Legislation update

Modern Awards and ‘annualised wage’ arrangements in effect from 1 March 2020

By Andrew Tobin / 25 February 2020
13 min.
Worthwhile read for: HR Professional, Business Owner, Employer

The Fair Work Commission is in the process of finalising its decision to insert new model ‘annualised wage’ clauses into some modern awards as part of an ongoing review of awards. Most of these will take effect at the start of the first full pay period that starts on or after 1 March 2020.

Some employers are concerned by the prescriptive detail in the changes and about their practical ability to comply with them.

In this article, Workplace and Employment Partner, Andrew Tobin explains:

  • the concept of an annualised wage;
  • the modern awards affected; and
  • options for compliance.

What is an annualised wage?

Broadly, an annualised wage is a flat or fixed annual wage or salary, which the parties to an employment contract intend, as a term of the contract, to compensate the employee over the course of a year for all legal entitlements due to the employee in respect of their work and working arrangements during that year. Properly expressed it will apply to all manner of payment obligations legally imposed on the employer, usually by an applicable award e.g., for payment of minimum weekly wages, allowances, overtime, penalty rates, annual leave loading and so on.

Payment of a fixed annual salary or wage has been, and will remain, a legitimate way to comply with the payment obligations imposed by a modern award, provided that:

  • the annual salary paid is monetarily sufficient to cover all award entitlements that would have applied; 
  • the agreement (i.e., the employment contract) between the parties is effective to apply the annual salary to those entitlements; and
  • if challenged, the employer can prove both of those things.

Proof will be a function of the dollar value of the salary or wage paid; the terms of agreement between the parties in the employment contract and; demonstrated compliance with that agreement – in each case supported by appropriate record keeping. None of this is changing. 

Rather, the new award provisions offer one method (among several possibilities) by which, if followed, an employer might prove performance of the employer’s payment obligations under an applicable award. However, adherence to the detail of the new provisions is not required, if other evidence is available to show that the annual salary was both sufficient and legally effective (under a properly written employment agreement) to meet payment liabilities imposed by an award.

Compliance with awards generally

Compliance by employers with payment obligations imposed by awards, other industrial instruments, the Fair Work Act and related record keeping requirements is important. Non-compliance can lead to back-pay liabilities for up to six years, very significant civil penalties or fines, plus interest, legal and other costs, adverse publicity and reputational damage.

These are not theoretical risks confined to large employers publicly admitting to, or being accused of, ‘wage theft’ or endemic underpayment. In one very recent case decided in February 2020, a small business was fined $200,000 and its sole director a further $40,000, for underpaying a teenage employee approximately $8,000 and for failing to provide payslips (Boyson v Centre Court Care Pty Ltd & Anor [2020] FCCA 229).

Further, the Commonwealth Government is due imminently to introduce legislation to criminalise the most serious forms of worker exploitation with significant jail terms and fines, having already increased civil penalties. Additional legislative reforms are under consideration, including the prospect for directors of repeat corporate offenders to be disqualified from holding office.

Awards affected by new annualised wage arrangements

The immediately relevant model clauses take two forms, described in the relevant Fair Work Commission decisions as model clauses 1 and 3.

Model clause 1 (an example of which, from the Clerks – Private Sector Award, you can view here) will apply to the following awards, on the basis that the employees to whom these awards apply generally work stable hours:

  • Banking, Finance and Insurance Award 2010;
  • Clerks – Private Sector Award 2010;
  • Contract Call Centres Award 2010;
  • Hydrocarbons Industry (Upstream) Award 2010;
  • Legal Services Award 2010;
  • Mining Industry Award 2010;
  • Oil Refining and Manufacturing Award 2010 (clerical employees only);
  • Salt Industry Award 2010;
  • Telecommunications Services Award 2010;
  • Water Industry Award 2010; and
  • Wool Storage, Sampling and Testing Award 2010.

