Are you ready for the new annualised salary arrangements taking effect from 1 March 2020?

Published 31 January 2020

In this edition of our newsletter, we take a look at which modern awards are affected by the new annualised salary obligations and the potential operational impact on employers.

Under the four yearly review of modern awards, the Fair Work Commission (the FWC)  has rendered a decision last July that finalised the review of annualised salary arrangement clauses for certain categories of modern awards. The new obligations will take effect from 1 March 2020 and may have a significant operational impact on employers who pay annualised salaries to employees covered by these modern awards.

What is an annualised salary arrangement?

At common law, it has always been possible to pay modern award covered employees a set ‘salary’ amount each pay period, and to use an ‘offset’ clause in their contract to ensure that any overpayment made during that period be used to satisfy any financial entitlement arising under the Modern Award, including allowances, overtime penalty rates, weekend and other penalty rates, and annual leave loading. It has not been necessary to have the benefit of an annual salary clause to do this.  However, at common law, such an arrangement will only be effective (and lawful) if the total amount paid to the employee each pay period (being each week, fortnight or month as the case may be) is sufficient to satisfy those financial entitlements.  Under the modern award, an overpayment in one pay period, cannot be used to offset an underpayment in another period.

Many of the Modern Awards currently have an annual salary provision which allows employers to go one step further, providing employers the option to ‘annualise’ an employee’s salary.  These clauses impose certain formalities in how the arrangement is made, which include appropriate safeguards ensuring individual employees are not disadvantaged and that the annual salary is not less than the minimum entitlements an employee will be entitled to under an award over the relevant annual period. So long as these formalities are strictly complied with, an employer may use the entire annual salary to offset any financial entitlements arising under the Award for the relevant year, rather than needing to ensure the entitlements are met for each individual pay period.

There are 19 modern awards that currently contain an annualised salary arrangement clause.

The changes introduced on 1 March 2020, have significantly increased the formalities required by the employer.

What awards are affected by the new obligations?

The FWC has set out variant model clauses, which will replace the existing annualised salary clause contained in 19 modern awards, and will be added into three modern awards that did not contain such clauses before.

Model Clause 1 will become the standard annualised wage arrangements clause for awards  under which employees generally work relatively stable hours, namely the:

  • 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; and
  • Wool Storage, Sampling and Testing Award 2010.

Model Clause 3 will become the standard annualised wage arrangements clause for awards under which employees work highly variable hours or significant ordinary hours which attract penalty rates under the award, namely the:

  • 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; and
  • Horticultural Award 2010.

The FWC has deferred the insertion of:

  • Model Clause 3 in the Health Professionals and Support Services Award 2010 for supervisory and managerial staff; and
  • Model Clause 4 in the Restaurant Industry Award 2010, the Marine Towage Award 2010 and the Hospitality Industry (General) Award 2010 in respect of non-managerial staff,

as it further considers these changes. A new operative date for these changes will be determined later.

What are the new requirements for annualised salary arrangements?

As mentioned above, only Model Clause 1 and Model Clause 3 will be implemented on 1 March 2020.

The key difference between the two clauses is that Model Clause 1 does not require the agreement of an employee to enter into an annualised salary arrangement whereas Model Clause 3 requires such an agreement. Model Clause 3 allows to terminate the arrangement  by mutual agreement between the parties or by either party giving 12 months’ written notice.

Under both clauses, the employer must notify a full-time employee in writing of:

  • the annualised salary that is payable;
  • the award provisions which are satisfied by payment of the annualised salary;
  • the method of calculation of the annualised salary, including specification of each separate component of the annualised salary and any overtime or penalty assumptions used in the calculation;
  • the outer limit number of ordinary hours that would attract the payment of a penalty rate under the award; and
  • the outer limit number of overtime hours which an employee may be required to work without being entitled to an amount above the annualised salary.

If an employee works any hours over the outer limit amounts specified above, such hours must be separately paid in accordance with the provisions of the applicable award.

The clauses aim to ensure that the annualised wage arrangement will not disadvantage employees by providing that:

  • Annualised Salary not to Disadvantage Employees: The annualised salary is not less than the amount the employee would have received under the award for the work performed over the year;
  • Annual Reconciliation Requirement: Every 12 months from the commencement of the arrangement or upon termination of employment, the employer must calculate the amount of remuneration that would have been paid to the employee under the provisions of the award and compare it to the amount of the annualised salary actually paid to the employee. If there is any shortfall, the employer must pay the outstanding amount within 14 days.
  • Record-Keeping Requirement: The employer must keep a record of the start and finish times of work, and any unpaid breaks, of each employee subject to an annualised salary arrangement in order to complete the reconciliation requirement. This record must be signed, or acknowledged as correct by the employee, each pay period or roster cycle.

What are the consequences for employers?

The new obligations contain a range of protections intended to protect against any employee disadvantage. However, these obligations will increase the administrative burden for employers paying annualised salaries to employees covered by modern awards containing an annualised salary arrangement. Employers must take extra steps to ensure they comply with the new notification, record-keeping and reconciliation requirements by 1 March 2020. For example, they should put in place a system which records the start and finish time of work, unpaid breaks, and overtime hours for each pay period for each of the covered employees. If employers fail to comply with the new requirements, they will face the risk of underpayment claims and potential penalties for breach of the modern awards.

To minimise this risk, employers should ensure that:

  • they know the modern award and classifications that apply to their employees;
  • the annualised salary arrangement complies with the new requirements contained in the applicable award; and
  • the annualised salary is sufficient to compensate for the hours effectively worked by an employee.

If you are unsure of how these new obligations will impact your business,  need information on which modern award applies to your employees, or how to comply with the reconciliation requirement, please contact us.

Olexo Workplace Law has also recently launched a new payroll reconciliation system, which is now available for our clients who need assistance with any of the issues set out above.  Please visit our reconciliation tool website for more information.

This content is general in nature and provides a summary of the issues covered. It is not intended to be, nor should it be relied upon, as legal or professional advice for specific employment situations.

Olexo Workplace Law recommends that specialist legal advice should be sought about specific legal issues.