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Federal Court finds annual salary not enough to constitute a guarantee of annual earnings

The Fair Work Act 2009 (Cth) allows employers to provide high income employees with a “guarantee of annual earnings”. Whether an employee is provided with and accepts a guarantee of annual earnings has a significant impact on whether the terms of a modern award will apply to them.

The Fair Work Act 2009 (Cth) (FW Act) allows employers to provide high income employees with a “guarantee of annual earnings”. Whether an employee is provided with and accepts a guarantee of annual earnings has a significant impact on whether the terms of a modern award will apply to them.

In Association of Professional Engineers, Scientists and Managers Australia v Peabody Energy Australia Coal Pty Ltd [2022] FCA 945, the Federal Court of Australia (the Court) was required to consider whether an annual remuneration clause in a number of employment contracts constituted a guarantee of annual earnings.

The employees worked at coal mines in Queensland and New South Wales before they were made redundant as a result of the closure of the mines. The employees were covered by the then Black Coal Mining Industry Award 2010 (the Award) which entitled employees who had more than 70 hours of accrued but untaken personal/carer’s leave to be paid such leave if their employment was terminated as a result of retrenchment.

The Association of Professional Engineers, Scientists and Managers Australia (APESMA) alleged that the employer had contravened a term of the Award because it failed to pay employees their accrued but untaken personal/carer’s leave on the termination of their employment due to redundancy.

The employer argued that it did not have an obligation to pay the accrued but untaken personal/carer’s leave because the Award did not apply to them as they were considered high income employees per section 329 of the FW Act. The employer submitted that the employees were employed under employment contracts which provided that they would receive an annual remuneration which was in excess of the applicable high income threshold. The employer contended that this was an undertaking which complied with the guarantee of annual earnings requirements as set out in section 330 of the FW Act.

The Court was not satisfied that the annual remuneration clauses in the contracts met the requirements of the FW Act and accordingly was not sufficient to be a guarantee of annual earnings. The Court held that a guarantee of annual earnings required “something more” than an agreement to pay an annual remuneration. In particular, it noted that:

  • The guarantee of annual earnings was to be an undertaking provided by the employer and accepted by the employee rather than an agreement to pay a salary;
  • The employer was required to notify the employee of the consequences of agreeing to a guarantee – namely that the Award would not apply to their employment;
  • The guarantee of annual earnings is for a guaranteed period and must specify or identify an end date, rather than the payment of a salary for an indefinite period or until varied or terminated; and
  • Certain obligations on the employer were civil remedy provisions which indicated that the guarantee of annual earnings needed to be readily identifiable.

Accordingly, the Court found that the Award applied to the employees because there was no guarantee of annual earnings.  

The Court found that in failing to pay the employees their accrued but untaken personal/carer’s leave entitlements on termination, the employer contravened the Award and in doing so, breached section 45 of the FW Act.

Lessons for employers

This case is a reminder to employers that the terms of a modern award will continue to apply to an employee unless a guarantee of annual earnings which complies with the requirements of the FW Act is accepted by the employee.

Pecuniary penalties will apply where an employer has contravened a term of the Award which applies to an employee, notwithstanding that they are paid an annual salary above the high income threshold.

Information provided in this blog 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 blog, or from links on this website to any external website. Where applicable, liability is limited by a scheme approved under Professional Standards Legislation.

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