What is an Annualised Wage Arrangement?
An annualised wage arrangement is where an employer pays an employee an annual wage in accordance with the terms of an applicable award or enterprise agreement that is no less than the amount an employee would receive under the applicable award or enterprise agreement for the work they perform over a year. An annualised wage arrangement is an alternative to paying an employee an hourly wage for each hour worked in a pay period. It is important to be aware that annualised wage arrangements under an applicable award or enterprise agreement are different to being paid an annual salary under an employment contract.
The specific requirements an employer needs to meet when entering into an annualised wage arrangement vary and can be found in the applicable award or enterprise agreement.
As we noted in our earlier articles here and here, various modern awards were updated in March 2020 in relation to annualised wage arrangements, including the introduction of new notification, record-keeping and reconciliation requirements. As we also noted, there are alternatives to strict compliance with annualised wage arrangements in modern awards – for example, the use of contractual “set off” clauses or individual flexibility arrangements.
An annualised wage arrangement in an award can cover award entitlements such as:
- Minimum weekly wages;
- Penalties;
- Overtime;
- Allowances; and
- Annual leave loading.
It is important to be aware that award provisions relating to annualised wage arrangements do not apply to award-covered employees who:
- Are part-time or casual; or
- Earn more than the high-income threshold (currently $175,000) and have been provided with a written annual guarantee of earnings in accordance with the Fair Work Act 2009 (Cth) (FW Act).
Recent Case Update: Construction, Forestry, Maritime, Mining and Energy Union v Fremantle Port Authority
This case considered whether an employment contract providing for payment of an annual salary constituted an agreement to be paid an average annualised wage under the terms of an applicable enterprise agreement, and, if not, whether the employer was able to “set-off” ‘over-agreement’ payments in certain periods against ‘under agreement’ payments in other periods.
The applicable enterprise agreements contained two methods for payment of wages – the first being an ‘ordinary wages method’ whereby employees’ wages could fluctuate each fortnight depending on hours actually worked; the second method was by an ‘average annualised wage’, meaning by agreement, employees could receive the same pay each fortnight even if their hours fluctuated.
Employees’ rostered hours of work in this case varied considerably from fortnight to fortnight (between 72 and 96 hours), due to the employer’s rostering arrangement of 2 days’ day shift, followed by 2 days’ night shift and then 4 days’ off. For reasons of administrative efficiency and to ensure a more even pay cheque each fortnight, employees were paid an ‘average annualised wage’ for this roster under the enterprise agreements, pursuant to their contracts of employment.
The Construction, Forestry, Maritime, Mining and Energy Union (Union) claimed that the Fremantle Port Authority (Authority) breached the FW Act by contravening the terms of applicable enterprise agreements, resulting in underpayments to its employees in some fortnights which it claimed should be paid (despite acknowledging the employees had been overpaid in other fortnights).
The Union argued that the employees were not given the opportunity to make any choice between the two methods of payment under the enterprise agreements and as a result, they should have been paid according to the ‘ordinary wages method’. In this respect, the Union argued that the employees’ contracts of employment providing for an annual salary did not amount to an agreement under the enterprise agreements to be paid an annualised wage. In other words, the Union argued that there was a difference between agreeing to be employed by the Authority (under a contract of employment including an annual salary) and an agreement to an annualised wage under the enterprise agreements. The Union however accepted that the employees were paid more under their annualised wage arrangements than they would have received had they been paid under the ‘ordinary wages method’.
The Authority argued that all that was required was an agreement by the employee to be paid an annual salary via their contracts of employment in order to satisfy the requirement under the enterprise agreements that there must be an agreement to be paid an annualised wage.
The Decision
The Federal Court agreed with the Authority, holding that the employment contracts providing for an annual salary for an employee’s position and rostering arrangement did satisfy the requirements of the enterprise agreements that employees must agree to be paid an average annualised wage. The Federal Court held further that even if it was found that there had been no agreement for the purposes of the annualised wage provisions of the enterprise agreements, then the Authority would have been permitted to set-off overpayments against underpayments.
Additionally, the Federal Court noted that although payment of annualised wages provided an administrative benefit to the Authority, there was no financial detriment to employees by being paid on that basis and employees in fact received additional superannuation by being paid an average annualised wage.
What Does This Mean For Employers?
Paying annual salaries to employees whose employment is covered by an award or enterprise agreement containing annualised wage provisions can be complex. Employers who choose not to strictly comply with applicable award or enterprise agreement provisions relating to annualised wage arrangements should take care to ensure that other means of paying annual salaries (for example, via the use of a contractual ‘set-off’ clause) do not result in an employer being at risk of an underpayment claim.
Put another way, payment of annual salaries under a contract of employment including a ‘set-off’ clause can be a valid alternative to strict compliance with annualised wage arrangements under an industrial instrument provided such annual salary is sufficiently high to meet all of an employee’s separate minimum entitlements and that the arrangement is documented appropriately.
The HR Legal team can help if you have any queries about annualised wage arrangements under awards or enterprise agreements.
Case reference: Construction, Forestry, Maritime, Mining and Energy Union v Fremantle Port Authority [2024] FCA 848
