18 February 2020

Annualised salaries: what are the options?

Corrs Chambers Westgarth


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Summary of the 5 options available under the new laws for paying an annualised salary.
Australia Employment and HR
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As of 1 March 2020, new annualised salary clauses will commence in a number of modern awards. Following substantial commentary on these new clauses,1 there is some uncertainty amongst employers about the options that exist for paying an annualised salary.

In two recent articles, we discussed the significant governance and compliance issues with annualised salaries and set off clauses and the practical and technical challenges associated with implementing these arrangements.

Importantly, some of the challenges that many employers are now grappling with are not new, and are not affected by the impending changes to some award clauses. Given this, we thought it timely to recap the options available for employers who want to pay an annualised salary.

5 options for paying an annualised salary

When it comes to annualised salaries, there is no wrong or right answer, or a 'one size fits all' approach. Each business should consider its own circumstances and determine the option (or combination of options) that suits it best.

The following five options are available for employers who want to pay an annualised salary:

  1. Modern award annualised wage arrangements. If the applicable modern award contains a clause providing for an annualised wage arrangement (presently called an annualised salary provision), an employer may pay an annualised wage in accordance with the clause. This option is only available under some awards, and is the clause affected by the proposed amendments.
  2. Common law set off clauses. Award entitlements can be 'set off' by payment of an annual salary as recorded in a common law employment contract.
  3. Individual flexibility agreements (IFA). Employers can agree with individual employees to vary the application of terms in the modern award through an IFA.
  4. Guarantee of annual earnings. For relatively high income employees, employers can enter into a guarantee of annual earnings by guaranteeing payment of at least the high income threshold (currently $148,700) for 12 months.
  5. Enterprise agreements. Employers can bargain with employees as a collective to make an enterprise agreement which contains terms and conditions of employment that are specific to the employer's business. An underpinning modern award will not apply under this option.

An entirely separate option is to simply pay in accordance with award conditions, for example with overtime and penalty rates paid as and when they arise. This is an option that some businesses are taking a fresh look at.

Below, we explore each of the five options outlined above in detail.

Option 1 – Annualised wage arrangements

On 1 March 2020, new annualised salary clauses, described as 'annualised wage arrangements', will commence in a number of modern awards. The changes affect awards with widespread coverage, including in white collar roles, such as the Clerks – Private Sector Award 2010 and the Banking, Finance and Insurance Industry Award 2010. For a full list, see Four Yearly Review of Modern Awards [2019] FWCFB 8583.

An applicable modern award with the 'annualised wage arrangement' clause enables employers to choose to annualise an employee's wages over a 12 month period to pay a set amount in satisfaction of the modern award requirements.

The new clauses impose prescriptive obligations on the employer in relation to record keeping, notification to employees and review. While there are slightly different annualised salary clauses across the affected modern awards, the following obligations are largely consistent in the new annualised salary clauses:

  • An employer is required to advise an employee, and keep a record of, the amount payable, the terms of the modern award satisfied by the 'annualised wage arrangement' and the outer limit of the number of ordinary hours or overtime hours in a given pay period or roster cycle that are compensated for.
  • Any amounts worked in excess of the 'outer limit' of ordinary hours will receive penalty rates or overtime rates in addition to the annualised salary.
  • An employer is required to conduct a reconciliation every 12 months (or on termination of employment) against the amounts payable under the modern award.
  • An employer is required to keep a written record of starting times, finishing times and unpaid breaks taken, which must be signed or acknowledged by the employee as correct.

The key differences between the clauses are:

  • the requirement for an agreement with the employee as to the annualised salary arrangement; and
  • requirements as to how the annual salary is required to be calculated, with one clause requiring the calculation of a minimum percentage uplift on the minimum annual wage in the modern award.

Option 2 – Common law set off

As discussed in our earlier articles,2 a common law set off is an arrangement recorded in the employment contract which sets off or 'buys out' the monetary entitlements, such as loadings, allowances, penalty rates and overtime rates, owing under the modern award.

Common law set off does not extinguish monetary entitlements under the modern award – the entitlements continue in force and remain payable. The annualised salary pays for that award entitlement.

Can common law set off continue to be relied upon with the new modern award annualised salary clauses being implemented?

With the incoming changes to the modern award annualised salary clauses, there has been some debate as to whether employers can rely just on common law set off or whether they are required to also comply with the modern award annualised salary clause and its resulting obligations. After all, a common law set off annualised salary is a form of annualised wage arrangement, and there is a legitimate concern that a Court or regulator may consider the common law annualised salary is regulated by the incoming 'annual wage arrangement' clause, with its record keeping and reconciliation obligations.

The Fair Work Commission (FWC), however, has repeatedly and consistently made clear that annualised salary clauses in modern awards are not intended to remove the ability for an employer to pay an employee a salary under a common law contract to offset or 'buy out' entitlements under a modern award.3 Further, various decisions of the Courts, including the decision of a Full Court of the Federal Court in Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate,4 which reviewed the development of this concept in detail, have affirmed the lawfulness of set off arrangements.

As such, employers can continue to rely on common law set off clauses to offset award entitlements without needing to rely on a modern award annualised salary clause and its consequent obligations. However, common law set off clauses come with their own requirements and record keeping obligations.

Requirements for effective common law set off

First and foremost, as monetary entitlements under the applicable modern award continue to be payable, it is essential that the payments made under an annualised salary satisfy the award payment obligations for each entitlement that the employee would otherwise be due for each pay period.5 It is inadequate for the annualised salary to compensate the employee only on an annual basis, if there are pay periods in which the employee is not being adequately compensated.

