From 1 March 2020, a number of modern awards were amended to include new provisions dealing with annualised salary arrangements. In this special edition e-update we provide a summary of these changes, outline what employers should be doing and what the changes mean for employees.

History of annualised salaries and review of annualised salary provisions

Annualised wage and salary arrangements have long been used by employers to remunerate employees in satisfaction of minimum rates of pay as well as other specific minimum award entitlements which employees would otherwise receive under the relevant awards.

Historically, annualised salary arrangement clauses appeared in industrial instruments, developed on an industry basis.
 
During the award modernisation process, the Full Bench of the Australian Industrial Commission (AIRC) considered submissions regarding the inclusion of a standard annualised wage and salary arrangements provision in modern awards but declined to include a standard clause in the modern awards at that time.
 
While the Full Bench of the AIRC declined to include annual wage or salary provisions as a standard clause in modern awards, it did decide to maintain annualised salary provisions in awards where they were already in place under the old system, and where there was either consensus or merit based on the nature of the industry or pattern of work. Accordingly, at the end of the process of making the modern awards, 19 of the 122 modern awards included an “annualised salaries” provision.

The Fair Work Act 2009 (Cth) (FW Act) permits modern awards to contain terms in relation to annualised wage arrangements that:
  • have regard to the patterns of work in an occupation, industry or enterprise;
  • provide an alternative to the separate payment of wages and other monetary entitlements; and
  • include appropriate safeguards to ensure that individual employees are not disadvantaged.
In February 2014, the Fair Work Commission (the Commission) commenced the first 4 yearly review of modern awards. The issue of annualised salaries arose with the Commission’s review of the Pastoral Award 2010 (Pastoral Award) and the application by the National Farmers’ Federation to vary the Pastoral Award to insert a new annualised salaries provision.
 
As part of the consideration of the inclusion of the clause, in its decision of 4 yearly review of modern awards—Pastoral Award 2010 [2015] FWCFB 8810, the Full Bench expressed concern that there were not appropriate safeguards in place in annualised salary clauses generally to ensure that employees were not disadvantaged.
 
The Full Bench noted that Part 3-6 of the Fair Work Regulations 2009 (FW Regulations) did not set out a requirement to make and keep a record of an annualised wage arrangement and also expressed doubt as to whether the FW Regulations required employers to keep records with respect to overtime pay and penalty rates.
 
In May 2016, President Justice Ross determined that it was appropriate to conduct a broader review of annualised salary provisions, leading to the Full Bench’s review of annualised salary arrangements in modern awards generally.
 
In the Annualised Wage Arrangements [2018] FWCFB 154 decision, the Full Bench identified that annualised salary clauses in modern awards differed greatly in terms of the safeguards intended to ensure that employees were not disadvantaged.
 
The Full Bench concluded that in order for annualised salary provisions in modern awards to be capable of forming part of a fair and relevant minimum safety net of terms and conditions, greater safeguards were required, including the requirement that salary arrangements be in writing or by agreement and mechanisms be implemented to ensure that employees did not receive less pay over the year than they would have received under the award. The Full Bench identified model clauses which could satisfy the requirements for annualised wage and salary arrangements and invited submissions on them by interested parties.
 
In February 2019, the Full Bench decided to replace the 19 existing annualised salary clauses with one of the new model clauses, and to insert new clauses into other awards.
 
The Full Bench published draft variation determinations in December 2019.
 
The model annualised salary clauses impose obligations on employers in relation to:
  • Agreeing to annualised salaries in writing;
  • Disclosing methods of calculation of the annualised salary;
  • Time recording;
  • Annual reconciliation calculations; and
  • Identifying the “outer limits” of hours to be worked under the arrangement.

What should employers be doing?

Employers should firstly be checking whether they are affected by these changes to the modern awards. The Commission’s website maintains a list of the most up to date modern awards and should be the primary source for accessing modern awards.

As the annualised salary provisions differ slightly depending on the modern award, it is important to check the applicable award carefully to ascertain the particular requirements for annualised salary arrangements.
 
Employers should also check to see how employees are currently remunerated, for example, is it by an annualised salary arrangement, or are employees paid a base salary with other entitlements (eg: overtime) paid when applicable?
 
Where employers currently use and wish to continue to use an annualised salary arrangement, they should take the opportunity now to conduct a review of the annual salary paid to each employee to ensure that the salary is sufficient to meet award entitlements. To do this, employers need to determine the components of the annual salary including – what provisions of the award are intended to be satisfied by the salary. In particular, employers should ensure that they understand the outer limits of overtime and penalty pay hours that an employee may be required to work without additional payment beyond their salary. For example, if an employee works a 40-hour week, their employer must ensure that their salary compensates them for a minimum of two hours of overtime per week, even if some weeks they may not work the full 40 hours.
 
In some cases, this will be the first time employers conduct this activity. For others, it will be a matter of reviewing annual salaries and determining if they are sufficient – or indeed, overly generous.
 
Once the employer is satisfied with the calculation of the annualised salary, generally, the annualised salary provisions in the awards require employers to advise or agree with the employee in writing about certain matters, including:
  • The salary that is payable;
  • The provisions of the award that are satisfied by the salary;
  • The method by which the salary was calculated, specifying each component and any assumptions used; and
  • The outer limit of hours that the employee may be required to work that would attract a penalty rate or overtime in each roster cycle or pay period without an entitlement to additional pay.

