Annualised wage arrangements – a greater administrative burden is here

As of 1 March 2020, some employers will be faced with a number of new obligations in respect to annualised wage arrangements for award-covered employees. The changes, a result of the Fair Work Commission’s[1] 4-yearly review of modern awards, introduce model annualised wage clauses into 22 awards. The applicable awards are set out in this eAlert. You will see that common awards such as the Clerks – Private Sector Award, the Banking, Finance and Insurance Award and the Manufacturing and Associated Industries and Occupations Award, as well as the Local Government Industry Award, are all impacted. Historically used as a means of payroll convenience, the changes impose surprisingly onerous notification, record-keeping and auditing requirements, creating an administrative burden for employers.

What is an annualised salary (wage) arrangement?

An annualised salary (wage) arrangement is a mechanism that under the relevant award, allows an employer to pay an employee an annual salary (or annual wage) which satisfies award entitlements such as overtime, penalty rates and loadings – that is, an ‘all-inclusive’ annual rate instead of a rate that specifies all applicable award entitlements.

What are the changes?

Many awards already contain annualised wage arrangement clauses which are relatively straightforward to apply and administer. The new model clauses on the other hand, specifically set out a number of obligations. These include, relevantly:

  • notification requirements – the employer must notify the employee of the amount to be paid as an annualised salary, as well as how this was calculated, and the other entitlements the annualised salary is intended to satisfy
  • setting the ‘outer limit’ of hours worked which the salary will satisfy and ensuring payment of any hours which are worked exceeding this time
  • annual reconciliations/audits of the arrangement – this involves comparing the actual amount earned to the amount which would have been earned considering all of the hours worked
  • recording and keeping a record of each employee’s start and finish times, as well as any unpaid breaks taken, for the purpose of carrying out the above reconciliations – employers are also required to have employees sign this record (or acknowledge as correct in writing, electronically) each pay period or roster cycle.

If, as a result of the required reconciliation, a shortfall is identified between the amount that would have been payable under the award and the amount of the annualised salary actually paid, the employer is required to pay the employee this shortfall within 14 days. The comparative reconciliation is also to be conducted upon any termination of employment.

There are four model clauses, with one model clause not currently applicable. Model Clause 2 at this stage has not been included in any awards.

Model Clause 1 will be inserted into 11 awards which already have annualised wage arrangement provisions and this clause does not require employee agreement to the arrangement. Model Clause 3 and Model Clause 4, on the other hand, do require employee consent to enter into the annualised arrangement.

Annualised salary (wage) arrangements vs set-off clauses

In the decisions from the Commission, the Commission noted that annualised wage arrangements apply separately to contractual arrangements that include a ‘set-off’ arrangement. A set-off clause in an employment agreement expressly entitles an employer to set-off payments due under an industrial instrument (such as penalties and allowances), against the entitlements and benefits provided to the employee under their employment agreement.

Employers should seek advice about whether an annualised salary arrangement, a set-off clause or some other arrangement (such as an individual flexibility arrangement) is the most appropriate mechanism for their particular business. In particular, there are requirements in implementing any of the arrangements which need to be considered.

Likely impact of the changes

As you can see from the above, the changes will bring about a remarkable shift in the utility and workability of annualised salary arrangements. Extensive documentation will now be required, along with sophisticated auditing and time recording arrangements. In industries or workplaces that do not have fixed rosters, the requirement for employees to sign or acknowledge records of their start and finish times (as well as breaks) in each pay period can be practically difficult. The Commission has helpfully noted that this acknowledgement can be obtained by electronic means, however the changes have the potential to fundamentally change how employers adopt annualised salary arrangements for award-covered employees[2].