As flagged in our recent post, “What to look out for in employment law in 2020”, new annualised wages clauses in 18 modern awards are in effect from 1 March 2020.

Affected awards include those for Clerks, Banking, Finance and Insurance, Contract Call Centres, Local Government, Manufacturing and Associated Industries and Occupations, Mining, Legal Services and Telecommunications Services.

Annualised wage arrangements are only applicable to full-time employees engaged under one of the affected awards.  The annualised wage can be paid in satisfaction of certain specified award provisions (for example, wage rates, allowances, overtime and penalty rates and leave loading).  In some awards, an employer has the right to introduce such an arrangement, whereas in other awards, the employer and employee must expressly agree to the arrangement.

Key obligations under the new clauses include:

  1. calculation – the employer must notify the employee of the method by which the annualised wage has been calculated, which of the award provisions are satisfied by the wage and the “outer limit” of the hours which are covered by the annualised wage;
  2. catch up payments – if the employee works more than that “outer limit”, overtime and/or penalty rates are payable (this catch up payment must occur each pay period or roster cycle, not after the annual reconciliation);
  3. reconciliation – an employer must conduct a reconciliation every 12 months to compare the amount that would have been payable under the award and the amount actually paid to the employee under the annualised wage, and pay the employee any shortfall within 14 days;
  4. record keeping – records of start, finish and break times must be kept and acknowledge as correct by the employee each pay period or roster cycle.

The changes have been described as prescriptive, onerous and requiring a return to the bundy clock. Many employers who used contractual annual salary set off arrangements in lieu of the award annualised wage arrangements have been comforted by statements by the Fair Work Commission that the new clauses do not seek to invalidate or regulate set off arrangements.

However, the Commission did note that an annualised wages clause was a more legally certain way than using a contractual set off clause. The Full Bench referred to two key areas of difficulty: the first being that if there is not “a close correlation between the nature of the contractual obligation and the nature of the award entitlements” then payment of the contractual salary may not satisfy the award entitlements.

The second area of difficulty is that payment of an annualised salary may not comply with award and legislative requirements requiring entitlements to be paid to an employee within a specified pay period.[1] This difficulty may arise where the payment made to an employee under an annual salary falls short of what the employee would have received under the applicable award in one pay period. The failure to meet the award minimum in the pay period may itself be a contravention of the award and/or the Fair Work Act.[2] There may also be debate about the capacity to apply payments in excess of the award minimum in other pay periods to avoid a claim for compensation based on an underpayment in a different pay period.

In addition to these reasons, there are several features of the contemporary industrial landscape which mean that if your awards contain annualised wage arrangements, they may be worth a closer look.

Low wages growth:  Reliance on set off arrangements in the past has been underpinned by a belief that the ordinary rates of pay in the awards are so far below the level of salary required by market conditions to attract and retain staff that no possibility of contravening the payment requirements of the awards could arise.  However, in the period 1 July 2017 to 1 July 2019, the increase in ordinary rates of pay under awards has totalled nearly 10%.  At the same time, the salary market for many white collar roles has stagnated.  As a consequence, the “excess” of the salary over the award has reduced and may not be sufficient to cover the overtime or penalty rates to which employees may be entitled by reason of the pattern of hours actually worked.

“Wage theft” and increased prosecutions: Contractual set off arrangements, even if operative, cannot prevent a timing contravention of the kind we have referred to above. By contrast, an annualised wage arrangement provides employers with the certainty of paying an annualised wage as well as a mechanism to rectify any underpayments at the end of the 12 month reconciliation period.  This option may now be more attractive in light of the Fair Work Ombudsman’s increased prosecution focus and the media and union attention on cases of so called “wage theft”.

Record keeping on the agenda: At first blush, the record keeping obligations for annualised wage arrangements seem more onerous than would otherwise be required. The Fair Work Act does not require start, finish and break times to be kept for full-time employees.[3]  However, many employers are still finding that their record keeping is deficient. For example, if a penalty rate or loading must be paid for overtime hours actually worked by an employee, an employer must keep a record that specifies the number of overtime hours worked by the employee during each day or when the employee started and ceased working overtime hours.[4]   In addition, if you fail to keep the required records, the Fair Work Act now imposes a reverse onus which makes it easier for an employee or the Fair Work Ombudsman to establish a contravention of an award or the Act. Also, where an employer relies on set off it needs to be confident that the periodic payment of salary leaves the employee no worse off than if he/she was paid directly in accordance with the award for the hours actually worked in each pay period. This confidence cannot exist in the absence of accurate data about the hours worked by the employee and the times of the day or week they were worked – which in practice means the keeping of time records.

The circumstances make it timely for employers to review their existing salary arrangements for employees. Other options which could also be considered include better use of existing flexibilities in your award, Individual Flexibility Agreements, Guarantees of Annual Earnings and enterprise agreements.

What should employers do?

  • Review existing arrangements, including contractual annual salary set off arrangements, to ensure they are fit for purpose, effective and compliant.
  • Consider the available options and revise arrangements as necessary. This could include revising existing contractual annualised salary set off arrangements, implementing an annual wage arrangement in accordance with the new award annualised wages provisions or other options.
  • Review and ensure compliance with record-keeping requirements.
  • For any identified historical non-compliance, develop and implement a plan for remediation.

[1] [2018] FWCFB 154 at [102].

[2] s323 of the Fair Work Act

[3] Employers are however required to keep records of hours worked by casual or irregular part-time employees (Reg 3.33).

[4] Fair Work Regulation 3.34

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