What should employers being doing already?

One of the most important aspects of the annualised salary changes is the introduction of time recording. Employers should ensure that impacted employees are recording their time accurately.
 
Where an employer does not have a time and attendance system already in place, they should introduce one as soon as possible. If the employer works with a payroll provider, their payroll provider may be able to facilitate access and training on a time and attendance system. Otherwise, an employer may introduce manual time sheets. These can be simple documents developed by an employer that record start and finish times and unpaid breaks.

It is important to note that all time and attendance records for each pay period or roster cycle must be signed by the employee or acknowledged as correct (which can be by electronic means, such as email), and must be kept as employee records.
 
Employers should also prepare advices to individual employees setting out, in writing, those matters relating to the calculation of their salary as set out above. This advice may take the form of a letter to the employee or an updated employment contract. Where required by one of the new annualised salary clauses, the employer should also seek the agreement of the employee in writing.
 
Employers must also conduct regular reconciliations of the hours worked by employees against the salary they are being paid. Where an employee is not paid enough to compensate them for the hours they have worked under the relevant award (for example, they work in excess of the outer limits), the employer should pay the employee any additional amounts owing as soon as possible, calculated in accordance with the award.
 
Lastly, employers should develop a plan for conducting the reconciliations required by the awards. Regular reconciliations will ensure that employees are paid correctly on an ongoing basis and can be compiled at the end of each year to meet the annual reconciliation requirements.


What do these changes mean for employees?

Understandably, many employees will be confused about how these changes will affect them personally and the way they are paid.

Primarily, these changes are administrative in nature and are intended to ensure employers create and maintain accurate pay records for their employees and pay employees correctly.

To achieve this primary goal, employees are now required to record their time, and this may come as a surprise to many who are not accustomed to recording their working hours. For this reason, employers should ensure that they engage in effective communication with employees when implementing the required changes, advising them of how these changes will affect them and what is required of employees moving forward.

This communication should advise employees that the changes have been introduced by the Commission and are mandatory. Employers should explain what is required of employees in terms of timekeeping and reassure employees that the new time keeping requirement is to ensure they are being paid correctly and will not result in a reduction in their wages.

If, during the course of an employer’s review of employees’ annualised salaries, it is found that an employee’s remuneration may not be compliant with the award and in particular these new provisions, then any changes made to the employee’s annualised salary  (e.g. an increase in salary), should be communicated to the employee as soon as possible.

The terms and conditions of an employee’s employment should otherwise remain the same.

 
What do these changes mean for employees?
 
Understandably, many employees will be confused about how these changes will affect them personally and the way they are paid.
 
Primarily, these changes are administrative in nature and are intended to ensure employers create and maintain accurate pay records for their employees and pay employees correctly.
 
To achieve this primary goal, employees are now required to record their time, and this may come as a surprise to many who are not accustomed to recording their working hours. For this reason, employers should ensure that they engage in effective communication with employees when implementing the required changes, advising them of how these changes will affect them and what is required of employees moving forward.
 
This communication should advise employees that the changes have been introduced by the Commission and are mandatory. Employers should explain what is required of employees in terms of timekeeping and reassure employees that the new time keeping requirement is to ensure they are being paid correctly and will not result in a reduction in their wages.
 
If, during the course of an employer’s review of employees’ annualised salaries, it is found that an employee’s remuneration may not be compliant with the award and in particular these new provisions, then any changes made to the employee’s annualised salary  (e.g. an increase in salary), should be communicated to the employee as soon as possible.
 
The terms and conditions of an employee’s employment should otherwise remain the same.
 
Ongoing obligations
 
These new annualised salaries provisions do not permit “set and forget” agreements in an employee’s contract. There are record-keeping and reconciliation obligations that employers must meet on a regular basis, so that any shortfall in an employee’s salary during a pay period or roster cycle can be rectified as soon as possible.

In summary, employers’ ongoing obligations are to:
  • ensure that all new employees who are covered by the affected modern awards are advised of (and if required, agree to) their annualised salary and the calculations that have been used to come up with that salary amount, including the specific modern award components that make up the salary;
  • ensure that their employee records are accurate and up to date, including time in attendance records;
  • ensure that any employees who work in excess of the ‘outer limits’ compensated for in their salary are paid for any excess hours in each pay period or roster cycle; and
  • conduct regular reviews and reconciliations (at least once every 12 months from the start of the arrangement) of an employee’s annualised salary against the award provisions, to ensure that there is no shortfall. If an employer is conducting regular reconciliation (e.g. monthly) then these reconciliations may be compiled to complete the required annual reconciliation.

Final comments 

Employers should review the annualised salary provisions in their applicable modern awards and take steps to achieve compliance with the obligations. Given that the annualised salary provisions differ slightly depending on the modern award that applies, legal advice should be sought to ensure that employment contracts and policies are compliant.
 
 
 
Should you require any further information or assistance, please contact our Director Shane Koelmeyer on (02) 9256 7500 or via email on sydney@workplacelaw.com.au.

Information provided in this update is not legal advice and should not be relied upon as such. Workplace Law does not accept liability for any loss or damage arising from reliance on the content of this update, or from links on this website to any external website. Where applicable, liability is limited by a scheme approved under Professional Standards Legislation.