As part of the Fair Work Commission’s (Commission) four-yearly review of Modern Awards, the Commission recently handed down a decision on 27 February 2019 (Decision), to insert new model clauses for annual wages into Modern Awards.
The Decision applied to 17 Modern Awards that currently contain annualised wage entitlements, and 2 Modern Awards that previously did not contain annualised wage arrangements.
We set out below some background, the new obligations imposed on employers, and the impact of the model clauses for employers.
On 20 February 2018 the Full Bench of the Commission made a provisional decision (2018 Decision) regarding annualised wage arrangements, as it was one of the common issues considered as part of the four yearly review.
The 2018 Decision set out what the Commission considered necessary in annualised wage provisions to ensure that they met the objective of Modern Awards, that is, to work together with the National Employment Standards to form a fair and relevant safety net of terms and conditions.
The 2018 Decision then set out four variations on the proposed model clauses. Model clauses 1 and 2 were identified as suitable for modern awards that covered employees who worked reasonably stable hours, and model clauses 3 and 4 were identified as being suitable for modern awards that covered employees who work highly variable hours of work (attracting penalty rates).
Submissions were invited on various aspects of the proposed model clauses, including the requirement for an annual reconciliation vs annual review of annual salaries, record-keeping requirements, termination of annualised wage arrangements, specification of method of calculation of annualised wages, proposed requirement on an outer limit on hours, requirement for a minimum pay increment, extension of standard annualised wage provisions to other awards; and applicability to part-time employment.
Following consideration of submissions from various unions and employer groups the Full Bench of the Commission determined that:
- model clause 1 would be inserted into awards that already contain annualised wage provisions that do not require employee agreement and cover industries and occupations that have relatively stable hours of work (Category 1 awards).
Category 1 awards are:
Banking, Finance and Insurance Award 2010
Clerks – Private Sector Award 2010
Contract Call Centres Award 2010
Hydrocarbons Industry (Upstream) Award 2010
Legal Services Award 2010
Mining Industry Award 2010
Oil Refining and Manufacturing Award 2010 (clerical employees only)
Salt Industry Award 2010
Telecommunications Services Award 2010
Water Industry Award 2010
Wool Storage , Sampling and Testing Award 2010
- model clause 3 would be inserted into awards that already contain annualised wage provisions and cover employees working highly variable hours or ordinary hours, the majority of which attract penalty rates (Category 2 awards). The Pastoral Modern Award and Horticultural Modern Award were included in this category despite not previously having contained annualised wage arrangements.
Category 2 awards are:
Broadcasting and Recorded Entertainment Award 2010
Local Government Industry Award 2010
Manufacturing and Associated Industries and Occupations Award 2010
Oil Refining and Manufacturing Award 2010 (non-clerical employees)
Pharmacy Industry Award 2010
Rail Industry Award 2010
Pastoral Award 2010
Horticultural Award 2010
Model clause 1
Model clause 1 permits employers to pay an employee an annualised wage in satisfaction of the minimum weekly wages, allowances, overtime penalty rates, weekend and other penalty rates and annual leave loading clause of the relevant award. The Employer must notify the employee in writing of their intention to pay an annualised wage and keep a record of:
- the annualised wage arrangement;
- the provisions of the award that are satisfied by the annualised wage;
- the method of calculation (including each specific component of the arrangement and any overtime or penalty assumptions made in the calculation); and
- the outer limit number of ordinary hours which would attract the payment of a penalty rate under the award and the outer limit number of overtime hours which the employee may be required to work in a pay period or roster cycle without being entitled to an amount in excess of the annualised wage. Any hours worked in excess of these outer limits in a pay period or roster cycle must be paid for in accordance with the applicable provision of the award.
Employers are required to ensure that employees in receipt of an annualised wage are not disadvantaged by conducting a reconciliation every 12 months of the annual wage arrangement against what the employee would have received had they only been renumerated under the award. Where there is any shortfall the employer must pay this to the employee. This reconciliation process requires the employer to keep a record of start and finish times and unpaid breaks taken, which must be signed by the employee every pay period or roster cycle.
Model clause 3
Model clause 3 permits annualised wage arrangements via mutual written agreement between the employer and the employee, and the employer must give the employee a copy of the agreement, which the employer is to keep as a time and wages record. The annualised wage arrangement can be terminated by either party giving 12 months’ notice in writing of the arrangement ceasing to operate at the end of the notice period, or at any time via mutual written agreement.
All other provisions of model clause 3 are the same as those prescribed by model clause 1.
Practical effect on employers
The intent of the model clauses for annualised wage arrangements is to ensure and maintain a fair safety net of terms and conditions for employees; however, the practical effect on employers is that it will likely result in an administrative burden. Some of these new requirements are outlined below.
The Commission confirmed their provisional conclusion from the 2018 Decision that an annual reconciliation was a fundamental requirement of any annualised wage arrangement.
In order to ensure that the requirement to conduct an annual reconciliation is met, employers may need to implement payroll reminders that issue alerts as an employee is approaching the end of their 12 month annualised wage arrangement so that the reconciliation can be conducted, and any underpayment made up.
Record keeping requirements
The Commission concluded that a record-keeping requirement was necessary as it was incidental to the requirement to conduct an annual reconciliation.
Records are required to be kept of start and finish times and unpaid meal breaks, which must be signed by the employee each pay period or roster cycle. This requirement, above all else, is likely to be the most burdensome for employers. Employers are generally required to keep a record of hours worked, however for employers in industries where such records are not routine, eg clerical employees, this requirement for record-keeping will necessitate some sort of record-keeping process, electronic or otherwise, to facilitate compliance with this requirement.
Employers will also have to develop a process whereby employees sign off on these records every pay period or roster cycle. For some employers, this may result in an increase in disputes with employees regarding the hours that they have worked, and potentially lead to protracted dispute resolution processes.
Specification of method of calculation of the annualised wage
The Commission determined that the method of calculation for the annualised wage arrangement would need to be specifically outlined in writing for employees. It is the Commission’s view that this will reduce the risk of any financially disadvantageous arrangement being put in place, and allow the employee to understand how many overtime, weekend and other hours that attract penalties or loadings the employee may work on the annualised wage arrangement without additional payment.
Whilst not necessarily onerous, the requirement to specify the method of calculation of an annualised wage arrangement will require careful consideration at the outset to ensure that an employee is not financially disadvantaged by the arrangement put in place. It will also require consideration of the reasonable expectations with regards to the hours to be worked in the role throughout a 12 month period.
Proposed requirement on an outer limit on hours
The Commission also determined that annualised wage arrangements should specify an outer limit on the number of hours that would normally attract penalty rates under the relevant modern award, which may be worked under the annualised wage arrangement, without the payment of additional remuneration. The Commission clarified that an outer limit was not intended to be the same as the average number of hours that an annualised wage calculation was based on. That is, an annualised wage arrangement may have be based on an average of five overtime hours per week but the specified outer limit could be ten overtime hours per week.
Specifying the outer limit will need to be included in the specification of the method of calculation of the annualised wage arrangement. It will mean that if an employee works in excess of the specified outer limit in a week then they will be entitled to additional remuneration for those hours worked in excess of the outer limit.
Whilst this may appear on its face to be yet a further administrative burden for employers with regards to monitoring hours worked per week, this requirement could be rolled into whatever process is put in place to meet the record-keeping requirement.
 See section 156 of the Fair Work Act 2009 (Cth) (FW Act)
 4 yearly review of modern awards – Annualised Wage Arrangements  FWCB 1289
  FWCFB 154 (2018 Decision)
 See section 134(1) of the FW Act