The Background

In 2019, as part of its four-yearly review of modern awards, the FWC proposed the inclusion of a series of model salary annualisation clauses for several modern awards (such as the Clerks – Private Sector Award and the Banking, Finance and Insurance Award) and this clause was incorporated into these Awards in December 2019. The purpose of this change was to introduce several notifications, recordkeeping and wage reconciliation obligations on employers who pay annualised salaries to their award-covered employees.

With effect from 1 March 2020, the FWC will introduce three new standard ‘annualised wage arrangement’ clauses which will replace the existing annualised salary clauses in the modern awards already containing such a clause and also be included in a number of modern awards which have not previously had an annualised salary clause.

The modern awards which will be impacted by the decisions are listed in the three Award Lists below, and include some modern awards with the most widespread coverage, including the Clerks – Private Sector Award 2010, the Manufacturing and Associated Industries and Occupations Award 2010 and the Banking, Finance and Insurance Industry Award 2010.  The impacted Awards will be revised and released prior to the effective date (the FWC has not yet confirmed the timing).

It is common practice for employers to pay an “all-inclusive” annualised salary which is intended to compensate or ‘set-off’ modern award monetary entitlements in relation to the performance of work, base wages, overtime rates, penalty rates and loadings. The alternative is for employers to pay wages and other monetary entitlements separately as and when they become due.  However, for employers with employees receiving an annualised salary, who are also covered by a modern award containing an annualised salary clause, the key issue will be whether the new modern award clauses will impact on their annualised salary arrangements.

What this means for employers

There are significant new obligations for employers under the three new modern award annualised wage terms, with the following three differences between the standard clauses:

  1. The requirement for employee agreement to an annualised salary arrangement. Under some modern awards (Award List 2 and 3 below), employee agreement will be required; under others (Award List 1), an employer may implement an annualised salary arrangement without employee agreement.
  2. The method by which employers calculate an annualised salary. Under Award Lists 1 and 2 below, the employer may calculate the annualised wage, but the wage must be calculated by reference to specified assumptions regarding the overtime and/or other penalty rates which the employee may be required to work and specify the ‘outer limits’ of ordinary hours and overtime hours that are satisfied by the annualised wage.
  3. For List 3 (below), these modern awards will require that the annualised wage must be a minimum percentage (as identified in those awards) in addition to the minimum weekly wage. The clause for Award List 3 will also specify the ‘outer limits’ of ordinary and overtime hours that will be satisfied by the annualised wage.

The new obligations which are similar across the three new standard ‘annualised wage arrangement’ clauses are the requirements for employers to:

  • record in an annualised wage agreement/arrangement (whichever is required) the provisions of the award which are satisfied by the annualised wage, and in the case of the modern awards in Lists 1 and 2 below, record the method by which the annualised wage has been calculated. This may include specifying each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation of the annualised wage.
  • record in the annualised wage agreement/arrangement (whichever is required), the ‘outer limits’ on the number of overtime hours or other penalty-rate hours which are to be taken as paid for by the annualised wage arrangement.
  • pay an employee (in addition to the annualised wage) for any hours worked which exceed those ‘outer limits’ in accordance with the applicable provisions of the modern award (i.e., overtime and penalty rates). These additional payments must be paid in the relevant pay cycle for the hours worked.
  • keep records of the start times and unpaid breaks for each employee and have employees sign, or acknowledge as accurate, that record in each pay cycle or roster cycle.
  • each 12 months from the commencement of the annualised wage arrangement or on termination of employment, calculate the amount which would have been payable to the employee under the modern award and compare this against the annualised wage arrangement. If a shortfall is identified, employers must rectify any shortfall within 14 days.

 The risks and how to minimise them

Where a modern award applies, and where the modern award includes an annualised wage clause, a concern for employers is whether their annualised salary arrangements comply with the terms of the modern award.

Where an employer fails to comply with the terms of a modern award annualised wage clause, and particularly where an annualised salary is not sufficient to compensate for hours actually worked by an employee, employers will be exposed to the risk of underpayment claims and potential penalties for breaches of the modern award. There have been may cases in the media over the past 12 months resulting from just this issue, exposing the business to considerable penalties from the FWC.

To minimise the risks associated with annualised salary arrangements, employers should consider the following:

  • Are you aware of the modern awards that apply to employees and the correct classifications for each employee as these will impact the calculation of an appropriate annualised wage?
  • Can your business comply with the requirements of the new clause/s with respect to employees who are covered by the impacted modern awards? For example, employers should ensure they have systems in place which allow recording of start, finish times and breaks, and ensure that any hours performed outside the ‘outer limits’ will be remunerated in addition to the annualised wage arrangement.
  • Are all annualised wage arrangements consistent with the terms of the modern awards that apply to employees, including the obligations to conduct reconciliations on an annual basis or on the termination of employment?
  • Can you identify and rectify any deficiencies in annualised salary arrangements promptly and in accordance with the terms of any applicable modern award?

Taking the time to conduct a review on whether your business is equipped to undertake these requirements is crucial to a successful transition and compliance.

 Modern award list

The three new annualised wage clauses will be added to or replace the existing annualised salary clauses in a number of modern awards.  Download the list of modern awards to check whether how changes impact your business.

You can also obtain further details from the Fair Work Ombudsman website at https://www.fairwork.gov.au/contact-us/offices/victoria