It is now been almost a year since we issued our February 2020 Employment Alert advising about changes that would likely directly impact employers of employees on annualised salaries employed under a significant number of modern awards. These awards had been amended so as to provide for certain arrangements, procedures and additional recordkeeping requirements in respect of annualised wage arrangements under those awards.
You may access our February 2020 Employment Alert by clicking on this link.
As we advised in our previous alert in relation to this issue, the rationale behind the amendments was an endeavour to ensure that annualised salary employees are paid at least at or above award rates – i.e. so that annualised salaries are not used by employers to actually underpay employees, particularly in respect of overtime and penalty rates. Such amendments were apparently in reaction to high-profile wage underpayment cases.
Now, almost a year on, it is worthwhile revisiting the subject of annualised salaries and reminding employers as to what are their options and obligations in this area. It is important to get these matters right. Significant penalties can arise from failure to comply with obligations under the Fair Work Act (the "Act"). Maximum penalties for breaches of civil penalty provisions such as in relation to obligation to pay minimum wage and to keep prescribed records in relation to each employee are up to $13,320 per contravention for an individual and 66,600 per contravention for companies. If the contravention is a "serious contravention" (see section 557 of the Act), then the maximum penalties increased to $133,200 per contravention and $666,000 per contravention for companies.
It is also timely to consider these matters now as the last of the award wage review payment increases have come into effect as of 1 February 2021. To see when the Fair Work Commission's award wage review increases came into effect in respect of 3 different categories of award – bearing in mind the impact of COVID-19 and the postponing of certain award minimum wage increases as a result – you can follow this link. All employers of employees that are covered by awards, whether annualised salary arrangements are being utilised or not, should be reviewing their employees' rates of pay to ensure that employees are being paid at least the minimum required to be paid under the relevant award.
Annualised Salary Options
The main options by which employers can pay employees an annualised salary that is in satisfaction of other award entitlements such as overtime and penalty rates, allowances, and leave loading are annualised wage arrangements under an applicable modern award or by use of properly drafted common law set-off clauses in a written employment contract.1
Annualised Wage Arrangements Under a Modern Award
Our earlier alert referred to above set out in some detail how such annualised wage arrangements would operate and what are the employer's obligations. Suffice it to say, an applicable modern award with an annualised wage arrangement provision allows employers to annualise an employee's wages over a 12 month period to pay a set amount in satisfaction of remuneration entitlements under the award. However, these annualised wage arrangement clauses impose prescriptive and strict requirements on the employer with respect to the keeping of records, employee notification and review of the arrangement. Whilst there are differences between the annualised wage clauses between the various awards that have such clauses, the following are obligations on the employer consistent across the awards in respect of these clauses and arrangements:
- There is a requirement that the employer advises the employee and records the amount payable, the terms of the award satisfied by the annualised wage arrangement and the outer limit of the number of hours (comprise of ordinary and/or overtime hours) for the pay period that applies to the employee and which are compensated for by the annualised salary;
- For each pay period, the employer must check if an employee has worked outside the limits that the annualised salary covers and if so, you must pay them the excess for that pay period.
- Every 12 months or, one could reasonably surmise, at around the end of the financial year, or upon termination, the employer must undertake a reconciliation exercise to ensure each employee has not been underpaid. If the reconciliation shows any underpayment (i.e. less than what the employee would have received under the award for the work they have done) then the employer must make good the underpayment.
- The employer must diligently record and keep records of employee working hours – that is, starting times, finishing times and unpaid breaks taken.
Common Law Set-off Clauses in an Employment Contract
Whilst not obviously apparent at the time that the relevant awards were being amended to include the annualised wage arrangement clauses, the FWC has made fairly clear that annualised wage clauses in modern awards are not intended to remove an employer's ability to pay an annualised salary to an employee under a common law contract in satisfaction of entitlements under an award. Thus, it would seem that employers can continue to rely on set-off clauses in employment contracts to offset award entitlements without having to strictly abide by the requirements of an annualised wage arrangement clause under an applicable award.
However, there are still significant requirements and obligations imposed on employers that must be complied with – and which are perhaps not much less onerous (if at all) than the requirements of an award annualised wage arrangement.
Most simply, it is still the case that it is fundamental that payments made under a common law annualised salary satisfy the award payment obligations that the employee would otherwise be entitled to each pay period. It is important to note that it is insufficient for the annualised salary to purport to operate only on an annual basis – the period to be considered is the pay period. If the rate of the annualised salary does not adequately compensate the employee for all entitlements (such as overtime) in a pay period then the employee is entitled to be paid the shortfall for that pay period.
Further, such set-off clauses must be carefully drafted so as to clearly identify what obligations and entitlements under the applicable award the annualised salary is paid in satisfaction of.
Perhaps most importantly – and which is necessary for the employer to be able to demonstrate that the annualised salary has remunerated the employee at least as well as under the minimum requirements of the applicable award – there are also significant record-keeping obligations. The Act and its Regulations provide for record-keeping requirements on employers and failure to comply can have serious consequences. This requires employers to make, and keep for 7 years, employee records as required by the Regulations. Moreover, the Act requires employers to give each employee a payslip within one working day of paying the employee's wages or salary. Non-compliance with these requirements is a contravention of a civil penalty provision for which penalties are payable.
Record-Keeping – An Important Requirement
Part 3-6, Division 3 of the Regulations requires employers to keep particular records including pay, overtime, leave, superannuation and termination of employment records. In particular, regulation 3.33 requires employers to keep certain pay records, including rate of remuneration, amounts paid to employees, deductions, and amounts employees are entitled to be paid (e.g. incentive-based payments, bonuses, penalty rates, and loading). Regulation 3.34 requires an employer to keep the records where an employee is entitled to payment of a penalty rate or loading for hours that they have actually worked, as follows:
- the number of overtime hours worked by the employee during each day; or
- when the employee started and stopped working overtime hours.
Practically, to keep these records, an employer has to record each employee's working hours and any unpaid breaks taken. These requirements must be complied with even if an employee's wage is "rolled-up" into an 'all up' (i.e. annualised) rate, whether under a common law set-off clause or an award annualised wage arrangement.
Under section 557C of the FW Act, if an employer fails to comply with its record-keeping obligations and is alleged to have contravened particular civil remedy provisions (e.g. contravention of modern awards and or minimum wages provisions), it is presumed that the alleged contraventions occurred unless the employer can disprove the allegation or has a reasonable excuse as to why it has not complied.
Employers that fail to keep records of employees' working hours will have little to no ability to disprove any alleged contraventions. As indicated above, the penalties for breach of such provisions can be very significant.
Steps to Check and Ensure Compliance
- Regular salary reviews. Employers should undertake salary reviews at least annually, and particularly when there has been a change to the wage rates under any awards that apply to the employer's employees, so as to ensure minimum wage requirements are being and/or will be met.
- Be clear about what annualised salary mechanism is being used and ensure compliance with the requirements of that mechanism. Employers should check to see whether they are paying annualised salaries under an award annualised wage arrangement or under a common law set off clause. The employer must then ensure that the compliance obligations associated with that mechanism are being met.
- Review records and record-keeping practices to ensure compliance with record-keeping obligations under the Act and/or the applicable award. As set out above, the record-keeping requirements on employers in respect of all employees are quite significant. Care should be taken that proper systems are in place to ensure these requirements are met.
1 There are three other options of lesser applicability and utility, being (1) individual flexibility arrangements under a modern award; (2) guarantee of annual earnings under s. 330 of the Act but which can only apply to employees being paid above the high-income threshold (currently $153,600); and (3) enterprise agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.