Using annualised salaries: are you ready for 1 March 2020?

Once upon a time, the utilisation of annualised salary provisions, including those appearing in the Clerks – Private Sector Award 2010 (Clerks Award) or the Banking Finance and Insurance Award 2010 (BFI Award), was a straightforward affair.

Reasonable checks and balances were in place, and compliance was practical and manageable, namely (my emphasis):

Annual salary not to disadvantage employees

(a) The annual salary must be no less than the amount the employee would have received under this award for the work performed over the year for which the salary is paid (or if the employment ceases earlier over such lesser period as has been worked).

(b) The annual salary of the employee must be reviewed by the employer at least annually to ensure that the compensation is appropriate having regard to the award provisions which are satisfied by the payment of the annual salary.

But the rules of the game are about to change significantly, resulting in an extraordinary administration and implementation burden for employers.  There is also bound to be head scratching on exactly what the point of utilising a (new) “annualised wage” is, given that the ability to annualise sits beside a requirement that employers make “top up” payments in particular pay periods in certain circumstances.    

What are the changes?

Effective 1 March 2020, two (slightly different) model clauses will commence operation as follows:

• The existing annualised salary provision, which appears in a limited number of modern awards, will be replaced by a new model clause

• The new model clause will be inserted into a number of modern awards that previously were silent on the issue

A list of the impacted awards can be accessed here . 

What does the new model clause say?

Now termed an “annualised wage”, the new model clause provides the following additional requirements (without limitation; and with my emphasis):

(a) Where an annualised wage is paid the employer must advise the employee in writing, and keep a record of: …

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

(iv) 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 …

(b) If in a pay period or roster cycle an employee works any hours in excess of either of the outer limit amounts specified pursuant to clause X.1(b)(iv), such hours will not be covered by the annualised wage and must separately be paid for in accordance with the applicable provisions of this award.

Thus, despite its name, and despite the retention of the text from the current clause that “The annualised wage must be no less than the amount the employee would have received under this award for the work performed over the year for which the wage is paid”, annualisation can only occur up to specified limits. 

Further, the benefit of an annualised salary provision for an employer was historically the reduction of the administration burden associated with calculating overtime, penalties, and allowances and the like each pay cycle.  Under the new model clause, employers will be required to do just that each and every pay cycle with respect to each and every employee subject to an annualised wage clause.

Additional record keeping obligations

But that’s not all.  The new model clause also imposes additional (and arguably impractical) record keeping obligations in the following terms:

The employer must keep a record of the starting and finishing times of work, and any unpaid breaks taken, of each employee subject to an annualised wage arrangement for the purpose of undertaking the comparison required by clause X.2(b). This record must be signed by the employee, or acknowledged as correct in writing (including by electronic means) by the employee, each pay period or roster cycle.

This represents a significant extension of the Fair Work Regulation 2009 (Cth) record keeping obligations which provide that “if a penalty rate or loading (however described) must be paid for overtime hours actually worked by an employee, a kind of employee record that the employer must make and keep is a record that specifies: (a) the number of overtime hours worked by the employee during each day; or (b) when the employee started and ceased working overtime hours.”

What about contractual set off clauses?

Contractual set off clauses are where the employer and employee agree that the salary payable under the contract has the purpose of satisfying the obligation to pay identified award entitlements (such as, for example, base wages, overtime rates, shifts and weekend penalty rates, allowances and annual leave loading), and may be off-set against any claim for those entitlements under the award.

In its decision concerning the new model clause, the Full Bench of the Fair Work Commission made plain that the new model clause does not seek to invalidate or regulate contractual set off clauses ([2019] FWCFB 4368 at [22]): “an employer is able to pay an employee to whom an award applies an annualised salary arrangement that compensates for or “buys out” various identified award entitlements without engaging with any annualised wage arrangement clause in that award and without there needing to be an annualised wage arrangement clause in that award.” 

That may provide employers with some comfort in relation to underpayment claims.  However, extreme caution must be exercised to ensure such clauses do not result in the employer breaching the frequency of pay provisions under the section 323 of the Fair Work Act 2009, or contravening a modern award: section 45.  Careful drafting is required to avoid the employer being found to have engaged the annualised wage provisions, with consequent award obligations in relation to notification and record keeping.   Furthermore, it is critical in using a contractual set-off clause that employers comply with the record keeping obligations for award covered employees under the Fair Work Regulations.

What do employers need to do?

Employers need to identify whether they are impacted by the changes, and if so, whether they wish to engage annualised wages provisions going forward.  Furthermore, careful attention will need to be given to current arrangements to avoid any contraventions come 1 March 2020.

Author: Amber Sharp

Leading Partner: James Mattson