The Fair Work Commission has varied the annualised salary provisions of 16 modern awards and added annualised salary provisions to two other modern awards. The variations come into effect on 1 March 2020 with the new provisions to operate from the first full pay period on or after that date.

This link sets out the 18 modern awards that are affected as well as the new annual salary provisions in full.

This @Work examines the new modern award provisions and considers how they interact with set- off clauses in employment contracts. A set-off clause provides that an employee’s salary is paid in satisfaction of payments under an industrial instrument such as overtime, penalty rates etc. If you have any questions regarding your employment contract, please do not hesitate to contact our Employment Contract lawyers.

What do these changes mean?

The variations mean that an employer may pay an employee an annual salary in satisfaction of one or more specified entitlements under the 18 modern awards. For example, the specified entitlements in the Clerks Private Sector Award are:

• minimum weekly wages;
• allowances;
• overtime penalty rates;
• weekend and penalties (other than shiftworkers); and
• annual leave loading.

Employers should check which entitlements are specified in the modern award which applies to their employees.

Of the 18 modern awards:

• ten (including the Clerks Private Sector Award) provide that the employer may in its discretion pay an annualised salary without the need to obtain the employee’s consent;
• seven modern awards (including the Manufacturing and Associated Industries Award) provide that an annualised salary is subject to the employee’s agreement. A copy of the agreement must be provided to the employee and a copy kept by the employer; and
• the remaining modern award (Oil Refining and Manufacturing Award) contains both of the annualised salary options for clerical and non-clerical employees.

Calculating the annualised salary

The new clauses introduce safeguards for employees receiving annualised salaries under the annualised salary provisions of a modern award.

Where the modern award gives the employer the discretion, the employer must advise the employee in writing (and keep a written record) of the following:

• the annualised wage that is payable;
• which of the entitlements noted above apply will be satisfied by the annualised salary;
• how the employer has calculated the annualised salary.  This requires the employer to specify each component of the salary such as the minimum wage under the modern award and how much has been allowed to cover entitlements such as overtime and other penalty rates.  Any assumptions used in the calculation must also be specified; and
• when an employee would be entitled to be paid penalty rates under the modern award after working ordinary hours and how many overtime hours the employee can work without exceeding their annualised salary.  If an employee works beyond these hours in a pay period or roster cycle, the employee will be entitled to be paid for these hours in addition to their annualised salary.

The above provisions also apply under those modern awards that provide for annualised salaries by agreement of the employer and employer and must be included in the agreement implementing the annualised salary.

Auditing of annualised salaries

The new provisions require employers to audit an employee’s annualised salary every 12 months (or on termination of employment).  This requires a comparison of what the employee was paid under the annualised salary versus what they would have received if paid under the minimum provisions of the modern award.  Any shortfall must be paid by the employer within 14 days.

In order to conduct the audit, the modern award requires that a record be kept for each pay period or roster cycle. That record must be signed by the employee (or otherwise acknowledged as correct by the employee). The employer must keep a record of the following in respect of each annual salary recipient:

• the starting and finishing times of work; and
• any unpaid breaks taken.

Ending an annualised salary arrangement

Where a modern award provides for the implementation of an annualised salary by agreement, the modern award provides that the agreement may be terminated:

• at any time where the parties agree to terminate; or
• by either party with 12 months’ notice in writing.

There are no termination provisions specified for annualised salaries implemented at the employer’s discretion.

Set-off arrangements

Employers may continue to use or introduce set-off provisions in an employment contract for employees covered by any of the 18 modern awards. 

The Commission has made clear that an annualised salary may be implemented by using a set-off clause in an employment contract and that this does not need to be done using any annualised salary provisions in a modern award.  The Commission has also said that the new annualised salary provisions will not invalidate or regulate contractual set-off provisions.  This means the new obligations described above would not apply if the annualised salary is implemented by way of a set- off clause in an employment contract rather than under a modern award provision.

Accordingly, employers face a choice as to whether to continue to use or introduce a contractual set- off clause or the new modern award provisions when implementing an annualised salary.  Some employers will find the new award based obligations relating to the implementation, auditing and record keeping obligations to be onerous.  However, the new provisions provide employers with a clear path to compliance in respect of annualised salaries. 

If employers decide to use contractual set-off clauses, we recommend that those clauses and related procedures are reviewed to ensure that they minimise the risk of any underpayments for annualised salary recipients. 

What’s next?

The proposed annualised salary provisions in four other modern awards, Restaurant Industry Award, the Marine Towage Award, Restaurant Industry Award and the Health Professionals and Support Services Award are yet to be finalised by the Commission and will not start operating from 1 March 2020.