Thursday, 20 February 2020

Are you ready for the changes to annualised wage arrangements in Modern Awards?

On 12 February 2020 the Fair Work Commission (FWC) finally confirmed the new clauses regarding annualised wage arrangements that will be inserted into many modern awards for full time employees. Most of these changes will come into effect from 1 March 2020 (list of the impacted awards is included below).

These changes do not apply to all employees on annualised salaries.  However, for those covered, the changes may be significant and may remove many of the flexibilities provided by these arrangements.

Do these changes apply to your business?

It is important to note that these changes do not apply to employees simply because they are paid an annualised salary. The changes only apply to those impacted awards listed below.

Importantly, these changes do not apply to employees who are:

  1. part time or casual;
  2. covered by a Modern Award without an annualised wage clause;
  3. covered by an enterprise agreement (which operates to the exclusion of the underpinning award);
  4. not covered by any award and therefore are considered award-free; or
  5. earning more than the high-income threshold (currently $148,700) and have been provided with a written annual guarantee of earnings in accordance with the Fair Work Act.

For example, an employee under the Professional Employees Award may be paid an annualised salary.  However that award does not contain an annualised salary provision and therefore these changes will not apply.

We set out below the requirements of the new clauses, together with alternative options for engaging staff on annualised salaries.

What do the new annualised wage clauses require?

A key requirement of the new clauses is that the annualised wage paid to an employee must be no less than the amount the employee would have received under the award for the work performed over the year for which the wage is paid (or if the employment ceases earlier over the period that has been worked).

The new clauses impose further conditions which are directed at ensuring this key requirement is met:

  1. You must notify employees receiving an annualised wage in writing, and keep a record of:

a) the annualised wage payable to the employee;

b) the clauses of the modern award that the annualised wage covers (eg overtime, penalty, allowances and annual leave loading);

c) the method by which the annualised wage has been calculated including specifying each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation; and;

d) the “outer limit” of ordinary hours that would attract the payment of penalties or overtime under the award the employee may be required to work in a pay period or roster cycle without being entitled to additional pay.

For existing staff who already have well drafted employment contracts, we suggest this is implemented via a letter confirming the arrangements. Note that some awards will require an employee is not only notified by also agrees to the arrangement (eg Manufacturing and Associated Industries and Occupations Award).

  1. Any hours worked in excess of the “outer limit” by an employee paid an annualised wage in a pay period or roster cycle must be paid separately to the annualised wage as overtime or at the relevant penalty rates.
  2. You must undertake an annual reconciliation each 12 months from commencement of the arrangement to ensure that the wage is equal to or more than the amount that would have been payable to the employee if they were paid strictly in accordance with the award. Any shortfalls must be paid to the employee within 14 days.
  3. You must keep a detailed record of the employee’s start and finish time, including any unpaid breaks for each pay period or roster cycle. This record must be signed by the employee or acknowledged in writing (including by electronic means) as a correct and accurate record during each pay or roster cycle.

Consideration should be given to implementing a process of recording hours of work and having employees acknowledge this in writing. Systems which can assist with this include time recording or clock in/clock out software like Kronos, Deputy or Time Target, or simply having physical time sheets or template emails which are submitted to payroll each pay or roster cycle.

If during a pay or roster cycle an employee has worked in excess of the outer limit amounts specified, they must be paid separately at the relevant overtime or penalty rate.

Are there any other options?

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.

  1. 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.

  1. “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.

  1. 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.

What do I need to do?

If your business and its employees are covered by one or more of the awards below, you will need to decide as soon as possible which option will be adopted and make the necessary arrangements to ensure your business is not exposed to underpayment and/or breach of award claims.

We can assist you to develop a compliant solution.

Impacted Awards from 1 March 2020

Banking, Finance and Insurance Award 2020

Broadcasting, Recorded Entertainment and Cinemas Award 2010

Clerks—Private Sector Award 2020

Contract Call Centres Award 2010

Horticulture Award 2010

Hydrocarbons Industry (Upstream) Award 2020

Legal Services Award 2020

Local Government Industry Award 2010

Manufacturing and Associated Industries and Occupations Award 2010

Mining Industry Award 2010

Oil Refining and Manufacturing Award 2020

Pastoral Award 2010

Pharmacy Industry Award 2010

Rail Industry Award 2010

Salt Industry Award 2010

Telecommunications Services Award 2010

Water Industry Award 2010

Wool Storage, Sampling and Testing Award 2010

This article was produced by HR Legal. It is intended to provide general information only in summary format on legal issues. It does not constitute legal advice, and should not be relied on as such.