The Fair Work Commission recently made a decision which will change annualised salary provisions under 22 modern awards from 1 March 2020 onwards. If an applicable award covers your employees, your obligations for paying employee salaries are going to change. This article will explain the fundamental changes and outline the steps you should take to ensure you are paying your employees correctly.

What Are the Current Laws on Annualised Salaries?

Several awards allow annualised salary arrangements. Here, you can pay a fixed annual wage excluding other award entitlements which you would otherwise have to pay, including:

The rules about paying employees an annual salary vary from award to award. However, most existing annualised salary provisions are relatively simple to apply and provide flexibility when managing your employee’s remuneration arrangements.

How Will the Rules Change?

From 1 March 2020, if you pay employees with an annual salary, you will have additional obligations regarding:

  • record keeping;
  • pay entitlements; and 
  • notifying or agreeing the employee’s salary.

The following modern awards will be amended to include model clause one (explained further below):

  • 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.

The following modern awards will be amended to include model clause three (explained further below):

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

Full-time employees under these awards will be subject to these new rule changes. These changes will not impact part-time and casual employees.

What Are the Model Clauses?

The Fair Work Commission plans to introduce two variations of model clauses into the aforementioned awards, which it refers to as:

  • model clause one; and
  • model clause three

While these model clauses differ slightly, several significant changes arise regarding both clauses. 

Written Records

Both model clauses require you to keep a written record of:

  • the annualised salary you pay; and
  • which provisions of the award you satisfy by paying the annualised salary.

This record must identify the method you use to you calculate the annualised salary. This should include specifying each separate component of the annualised salary and any overtime or penalty assumptions you used in the calculation. The record must also specify the number of:

  • ordinary hours that would attract the payment of a penalty rate under the award; and
  • overtime hours which the employee may have to work without being entitled to any additional loading.

Any hours your employees work exceeding these limits will not be covered by the annualised salary. Here, you will need to pay overtime entitlements in addition to the annualised salary.

The model clauses also require employers to keep a written record of the start and finish times, including any unpaid breaks that employees take. During each pay period, the employee must sign this record or acknowledge in writing that it is correct.

Auditing

The model clauses require you to conduct an audit either:

  • every 12 months from the commencement of the annualised salary arrangement; or
  • upon the termination of someone’s employment.

This audit must calculate the amount of remuneration that you would pay to the employee under the award, in comparison to their annualised salary. If the amount payable is more than the annualised salary, you must pay the difference to your employee within 14 days.

Differences Between the Clauses

The key difference between the model clauses is that model clause three only permits annualised salaries when a written agreement between you and the employee is in place. You must provide a copy of the agreement to the employee and keep a copy for your records. Furthermore, the annualised salary arrangement can be terminated either by:

  • a mutual written agreement between the parties, at any time; or
  • either party providing written notice 12 months before the arrangement ceasing to operate.

All other provisions of model clause three are the same as those prescribed by model clause one.

How This Affects Employers

Overall, these changes will create more burdens to ensure you pay your employees in accordance with their award. Many employers may find the new annualised salary arrangements difficult to implement and time-consuming to manage. 

However, if you fail to comply with the terms of a modern award annualised wage clause, you could face the risk of underpayment claims and severe penalties for breaches of the modern award.

Next Steps for Employers

In preparation for these changes taking effect in March 2020, employers should:

  • confirm whether any award captures your employees;
  • check whether some or all of your employees are captured by an award listed above; and
  • consider whether you would like to pay them an annualised salary or pay their entitlements each pay period if an award covers them.

If you plan to offer an annualised salary, you should:

  • ensure the annualised salary satisfies any amount you owe under the award; and
  • prepare a notification or agreement you can send to each employee which sets out the terms above.

You should also review your payroll system to ensure it is suitable to meet your new record keeping requirements, including:

  • recording employees’ starting and finishing times;
  • having employees sign a record of their starting and finishing time at the close of each pay period or roster cycle;
  • paying additional overtime or penalty rates outside those specified in the notification or agreement; and
  • paying employees the difference between the amount payable under the award and the annualised salary.

Key Takeaways

As an employer, you must take steps to ensure you are compliant with the annualised salary provisions that will apply to your business from 1 March 2020. This will mean taking steps to ensure that your payroll system and record keeping procedures are up to date. If you have any questions about how these changes to annualised salaries may affect your business, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

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Nathalie King
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