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Changes to Annualised Salaries under Modern Awards: A Short Guide
From 1 March 2020, changes to the annualised salary provisions in a number of modern awards will impose more onerous administrative requirements on employers with respect to award-covered salaried employees.
This change was the result of a decision of the Fair Work Commission (FWC) ([2019] FWCFC 4368]) (Decision) as part of its four yearly review of modern awards. This article sets out, in general terms, the steps employers will need to take to prepare for these changes. (It is imperative, however, that employers seek bespoke advice on how these changes will affect their specific employment arrangements. This is intended to be a brief, introductory guide.)
What are annualised salaries?
Many modern awards contain an ‘annualised salary’ clause, conferring upon employers the ability to pay to award-covered employees an annualised salary, being a fixed, ‘all inclusive’ salary, covering various entitlements such as weekly pay, allowances, overtime rates, other penalty rates and annual leave loading. Annualised salary provisions have traditionally given employers a simple and administratively efficient option with respect to structuring their employee’s remuneration.
What are the important changes?
Nineteen modern awards will be impacted by the changes made by the FWC to annualised salary provisions, including the Banking, Finance and Insurance Award 2010, Clerks – Private Sector Award 2010, Hospitality Industry (General) Award 2010 and Manufacturing and Associated Industries and Occupations Award 2010. A further three awards, including the Health Professionals and Support Services Award 2010, will have annualised salary provisions inserted where one previously did not exist.
Notably, the FWC has developed several model clauses which will apply to the affected awards. Subtle differences exist between these clauses. For example, some model clauses require employees to agree to an annualised salary arrangement, whereas, others do not. It is important employers are aware of which clause has been inserted into the modern awards that apply to their workforce so these nuances can be properly addressed.
The main changes to the annualised salary provisions, largely common between the model clauses, include:
- keeping accurate written records of the annualised salary arrangement, the provisions of the award satisfied by the annualised salary arrangement and, in some instances, the method used to calculate the annualised salary;
- keeping written records of the employee’s starting and finishing times of work, and any unpaid breaks taken, to be acknowledged as accurate by the employee;
- recording the “outer limit” number of ordinary hours which would attract award penalty rates, and the “outer limit” number of overtime hours which the employee may be reasonably required to work in a pay period or roster cycle which would be adequately remunerated by the annualised salary; and
- where an employee works in excess of the ‘outer limit’ hours above, paying that employee an additional amount to accurately compensate for the additional hours worked.
- implementing new procedures to record employee’s start, finish and break times;
- calculation of “outer limit” number of ordinary and overtime hours;
- ensuring employees sign a record of these times with each pay cycle; and
- providing additional remuneration to any employees whose hours are in excess of what is now covered by the annualised salary arrangement.
It is fair to say that some of these obligations, particularly in relation to record keeping, somewhat defeat the rationale for employers adopting annualised salary arrangements, which is to provide certainty and administrative simplicity.
What do employers need to do?
It is important employers are aware of which clause applies to their award-covered employees prior to the changes being implemented on 1 March 2020.
Employers affected by these changes may need to alter their administrative and payroll procedures to ensure that they are compliant with the new award requirements. This may include, for example:
- implementing new procedures to record employee’s start, finish and break times;
- calculation of “outer limit” number of ordinary and overtime hours;
- ensuring employees sign a record of these times with each pay cycle; and
- providing additional remuneration to any employees whose hours are in excess of what is now covered by the annualised salary arrangement.
It is also important that employers ensure they review the changes to the annualised salary provisions against any similar arrangement set out in existing or prospective contracts of employment. The Decision does, however, keep open the possibility of continuing to use common law contractual set-off clauses.
A number of recent underpayment scandals covered in extensively in the media have arisen from the misuse of annualised salaries for employees covered by modern awards. The possibility of back payments, penalties and public opprobrium make this an important issue for employers to get right.