As part of the four yearly review of modern awards, the Fair Work Commission (FWC) has recently handed down a decision which will impact employers paying annualised salaries to employees covered by a modern award with an annualised salary clause 1. The FWC decision finalises the terms of three new standard 'annualised wage arrangement' clauses, which will replace the existing annualised salary clauses in the 19 modern awards already containing an annualised salary clause. The new terms will also be inserted into three modern awards which have not previously had an annualised salary clause 2.
The modern awards which will be impacted by the decisions are listed in the three categories below this article, and include some modern awards with the most widespread coverage, including the Clerks – Private Sector Award 2010, the Manufacturing and Associated Industries and Occupations Award 2010 and the Banking, Finance and Insurance Industry Award 2010.
When do the changes take effect?
In light of the significant new obligations on employers, the FWC has determined that the new annualised wage arrangement clauses will not take effect until 1 March 2020.
Background - annualised salary arrangements
It is common practice for employers to pay an "all-inclusive" annualised rate of pay which is intended to compensate or 'set-off' modern award monetary entitlements in relation to the performance of work, such base wages, overtime rates, penalty rates and loadings. The alternative is for employers to pay wages and other monetary entitlements separately as and when they fall due.
There is no requirement for a modern award to have an annualised salary term for an employer to lawfully pay an annualised salary to an award-covered employee. In practice, most employers rely upon an annualised salary arrangement under a contract of employment which identifies the entitlements which are offset by the "all inclusive" annualised salary.
However, for employers with employees receiving an annualised salary, who are also covered by a modern award containing an annualised salary clause, the key issue will be whether the new modern award annualised wage clauses will impact on their annualised salary arrangements.
New obligations for employers under modern award annualised wage terms
There are significant new obligations for employers under the three new modern award annualised wage terms.
There are some notable differences between the three new standard clauses in respect of:
- the requirement for employee agreement to an annualised salary arrangement. Under some modern awards (Categories 2 and 3 below), employee agreement will be required; under others (Category 1 below), an employer may implement an annualised salary arrangement without employee agreement
- the method by which employers calculate an annualised salary. Under Categories 1 and 2 below, the employer may calculate the annualised wage, but the wage must be calculated by reference to specified assumptions regarding the overtime and/or other penalty rates which the employee may be required to work and specify the 'outer limits' of ordinary hours and overtime hours that are satisfied by the annualised wage. For Category 3 below, those modern awards will prescribe that the annualised wage must be a minimum percentage (as identified in those awards) in addition to the minimum weekly wage. The clause for Category 3 modern awards will also specify the 'outer limits' of ordinary and overtime hours that will be satisfied by the annualised wage.
The new obligations which are similar across the three new standard 'annualised wage arrangement' clauses are the requirements for employers to:
- record in an annualised wage agreement/arrangement (whichever is required) the provisions of the award which are satisfied by the annualised wage, and in the case of the modern awards in Categories 1 and 2 below, record the method by which the annualised wage has been calculated. This may include specifying each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation of the annualised wage
- record in the annualised wage agreement/arrangement (whichever is required), the 'outer limits' on the number of overtime hours or other penalty-rate hours which are to be taken as paid for by the annualised wage arrangement;
- pay an employee (in addition to the annualised wage) for any hours worked which exceed those 'outer limits' in accordance with the applicable provisions of the modern award (i.e., overtime and penalty rates). These additional payments must be paid in the relevant pay cycle for the hours worked
- keep records of the start times and unpaid breaks for each employee and have employees sign, or acknowledge as accurate, that record in each pay cycle or roster cycle
- each 12 months from the commencement of the annualised wage arrangement or on termination of employment, calculate the amount which would have been payable to the employee under the modern award and compare this against the annualised wage arrangement. If a shortfall is identified, employers must rectify any shortfall within 14 days.
How should employers prepare?