Model clause 3 (an example of which, from the Manufacturing and Associated Industries and Occupations Award you can view here) will apply to the following awards, on the basis that the employees to whom these awards apply can work highly variable hours or significant ordinary hours attracting penalty rates:

  • Broadcasting and Recorded Entertainment Award 2010;
  • Horticulture Award 2010;
  • Local Government Industry Award 2010;
  • Manufacturing and Associated Industries and Occupations Award 2010;
  • Oil Refining and Manufacturing Award 2010 (non-clerical employees);
  • Pastoral Award 2010;
  • Pharmacy Industry Award 2010; and
  • Rail Industry Award 2010.

The changes to all the awards list above will take effect from 1 March 2020. At the time of writing similar changes are being considered and are likely to follow in relation to the following further awards:

  • Health Professionals and Support Services Award 2010;
  • Hospitality Industry (General) Award 2010;
  • Restaurant Industry Award 2010; and
  • Marine Towage Award 2010.

Content of the new provisions

The following elements, for employers who choose to engage with them, are common to both model clauses:

  • they apply only to full-time employees;
  • the employees must be notified of the annual wage to be paid; the award provisions to be satisfied by it; the method by which it is calculated, including the number of ordinary hours that would usually attract a penalty payment; and the number of overtime hours which the employee is expect to work without additional payment (with hours worked outside those hours to be separately paid for, in addition, in accordance with the applicable award);
  • the annualised wage must be no less than what the employee would have been paid under the award over the year for which the wage is paid;
  • annually or upon termination of the employment, the employer must reconcile the annual wage paid with the award entitlements that were applicable and make up any shortfall within 14 days;
  • the employer must keep a detailed record of working hours, including of unpaid breaks taken, for the purposes of performing the annual reconciliation. Employees must sign off on that record as correct (electronic sign off is acceptable) each pay period or roster cycle.

Model 1, for an employer who chooses to engage with it, requires employees to whom an annualised wage is paid to be given a written notice of the various elements of the annualised wage to be paid.

Model 3, again, for an employer who chooses to engage with it, requires agreement between the parties about the matters described above, which the parties can terminate by further agreement at any time, or, upon 12 months’ written notice to the other.

Many employers are finding the prescriptive elements of the model clauses difficult to contemplate, particularly the requirement for sign-off by employees of their working hours over each pay period or roster cycle.

An alternative option – private contractual arrangements

As stated at the outset and contrary to what others have written elsewhere, compliance with annualised wage clauses in awards is not mandatory to allow an employer legitimately to pay an annualised wage or salary to satisfy award payment obligations. One alternative (others are mentioned below) is for the parties to agree, by the terms of an employment contract, that the wage or salary being paid ‘buys out’ all applicable payment entitlements.

For an employer contemplating that path, it is important to appreciate exactly what the Fair Work Commission has said on that subject in their decisions on 20 February 2018, 4 July 2019 and 23 December 2019, as follows (our emphases added):

‘Of course it is not necessary to have an annualised wage provision in a modern award in order for an employer to be able to pay an employee to whom the award applies an annualised salary that compensates for or “buys out” various identified award entitlements…In short, under a contract of employment the employer and employee may agree that the salary payable under the contract has the purpose of satisfying the obligation to pay identified award entitlements (such as, for example, base wages, overtime rates, shifts and weekend penalty rates, allowances and annual leave loading). The payment of salary pursuant to such a contract of employment may be relied upon by the employer as satisfying in part or whole any claim by the employee for under-payment of the identified award entitlements. However this means of paying an annualised wage to an employee to whom a modern award applies is not entirely free from legal difficulty. If there is a lack of a “close correlation between the nature of the contractual obligation and the nature of the award obligations”, then payment of the salary may not satisfy the relevant award entitlements. Further, the fact that an annual salary provided for in a contract of employment may, over the course of a year, equal or exceed identified award entitlements such as to discharge payment of them may, arguably, not amount to compliance with an award requirement that pay entitlements are required to be made to the employee within a specified pay period. Issues such as these may make the payment of a salary pursuant to an annualised wages provision in a modern award a more desirable and legally certain option. Annualised Wage Arrangements Decision [2018] FWCFB 154 at paragraph [102].

