WHO SHOULD READ THIS
- All employers, human resource managers and in-house lawyers who manage payroll and employee entitlements.
WHAT YOU NEED TO KNOW
- Modern award changes came into effect from 1 March 2020, introducing annualised wage arrangements.
WHAT YOU NEED TO DO
- Ensure that you understand your options and the benefits of paying employees an annualised salary in accordance with the modern award annualised wage arrangements.
Pay disputes centred heavily on the employment relations radar last year with a number of highly publicised business owners in the hospitality industry feeling the heat of the 'wage theft' label. It appears that this pressure is still on for 2020.
We have seen the Fair Work Commission (Commission) respond to concerns about employers paying employees appropriately, introducing prescriptive annualised wage arrangement requirements in a number of modern awards as part of the 4 yearly modern award review. Employers, human resource managers and payroll should be aware that annualised wage arrangement provisions came into effect from 1 March 2020 for 22 Awards, including the Hospitality Industry (General) Award 2010, and the Clerks – Private Sector Award 2010.
The annualised wage arrangement provisions introduced provide employers with another method of annualising employees' salaries however, in a way that truly allows the salary to be annualised across the year, as opposed to the employer having to ensure that employees are paid their entitlements under an applicable modern award each pay period.
The introduction of annualised wage arrangements has caused confusion, with many advisers and employers questioning whether these new provisions prevent employers from paying employees common law salaries with an effective offset provision in their contract.
The Commission has expressly stated in the 4 yearly modern award review decisions that the new annualised wage arrangement provisions do not prohibit employers from relying on common law salaries with an effective offset clause.
While the Commission has expressed this view, it is important to note that this does not give employers the ability to pay employees common law salaries without keeping appropriate records or be at risk of underpaying its employees.
Option 1: Common law salaries with an offset provision
Many employers currently choose to pay their employees an 'all inclusive' annualised salary as opposed to paying them the base award rate plus overtime and penalty rates, allowances and other award entitlements. However, many do so without complying with their record keeping requirements or auditing whether the salaries paid are greater than employees' entitlements to payment under applicable awards in each pay period. They take a 'set and forget' approach.
The Fair Work Act 2009 (Cth) (FW Act)
and the Fair Work Regulations 2009 (Cth) (FW
Regulations) impose record keeping requirements on
employers and failure to comply can have serious
The FW Act requires employers to make, and keep for seven years, employee records in accordance with the FW Regulations. Further, the FW Act requires an employer to give each employee a payslip within one working day of paying his or her wages or salary. Failure to comply with these requirements is a contravention of a civil penalty provision for which penalties are payable.
Part 3-6, Division 3 of the FW Regulations requires employers to keep particular records including pay, overtime, leave, superannuation and termination of employment records. Relevantly, regulation 3.33 requires employers to keep certain pay records, including rate of remuneration, amounts paid to employees, deductions, and amounts employees are entitled to be paid (e.g. incentive-based payments, bonuses, penalty rates, and loading). Regulation 3.34 requires an employer to keep the following records where an employee is entitled to payment of a penalty rate or loading for hours that they have actually worked:
- the number of overtime hours worked by the employee during each day; or
- when the employee started and ceased working overtime hours.
Practically, to keep these records, an employer has to record each employee's working hours and any unpaid breaks taken. These requirements apply even if an employee's wage is rolled-up into an 'all up' rate.
In addition to the record keeping requirements in the FW Act and the FW Regulations, some modern awards impose award specific record keeping requirements. For example, in the Market and Social Research Award 2020, clause 15.5 requires an employer to keep time and wages records showing the name of each employee, rate of wages and commissions, hours worked, allowances paid in accordance with the award, and details of any deductions.
Importantly, under section 557C of the FW Act, if an employer fails to comply with its record keeping obligations and is alleged to have contravened particular civil remedy provisions (e.g. contravention of modern awards), it is presumed that the alleged contraventions occurred unless the Company can disprove the allegation or has a reasonable excuse as to why it has not complied.
Employers that fail to keep records of employees' working hours will have little to no ability to disprove any alleged contraventions. Currently, the maximum penalty for a breach of the civil remedy provisions is $63,000 for a corporation and $12,600 for an individual. These penalties are in addition to any amounts paid to employees for underpaid entitlements.
