ability to cash out annual leave from 2 weeks per year of service to any amount as long as 4 weeks' leave remains.
  • Introduce reasonable obligations on employees to produce medical certification or a statutory declaration regarding absence for personal leave – directed to confirming whether there is a genuine reason for the work absence. Employers may require (reasonable) escalating certification requirements based on the period or pattern of absences. The obligation to provide certification must not extend beyond what would be required to satisfy a reasonable person that the absence was taken for a permissible reason justifying personal leave. Modern awards may include medical certification requirements, with which the contract should be consistent. The employee should acknowledge in the contract that the employer's certification requirements are reasonable.
  • Review any payments in employment contracts specifically applied to meet award payment obligations ("set-off provisions") to make specific reference to new modern award entitlements – so that above-award payments are stated to be applied to meet modern award monetary entitlements, and/or include an individual flexibility agreement annexed to the employment contract.
  • Introduce a written consent for deduction from an employee's wages for annual or sick leave taken in advance (which contains express agreement that this is for the employee's benefit). [Note that most modern awards contain this "Paid leave in advance of accrued entitlement" provision, so that this contractual consent is generally only required for non-modern award employees].
  • Introduce a clause for executives so that where they are provided with termination pay under the contract in circumstances of redundancy, this is specifically paid to meet the NES requirements to pay notice of termination and redundancy pay.
  • For employees earning more than $108,300 per annum who may be award-covered, add a high income guaranteed earnings annexure to exclude award coverage.
  • The averaging period for maximum hours of work should be decreased from 12 months to 6 months. If appropriate, managerial and executive employees should acknowledge in the employment agreement that the required hours to complete the job are reasonable in the circumstances.
  • Change "qualifying period" (for unfair dismissal) to "minimum employment period".
  • Recognise unpaid community service leave.
  • Recognise make up payments for jury duty.
  • Replace references to the Workplace Relations Act with the Fair Work Act.

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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