Prior to 1 March 2020, employers who pay annualised salaries to employees whom the annualised wage clause will apply should:
- consider the interaction between the modern award annualised wage term and any contractual annualised salary arrangements for employees who are covered by a modern award containing an annualised salary term
- take into account the requirements under the new annualised wage clause for new contracts of employment entered into prior to 1 March 2020
- ensure that their organisations can comply with the requirements of the new clause/s in respect of employees covered by the impacted modern awards. For example, employers should ensure they have systems in place which allow recording of start, finish times and breaks, and to ensure that any hours performed outside the 'outer limits' will be remunerated in addition to the annualised wage arrangement.
What are the risks if we get it wrong?
In the circumstance where a modern award applies, and particularly where the modern award includes an annualised wage clause, a key concern for employers is whether their annualised salary arrangement complies with the terms of the modern award.
Where an employer fails to comply with the terms of a modern award annualised wage clause, and particularly where an annualised salary is not sufficient to compensate for hours actually worked by an employee, employers will be exposed to the risk of underpayment claims and potential penalties for breaches of the modern award. George Calombaris' Made Group is the most notable recent example of an employer to fall foul of the annualised salary requirements under the modern awards. The Made Group rectified underpayments to employees totally nearly $8 million, which arose from annualised salary arrangements which did not adequately compensate employees for their actual hours worked and which contravened the terms of the annualised salary clause in the applicable modern award.
How to minimise the risk of getting it wrong?
To minimise the risks associated with annualised salary arrangements, employers should:
- ensure your business is aware of the modern awards that apply to employees and the correct classifications for each employee, which will impact on the calculation of an appropriate annualised wage
- ensure the annualised wage arrangements are consistent with the terms of the modern awards that apply to employees, including the obligations to conduct reconciliations on an annual basis or on the termination of employment
- identify and rectify any deficiencies in the annualised salary arrangements promptly and in accordance with the terms of any applicable modern award.
Impacted modern awards
The three new annualised wage clauses will be added to or replace the existing annualised salary clauses in the following categories of modern awards.
Category 1 includes modern awards which cover employees who work relatively stable hours. The FWC determined that the annualised salary term for this category will not require an employee's agreement to the introduction of an annualised salary arrangement. This category includes:
- Banking, Finance and Insurance Award 2010
- Clerks - Private Sector Award 2010
- Contract Call Centres Award 2010
- Hydrocarbons Industry (Upstream) Award 2010
- Legal Services Award 2010
- Mining Industry Award 2010
- Oil Refining and Manufacturing Award 2010 (clerical employees only)
- Salt Industry Award 2010
- Telecommunications Services Award 2010
- Water Industry Award 2010
- Wool Storage, Sampling and Testing Award 2010
Category 2 includes modern awards which cover employees who work highly variable hours and/or significant ordinary hours of work which attract a penalty rate. The FWC determined that the annualised salary term for Category 2 modern awards will require employers and employees to agree on the application of an annualised salary arrangement. This category includes:
- Broadcasting and Recorded Entertainment Award 2010
- Local Government Industry Award 2010
- Manufacturing and Associated Industries and Occupations Award 2010
- Oil Refining and Manufacturing Award 2010 (non-clerical employees)
- Pharmacy Industry Award 2010
- Rail Industry Award 2010
- Horticulture Award
- Pastoral Award 2010
- Health Professionals Award 2010
Category 3 includes modern awards which currently provide that the annualised salary be an amount not less than a specified percentage above the minimum weekly wage set out in the modern award. The FWC determined that the annualised salary term for Category 3 modern awards will require employers and employees to agree on the application of an annualised salary arrangement. The clause will only apply in respect to non-managerial staff. This category includes:
- Marine Towage Award 2010
- Restaurant Industry Award 2010
- Hospitality Industry (General) Award 2010
1 4 yearly review of modern awards - Annualised Wage Arrangements (AM2016/13)  FWCFB 4368
2 Pastoral Industry Award 2010, Horticulture Award 2010 and Health Professionals Award 2010
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.