In addition to keeping records, employers should be aware that they still have to ensure employees are the paid amounts they are entitled to under the applicable award each pay period. Even if an employee is better off being paid their common law salary over the year than they would be if they were paid in accordance with the award, if they are paid less than what they are entitled to under the award for a particular pay period, the employer will technically be in breach of a civil penalty provision.
Employers should also ensure that they have effective offset provisions in their contract to ensure that they have the ability to set off employees' award entitlements against their annualised salary.
Option 2: Annualised wage arrangements
The annualised wage arrangement clauses came into operation from the start of the first full pay period that starts on or after 1 March 2020. They require employers to notify employees in writing (or reach agreement) of the details of the annualised wage arrangement, keep records of hours worked by employees, conduct audits, and pay employees where there is a shortfall.
The intention of these new provisions is to protect employees paid an annualised wage by providing greater transparency and accountability. While many employers may view these arrangements as administratively burdensome, the record keeping requirements are similar to those who pay employees common law salaries, and they provide for employers to annualise salaries without being liable for contraventions each pay period an employee is worse of than the award.
If an employer chooses to implement an award annualised wage arrangement, they must comply with the requirements summarised below.
Written notice or agreement
Employers must notify employees in writing (or, under particular awards, agree in writing with employees) and keep records of:
- employees' annualised wage;
- the clauses of the modern award to be satisfied by the annualised wage;
- how the annualised wage has been calculated (specifying each separate component and any overtime or penalty assumptions used);
- specify the outer limit of ordinary hours that the employee is required or expected to work under the annualised wage before he or she is entitled to any overtime or penalty rates; and
- the outer limit of overtime hours or penalties, which the employee may be required to work in a pay period (or roster cycle) without receiving any additional payment above the annualised wage.
Employers must make additional payments to employees if they work hours in excess of the 'outer limits'.
Where the award requires the employee and employer to agree to the annualised wage arrangement, the employer must provide the employee with the written agreement. The employer or employee can terminate the agreement by giving 12 months written notice or by written agreement.
Employers must keep a record of each employee's start and finish times and any unpaid breaks taken. Employees must sign or acknowledge these records as being correct in writing (including electronically) each pay period or roster cycle. Employers must also keep a copy of the annualised wage agreement or written notice to the employee.
Employers must undertake a reconciliation every 12 months from the commencement of the arrangement (or on termination of the employee's employment) to ensure that the employee is better off under the annualised wage arrangement compared to what they would be entitled to be paid under the award.
If the audit reveals that an employees' annualised wage is less than the amount the employee would be entitled to under the award, the employer must pay the shortfall to the employee within 14 days.
The new terms will be incorporated into a number of commonly applied modern awards such as the, Banking, Finance and Insurance Award 2020, Clerks – Private Sector Award 2010, Manufacturing and Associated Industries and Occupations Award 2010, and the Mining Industry Award 2010. This is not an exhaustive list.
The following modern awards will also have annualised wage arrangement clauses added once the review process concludes and the Commission releases final determinations: Hospitality Industry (General) Award 2010, Health Professionals and Support Services Award 2010, Marine Towage Award 2010 and the Restaurant Industry Award 2010.
In some awards, the annualised wage arrangement provisions only apply to employees in particular classifications. For example, the annualised wage arrangement clause is only applicable to Supervisor/Trainer/Coordinator Level I or II under the Manufacturing and Associated Industries and Occupations Award 2010.
Employers now have two options to annualise employees' salaries. Modern award annualised wage arrangements and common law salaries. While common law salaries may appear less administratively burdensome, it is important that employers still comply with the record keeping requirements and regularly review employees' salaries against their entitlements under the award each pay period.
Modern award annualised wage arrangements require employers to provide employees with a transparent explanation of how their annualised wage is calculated, set outer limits, record hours, make payments where those outer limits are exceeded, and conduct annual audits and pay any shortfall. However, the benefit of these arrangements are that they do provide for salaries to be annualised across a 12-month period and provide transparent remuneration arrangements.
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.