‘As we made clear in paragraph [102] of the 2018 decision, an employer is able to pay an employee to whom an award applies an annualised salary arrangement that compensates for or “buys out” various identified award entitlements without engaging with any annualised wage arrangement clause in that award and without there needing to be an annualised wage arrangement clause in that award…The model clauses do not seek to invalidate or regulate any such contractual arrangements.’ Annualised Wage Arrangements Decision [2019] FWCFB 4368 at paragraph [22].

‘We note, as stated in paragraph [22] of the July 2019 decision, that employers 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.’ Annualised Wage Arrangements Decision [2019] FWCB 8583.

What now?

There are no transitional arrangements for the incoming changes to the awards described above. They take effect at the start of the first full pay period that starts on or after 1 March 2020.

If, historically, you have effectively relied upon private contractual annualised salary or wage arrangements to satisfy your award payment obligations, there is no reason for that not to continue without radical changes to your systems and processes. In any event, it may not be straight forward to unscramble existing annualised wage arrangements, although in some cases some revision of historical contractual language may be required going forward. Subject to that possibility, if you were compliant before 1 March 2020, you should still be compliant after (but keeping in mind that underpayment claims can be pursued at any time within six years after an underpayment occurs).

In particular it does not follow that you need immediately to give notices of the kind referred to in model clause 1, or try to make agreements (try being the operative word – it takes two parties to agree) with employees to whom model clause 3 applies, or; start requiring employees to sign off on their hours at the end of each pay period or roster cycle.

However, given the very high level of attention that Governments, regulators and the community are now giving to compliance by employers with their wage payment obligations, more than ever, you do need to be sure that you are not underpaying your workers and, if required to do so, that you can prove it.

For some employers, going forward, that might look like moving to a system entirely consistent with the new model clauses. As indicated above, this is the ‘legally certain option’ in the case of awards that deal expressly with annualised wage arrangements, but the same can be said for awards without annualised wage arrangement clauses.

For others, it will involve the following activities:

  1. Identify the awards that apply to your workers.  
  2. Check that your existing salary and wage arrangements are sufficient to ‘buy out’ all applicable award entitlements, based on the actual working patterns of your workers. If you identify potential problems, seek urgent legal advice about how to approach resolving them.
  3. Ensure that you have systems and processes in place to properly record working hours, for later reference, as required. The detail of this will vary from workplace to workplace and possibly also between groups of workers and some individuals. Think how, if challenged, you will prove that the working arrangements you believe or are assuming to exist, actually exist. The sophistication of the answer will depend, largely, on the potential variability of actual work patterns, and, the extent to which the annual salary or wage exceeds the applicable award entitlements. As a general proposition, less prescription may do for workers remunerated far above award rates, and more if the annual salary or wage has been calculated within a tight margin. Either way, minimum statutory record keeping requirements apply for seven years. Failure to keep required records can have significant consequences, including a presumption of modern award breaches.
  4. Given the ‘legal difficulty’ to which the Fair Work Commission referred in their 2018 decision, if you are going to continue to rely on annualised wage or salary arrangements outside of the model award clauses, you need to check that the detail of that arrangement, as set out in applicable employment contracts, properly addresses the issues. Our view is that, in most situations, the ‘legal difficulty’ can be adequately addressed through proper drafting (in combination with the other measures listed here).
  5. Check your award wage modelling periodically, at least annually and more frequently if there are exceptions – at any level – to the (provable) assumptions of working patterns upon which your annual wage models are based. An unresolved issue is whether a legally compliant annual wage or salary needs to at least meet the award entitlements that would have applied per pay period, rather than across the full year. The best outcome is to ensure that the wage or salary is sufficient, per pay period, rather than on average across the full year, although our view is that some level of averaging, if necessary, can still be legally compliant (achieved through the drafting exercise mentioned above).

Other options

Other tools are also available to assist compliance. These include, where suitable or appropriate, the use of individual flexibility agreements, guarantees of annual earnings for high income earners, or enterprise agreements.

For further information or assistance, please contact our Workplace and Employment team.

Andrew Tobin
Andrew is a Partner and the head of HopgoodGanim Lawyers’ Workplace and Employment practice.
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