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Navigating the complicated maze of workplace modern awards and the industrial relations landscape can be challenging. Some recent high profile wage underpayment cases have shone a spotlight on whether additional safeguards are required so as to ensure that salaried employees are sufficiently protected and remunerated.

As part of the 4-yearly review of modern awards, the Fair Work Commission (FWC) has recently issued determinations to vary a number of modern awards to include a model annualised salary clause. These clauses effectively enable a covered employer to pay employees an annualised salary in satisfaction of other modern award entitlements, including allowances and overtime.

While most of the affected modern awards already include an annualised wage provision, the new clauses (which have replaced the existing arrangements) impose more prescriptive obligations on employers, including in relation to time-recording requirements (i.e. keeping records of employees’ start and finish times, and any unpaid breaks taken and providing such records to employees for signing each pay period or roster cycle).

Annualised salaries are often insufficient to cover excessive overtime hours, which means the employee may be underpaid if they work significantly longer hours than planned. The changes to annualised wage arrangements are directed at ensuring that an employee’s salary is sufficient enough to offset against other award entitlements such as the overtime that they would have been entitled to if they had not received a salary.

Having legally effective offset clauses is also of particular importance in the current COVID-19 environment, when many employees have been working from home. This has not only changed ‘where’ work is performed, but ‘when’. Employees who are managing childcare arrangements (including for school-aged children) will likely be working non-traditional hours, such as late nights and weekends. While a number of modern awards have been temporarily varied to address this issue, under other awards work during these hours will strictly create an entitlement to penalty rates and overtime. Employers will not only need to ensure they have appropriate policies in place to manage such changes, but also that the salaries paid have a sufficient ‘buffer’ to offset against these potential award entitlements.

The new annualised salary clauses had an operative date of 1 March 2020, and have been introduced to a number of modern awards, including the Banking, Finance and Insurance Industry Award 2020 and the Clerks – Private Sector Award 2010.

Application

Will the new annualised wage arrangements automatically apply to all employers covered by a relevant modern award?

Based on public commentary, there appears to be some uncertainty regarding the proper application of the new annualised salary clauses, and whether the new arrangements automatically apply to all employers covered by the relevant modern awards. Navigating whether employers need to comply with these arrangements will depend on the particular annualised wage arrangements and an employer’s particular circumstances.

For example, in some cases, written agreement (and consent) between an affected employer and employee will be required in order for the annualised wage arrangements to apply.

In other cases where no written agreement is required (such as under the Clerks – Private Sector Award 2010), it appears that the FWC’s position is that the new annualised wage arrangements will not apply where an annualised wage is paid under an “offset” or “set-off” clause in a common law contract of employment, and the parties have not agreed to an arrangement under an annualised wage clause in a modern award.

This particular issue has not yet been considered by a Court, and it is therefore possible the annualised wage arrangements will be interpreted more broadly, for example that the new record-keeping requirements still apply, even if an employee is employed under a common law contract of employment that includes an offset clause.

Employers who do not rely on such contractual arrangements to pay annual salaries will be required to comply with any applicable annualised wage arrangements.

Preparation

What should I do about the 1 March 2020 changes if my business uses contractual offset clauses?

As set out above, based on the FWC’s decisions, affected employers who rely on effective contractual offset clauses are not necessarily required to comply with the record-keeping requirements under the new annualised wage arrangements. That said, employers will ultimately need to take a ‘wait and see’ approach as to whether Courts or Tribunals take a different approach now as to how offset clauses are drafted, in light of the new annualised wage arrangements.

In the meantime, we recommend that, as a minimum, employers review their contractual offset clauses to determine whether they are likely to be effective. For an offset clause to be legally effective, it needs to be drafted to ensure that there is a ‘close correlation’ with the relevant modern award terms. This may include, for example, expressly referring to the award terms that are offset and clarifying that the offset clause is not an annualised wage arrangement under the relevant modern award.

Record keeping

How should my business manage record-keeping requirements?

It is important to note that, for all employers, record-keeping obligations exist outside of these new annualised wage arrangements.

Employers who use offset clauses will need to know, and be able to establish, the number of ordinary hours and overtime hours an employee is required to work, in order to determine whether the salary paid is sufficient to offset against any award entitlements. This is currently the case under the existing record-keeping requirements in the Fair Work Act 2009 and have not changed after 1 March 2020.

For affected employers who do not use contractual offset clauses (or for those who wish to take a conservative approach and apply the new time-recording arrangements even if not strictly required), there are a number of options available to manage the time-recording requirements in the new annualised wage arrangements, ranging from full and direct compliance (which would likely involve introducing some form of technology) to more ‘passive’ options, that are still consistent with the new requirements.

What's next?

Future guidance from Courts and Tribunals will help to clarify the annualised wage arrangement position for those employees who have a contractual offset clause, and the proper interpretation of the new annualised wage arrangements.

Additionally, there is likely to be further legislative change in this area, with the Commonwealth Government currently consulting on a number of proposed reforms, including:

  • criminal offences for serious underpayment contraventions
  • director disqualification orders, adverse publicity orders and banning orders
  • establishing a more streamlined Court or Tribunal small claims process to deal with underpayment claims.

It will take some time to navigate how the new annualised wage arrangements (and any subsequent legislative changes) interrelate with the current system in place.

For the moment, we recommend that you seek professional advice on your payroll compliance position.