Employment contracts and their set off clauses must also be carefully drafted to clearly identify the award obligations that are being paid for by the annualised salary so there can be no doubt as to what the annualised salary is being paid for. While there does not need to be the exact language of the award, there needs to be a close correlation between the contractual payment and the award obligation it is discharging.

Record keeping obligations

The 'sleeper' in the use of annualised salary set off clauses is in the record keeping obligations.

As the modern award provisions continue to be payable (it is just that the salary pays for it), the record keeping obligations of the Fair Work Act 2009 (Cth) (FW Act) and Fair Work Regulations 2009 (Cth) continue to apply. The record keeping obligations require employers to keep prescribed records for seven years.6 Records that are required to be kept include records that specify the rate of remuneration paid to an employee and the gross and net amounts paid.

Records must also set out details of any incentive based payments, bonuses, loadings, penalties, allowances or entitlements that are payable. If an employee is entitled to be paid an overtime rate, the record of the overtime worked must be retained, whether the employee was specifically paid an overtime rate or not (e.g. because they are paid a salary under a set off clause in the contract). In our experience, many employers have not understood their record keeping obligations in relation to overtime work for employees who are paid annualised salaries.

The implications of failing to keep the relevant records can be significant. Following amendments to the FW Act in 2017, if an employer does not comply with record keeping obligations it is presumed that certain allegations of modern award breaches are to have occurred, unless the employer can prove otherwise or they have a reasonable excuse for the failure to keep records.7

As a consequence, a number of employers are exploring additional options to maintain the traditional benefits of an annualised salary – namely, administrative ease and promoting a modern flexible working culture free from 'clock watching'.

Option 3 – Individual flexibility agreements

An employer and an individual employee can agree to enter into an IFA to vary the application of terms in the modern award, which can include hours of work, overtime rates, penalty rates, allowances and annual leave loading. IFAs require that the employee is better off overall under the individual flexibility agreement than what they would be under the modern award. IFAs must be recorded in writing and contain the requirements outlined in the modern award.

IFAs can be terminated by the employee or employer providing the required notice of termination of the IFA to the other party. This does not terminate the employment, only the IFA.

In the past, IFAs have not been seen as a useful way to implement workforce wide arrangements given their individual nature, and due to the fact that the IFA can be terminated on the employee's notice. Nonetheless, we are increasingly seeing it used an option to vary (and extinguish) some award entitlements that are otherwise compensated for.

Option 4 – Guarantee of annual earnings

For employees who earn over A$148,700, employers also have the option of entering into a guarantee of annual earnings under the FW Act.8 A guarantee of annual earnings requires the employer to commit in writing to paying the employee in excess of the high income threshold (currently $148,700 but indexed and adjusted annually) for 12 months.

The significant benefit in this context is that the modern award will no longer apply to the employee for the period of the guarantee.

Option 5 – Enterprise agreements

Enterprise agreement terms can provide for the payment of an annual salary encompassing the modern award monetary requirements. Enterprise agreements can also vary other modern award terms and can contain other permitted terms which apply to the employment relationship. When an enterprise agreement is made, the modern award will no longer apply.

However, it is obviously required that each of the employees who are to be covered by the enterprise agreement must be better off overall under the enterprise agreement than the relevant modern award. The FWC continues to take a strict approach to the approval of enterprise agreements and it is crucial that employers strictly comply with all requirements in the FW Act for approval.

Next steps

When implemented properly, annualised salaries provide significant benefits to an employer and stability of income to the employee. But they also create a number of challenges for employers from a technical and practical perspective.

Below are some steps employers can take to address these challenges:

  • Understand and be clear about the mechanism used to set off an employee's annualised salary against modern award entitlements. For example is it a common law set off arrangement or a modern award annualised wage arrangement clause? They are different options, with different compliance obligations.
  • Ensure compliance with the mechanism used. For employees paid in accordance with the modern award wage arrangement clause, be familiar with and implement procedures to comply with the obligations in the respective modern award. For common law set off, review the set off clause in the employment contract to ensure it is meeting the requirements for effective set off at common law (discussed in our earlier articles).
  • Undertake annual salary reviews. As award rates generally increase on 1 July, employers should undertake regular reviews to ensure employees are receiving a salary which is sufficient to meet modern award entitlements.
  • Undertake annual salary reconciliations. This is an option particularly for employees whose salaries are close to the award or for whom you have limited visibility of their working hours, to confirm that the annualised salary is sufficient to cover the modern award minimum entitlements in each pay period.
  • Review the records that are required to be made and retained and implement processes to comply with any statutory requirements. In our experience, it is common that the relevant records are not being kept for employees who are being paid an annualised salary.


1 Eg: David Marin-Guzman, "Overtime rules for pub staff after 16 hours 'unworkable'", Australian Financial Review (online, 6 February 2020), see; Peter Richards, 'Wage theft a costly punishment for innocent business', Australian Financial Review (online, 12 November 2019), see.

2 See.

3 Four Yearly Review of Modern Awards [2015] FWCFB 6656 at [74]; Annualised Wage Arrangements [2018] FWCFB 154 at [102]; 4 Yearly Review of Modern Awards – Annualised Wage Arrangements [2019] FWCFB 4368 at [7], [22].

4 (2015) FCA FC 99 ('Linkhill'); an application for special leave to appeal to the High Court was filed by Linkhill Pty Ltd, but was dismissed.

5 Lynch v Buckley Sawmills Pty Ltd (1984) 3 FCR 503, at 509, also James Turner Roofing Pty Ltd v Peters (2003) WASCA 28, at 45

6 Fair Work Act 2009, section 535.

7 Fair Work Act 2009, section 557C.

8 Fair Work Act 2009, section 330.

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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