Australia: Annualised Wages in Modern Awards – A New Approach

Employee Relations & IR
  • Herbert Smith Freehills

The model clauses proposed by the Fair Work Commission are fundamentally different from the previous clauses, and indeed from any regulation previously proposed. They require a radically different approach. They are extremely prescriptive. They will impose a number of significant administrative burdens on employers covered by those awards. These administrative burdens will undoubtedly impact the utility of using annualised salaries in many workplaces, particularly where working hours are variable from pay cycle to pay cycle.

For some decades, annualised salaries have been utilised across many different industries. They are administratively easier for employers and provide employees with certainty as to their income for each pay period.

As part of its Four Yearly Review of Modern Awards, the Fair Work Commission has decided to vary a number of modern awards that contain annualised salary clauses, and to insert its model clause into two awards that have not to date made express provision for them.[1]

However, the model clauses proposed by the Fair Work Commission are fundamentally different from the previous clauses, and indeed from any regulation previously proposed. They require a radically different approach. They are extremely prescriptive. They will impose a number of significant administrative burdens on employers covered by those awards. These administrative burdens will undoubtedly impact the utility of using annualised salaries in many workplaces, particularly where working hours are variable from pay cycle to pay cycle.

There are two different model clauses that are being adopted by the FWC in relation to different modern awards. The full model clauses and applicable awards are set out in the schedule to this article.[2]

The model clauses impose significant challenges

While these differ slightly, there are a number of significant challenges that arise in relation to both clauses:

  1. The need to identify all entitlements in the award, the method in which it was calculated and the outer limits of ordinary hours and overtime – administratively burdensome and potentially limiting to an employer’s ability to ‘set off’ over-award payments

The model clauses require employers identify in a written record which provisions of the award will be satisfied by payment of the annualised salary.  The written record must identify the method by which the annualised salary is calculated (including each separate component and any overtime or penalty assumptions used in the calculation). The record must specify the outer limit number of:

    • ordinary hours that would attract the payment of a penalty rate under the award; and
    • overtime hours which the employee may be required to work without being entitled to an additional amount.

Any hours worked in excess of the outer limits will not be covered by the annualised salary and must be paid separately in accordance with the award.

Identifying the written record may be easy to achieve for some employers where they have existing records of annualised salaries showing an estimate of the remuneration an employee would receive pursuant to the modern award based on their regular hours of work. However, for many others it will be very difficult. Many salaries are not solely based on what the employee should earn under an award. Rather, some have been built over many years where the original calculations of the salary are no longer known by the parties. They provide salaries far in excess of what the minimum rates in the award prescribe. Others are determined by reference to market comparisons that set a level of remuneration needed to attract suitable candidates.

As a consequence, many employers will need to ‘reconstruct’ what the components of the annualised salary would be based on and align them with a variety of award clauses which are unrelated to their composition. It will frequently be a most theoretical exercise, yet it will be required in the case of every award covered employee in order to comply with the requirements of the model clauses. For larger organisations with many employees, it is a time consuming and resource intensive task to calculate the components of the annualised salary, and document these components in the manner required by the model clauses.

The other issue which arises is if portions of an annualised salary are assigned to a particular entitlement (as this requirement seems to require), there will be restrictions on the employer’s ability to use any over-award payments in the annualised salary to ‘set off’ those payments against any underpayments owed to an employee. This is because at common law, where a payment is made for a particular purpose (e.g. payment for ordinary hours), an employer cannot later say that the payment is made for an a different purpose (e.g. payment for overtime). By specifying in the written record all calculations and identifying each purpose of each portion of the annualised salary, employers will likely be unable to seek to set off any underpayments that may be owed to an employee for a different purpose.

  1. Record keeping of hours and breaks and the requirement for signing those records – administratively burdensome and there may be an inability of payroll systems to satisfy reporting requirements

The model clauses require employers to keep a written record of the start and finish times and any unpaid breaks taken by an employee, that must be signed by the employee each pay period or roster cycle.

Our experience is that it is relatively unusual for employees to ‘sign’ a record showing their start and finish times and any unpaid breaks taken by them each pay period or roster cycle. Often, there are rosters that set those start and finish times and breaks that are made before the roster cycle, and then timesheets showing the hours worked are signed off by managers. However, the requirement in the model clauses is for employees to ‘sign’ the record showing what hours they actually worked and their unpaid breaks. Employers will need to explore whether adjustments can be made to their systems to comply with this requirement. For many years, the overwhelming majority of payroll systems have been electronic. Neither party ever actually signs anything. Whilst simple on its face, this requirement might be quite onerous to apply in practice.

The Australian Industry Group, in its recent submission to the Fair Work Commission, suggested that instead of the signature requirement, the written record of hours worked and unpaid breaks taken could instead be provided to employees each pay period or roster cycle.[3] This avoids the requirement for the record to be signed by the employee, which is not possible under many payroll systems. However, this change has not yet been adopted by the Fair Work Commission, and the submission falls outside of those requested, which (other than a couple of specific awards) were restricted to transitional provisions. The Commission may decide not to adopt it for that reason.

  1. Annual audits of remuneration – timing may be different for each employee and resources will need to be dedicated to the annual audit

The model clauses require that employers conduct an audit each 12 months from the commencement of the annualised wage arrangement or upon the termination of employment. The audit must calculate the amount of remuneration that would be paid to the employee under the award compared to the annualised salary paid to the employee.

It is difficult to reconcile this requirement with the requirement to pay employees at the end of each pay period and additional amount if the hours worked exceed the ‘outer limit’ required to be identified and communicated. Given that requirement, it is difficult to see the relevance of an annual reconciliation.

For ongoing employees, the 12 month period is calculated from the commencement of the annualised wage arrangement, which may be different for each employee if their annualised salary arrangement is signed on the commencement of their employment. Employers could consider standardising the dates of their annualised wage arrangements to ensure that the 12 month audit period occurs at the same time for all employees. Employers will then need to keep records to ensure that there are notifications sent in advance to relevant HR or payroll personnel to ensure that the audit is completed at the 12 month mark.

When will the awards be varied?

The Fair Work Commission is yet to determine when the clauses will be amended in the various awards, and is considering submissions that have been made in relation to transitional arrangements that should apply. Some submissions have recommended to the Fair Work Commission that a 12 month transitional period is required for employers to correct payroll and reporting systems to implement the changes.

This article was written by Anthony Longland, Partner and Wendy Fauvel, Senior Associate