There are some alternatives to strict compliance with the new annualised wage requirements.
One option is to cease using annualised wages and pay employees strictly in accordance with the award.
The FWC in their decision confirmed that payment of a salary pursuant to an annualised wages provision in a modern award is a “more desirable and legally certain option”, however the FWC acknowledged that employers and their employees can elect to enter into alternative arrangements which also allow for payment of annualised salaries without strict compliance with the new requirements.
We explore these alternative options below.
- Guarantee of annual earnings for high income employees
Under section 47(2) of the Fair Work Act 2009, a modern award does not apply to an employee at a time when:
- the employee is a “high income employee” (ie where that person earns more than the high income threshold, currently is $148,700 base); and
- the employee has been provided with a guarantee of annual earnings.
In practice this will require an employer to provide any existing employees with a notice in writing confirming that the employee will be provided with a guarantee of annual earnings and seeking the employee’s agreement. For new employees, a guarantee of annual earnings can be included in the employee’s contract of employment.
This may be of particular relevance to employers covered by the Banking, Finance and Insurance Award 2010, which contains classifications up to middle management level.
- “Set off” clauses
In the annualised wage decisions, the FWC recognised that the new annualised wage arrangements were not intended to displace contractual arrangements between employers and employees. In particular, the ability for the parties to agree that the employee will be paid an above-award salary in satisfaction of expressly identifiable award entitlements.
This is commonly referred to as a “set off” clause.
For employers who are paying well above award but less than the high income threshold, a well drafted set off clause may be an attractive alternative to compliance with the annualised wage arrangement. In this case, employers will not strictly speaking be required to comply with the additional requirements for annualised wage agreements including record keeping and annual reconciliations.
However, it is important to emphasise that, as identified by the FWC, this means of paying an annualised salary to an employee to whom the modern award applies is not entirely free from legal risk, particularly where employees frequently work outside their contracted hours of work. Employers should therefore take steps to ensure that the salary is sufficient to cover minimum award obligations. A back of envelope calculation is that an employee being paid 50% above the Award would be better off if they worked up to 50 hours per week, including some weekend or evening work.
- Individual Flexibility Arrangements
All modern awards provide for a flexibility clause which enables an employer and employee to enter into an individual flexibility arrangement (IFA) to change the effect of certain clauses in the award to suit the genuine needs of the employer and employee.
An IFA must result in the employee being better off overall compared to the employee’s minimum award entitlements at the time the IFA is made compared to if the IFA had not been made. Both financial and non-financial benefits provided to employees will be considered when determining whether an employee is better off overall.
Strictly speaking, an employee and employer could agree to an IFA which provides for payment by way of an annualised salary or flat rate in satisfaction of award entitlements such as overtime rates, penalties and allowances. This would mean that the employee is not being engaged pursuant to the annualised wage arrangements under the award and therefore the employer will not be obliged to comply with the additional requirements for annualised wage agreements including record keeping and annual reconciliations.
An IFA must be provided as separate agreements to the employment contract and is terminable on 13 weeks’ notice. Termination of an IFA does not end the employment, only the operation of the IFA. Furthermore, an IFA can only be entered into after the individual employee has commenced employment with the employer, because an offer of employment should not be condition on entering into an IFA.
As an additional layer of protection for employers, we also recommend that where employees are subject to an IFA which provides for an annualised salary, a set off clause also be included in the employee’s contract of employment as outlined above.