11 March 2020
This article was first published in the March 2020 edition of the Law Society of NSW Journal.
In employment circles, 2019 was the year of the underpayment. We witnessed a regular stream of underpayment claims affecting some of Australia’s most high profile employers – from iconic Australian brands and large employers through to celebrity chefs.
The ensuing examination of the apparent increase in underpayment claims often pointed to the complexity of Australia’s workplace relations system. Modern awards were seen as the main culprit. They apply to different occupations and industries, and contain different wages for different employees, ordinary hours and hence overtime provisions, penalty rates, loadings and allowances.
For many employers to whom an award applied, the simplest way to deal with the different award obligations was to pay an annualised salary expressed to compensate for the award entitlements that may arise.
From an employer’s perspective, paying a predetermined amount annually to compensate for these irregular entitlements has the perceived benefit of administrative ease, and was seen by many to support a modern flexible working culture free from ‘clock watching’.
From an employee’s perspective there were also benefits. An annualised salary was meant to pay more than the minimum under the award, typically with a ‘surplus’ or ‘buffer’. A predetermined annual salary also provides an employee with income stability where hours of work fluctuate.
In this context, and as part of its four-yearly review of modern awards, the Fair Work Commission (‘FWC’) has updated, and in some cases introduced, new clauses relating to annualised salaries – now called ‘annualised wage arrangements’ – to provide greater certainty and accountability to the annualised salary provisions of modern awards.
These changes, which take effect on 1 March 2020, will initially impact 22 modern awards including awards such as the Clerks – Private Sector Award 2010 that covers a wide range of clerical, administrative and office staff; the Banking, Finance and Insurance Industry Award 2010 that covers clerical, office and middle management staff in the banking, finance and insurance industry; and the Legal Services Award 2010 that covers clerks, graduates and clerical employees in the legal services industry.
The changes have resulted in a significant divergence of views as to what steps, if any, need to be taken by employers to whom these awards apply. The changes will not affect employers and employees covered by an enterprise agreement or who have entered into a Guarantee of Annual Earnings or an Individual Flexibility Agreement that varied relevant terms.
The Fair Work Act 2009 (Cth) (‘FW Act’) provides that modern awards may include terms about ‘annualised wage arrangements’. In its review of modern awards, the Full Bench of the FWC acknowledged the benefits of annualised salaries, but also the need for improved safeguards to ensure employees received more under the salary than they would have otherwise under the applicable award.
The FWC considered the use of ‘annualised wage arrangements’ should be guided by the following principles:
Applying these principles, the Full Bench embraced the language of the FW Act and drafted four model clauses to replace the existing ‘annualised salary’ clause.
The model clauses have prescriptive requirements for the identification of payments covered by the annualised wage, together with detailed record and reconciliation obligations. Each of the four model clauses have the following key features:
The model clauses differed on the requirement for agreement to pay an ‘annualised wage arrangement’ and requirements for employees to sign off the records of their hours in a given pay period.
A common element of an ‘annualised wage arrangement’ made under an award is that, properly implemented, it extinguishes certain award entitlements to minimum wages, overtime penalty rates, allowances and loadings. Since these entitlements were no longer payable, the Full Bench observed that it is likely the record keeping obligations relating to these matters under the FW Regulations would not apply. As a consequence, the clause providing for ‘annualised wage arrangements’ itself included record keeping requirements and additional safeguards to ensure that the amount paid under the annualised wage arrangement fully compensates for the entitlements it extinguishes.
Despite the clear similarity in language and concept, the Full Bench of the FWC has made clear that the incoming changes are not intended to remove the ability for an employer to pay an employee a salary under a common law contract to offset or ‘buy out’ entitlements under a modern award (see Annualised Wage Arrangements  FWCFB 154 at ; 4 Yearly Review of Modern Awards – Annualised Wage Arrangements  FWCFB 4368 at  and ); 4 Yearly Review of Modern Awards – Annualised Wage Arrangements  FWCFB 8583 at ) .
In the eyes of the Full Bench, a salary paid under a common law contract to compensate or pay for entitlements that remain payable under a modern award continues to be an option for employers, and is separate from the ‘annualised wage arrangement’ model in a modern award. In its 2019 four-yearly review, the Full Bench stated:
“[E]mployers may, pursuant to private contractual arrangements, pay employees in accordance with a salary arrangement that compensates for or ‘buys out’ identified award entitlements without engaging with the annualised wage arrangements provision in the applicable award” (at ).
The Full Bench did, however, identify the need for caution when using annualised salaries. Annualised salaries require a well drafted contractual set off clause that clearly identifies the nature of the award obligation that is being discharged by the payment of the annualised salary. This is because the underlying award entitlement is not extinguished, rather the salary paid is said to offset these entitlements. It is also generally accepted that an employer must satisfy the award payment obligation for each and every pay period in the award (see Lynch v Buckley Sawmills Pty Ltd (1984) 3 FCR 503 at ; see also James Turner Roofing Pty Limited v Peters (2003) WASCA 28 at ).
For these reasons, the Full Bench has described common law arrangements as ‘not entirely free from legal difficulty’ and expressed the view that an ‘annualised wages provision in a modern award [is] a more desirable and legally certain option’ (see Annualised Wage Arrangements  FWCFB 154 at ).
A further issue, which is not new, is that the FW Act and FW Regulations contain detailed record keeping obligations where an employee is entitled to be paid allowances, loadings, penalties and overtime. Under a typical common law annualised salary arrangement, these entitlements remain payable under the award as the contract cannot extinguish the entitlement. It is just that these entitlements which remain payable are, in fact, paid for by the salary.
As a consequence, under a common law annualised salary, it appears the record keeping obligations under the FW Act and FW Regulations for allowances, loadings, penalties and overtime remain, even though no additional or separately identifiable payment is made for them.
The implications of failing to keep the records required under the FW Regulations can be significant, including by engaging section 557C of the FW Act which places the burden on the employer to disprove allegations that they have breached the award.
The 1 March 2020 award changes have created significant discussion and a debate as to whether employers can rely just on common law set off or whether they are required to comply with the modern award annualised salary clause and its resulting obligations as well. After all, a common law set off annualised salary is a form of annualised wage arrangement, and so there is a legitimate concern that a court or regulator may consider the common law annualised salary is regulated by the ‘annual wage arrangement’ clause with its record keeping and reconciliation obligations, or risk an allegation of breaching the award.
The Full Bench of the FWC has, however, made clear its view that an annualised salary set off clause remains an option for an employer to use, and it is an option that is not regulated by the obligations in the new award ‘annualised wage arrangement’ clause. An annualised salary set off clause is a well-established and legally accepted means of compensating for specified award entitlements, and the award changes do not intend to disrupt these arrangements.
That is not to say nothing will change. There will be increased scrutiny on common law annualised salary set off clauses. At the outset, they need to be carefully drafted so the annual salary closely reflects the award obligation it purports to discharge. More fundamentally, it is not a ‘set and forget’ type arrangement. The salary must always be sufficient to cover the employee’s award obligation. Finally, and what is often missed, is that there must be a system in place to ensure that records are maintained in accordance with the FW Act and FW Regulations – including records of overtime worked, loadings, penalty rates and allowances – even though no additional or separately identifiable payment is made for such entitlements.
One thing is agreed – the adoption of annualised salaries (howsoever described) requires vigilance and ongoing work, including regular checks, for employers to demonstrate that they have discharged their award obligations. The administrative ease that was considered a feature of an annualised salary has just got a whole lot more difficult.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.