Paying employees a flat rate can seem appealing. However, you must pay employees for all of the hours they work. The rate of pay is dependent on a number of factors including:
- the national minimum wage;
- the applicable modern awards; and
- registered agreements.
The Fair Work Ombudsman (FWO) closely monitors employee rates to ensure you are paying your employees’ minimum entitlements. A flat rate of pay may be easier from a payroll and accounting perspective, especially if there are a large number of employees covered. However, there are a number of important considerations when determining if you should pay employees a flat rate in your business.
Reasons for Wanting to Pay Employees a Flat Rate
First, it is important to consider why you want to pay employees a flat rate. Different employment instruments set out penalty rates for overtime, weekends and public holidays, as well as allowances and loading.
Higher overall flat rates may encourage some employees to seek longer-term engagement with your business, decreasing staff turnover and ensuring your workforce is committed. Paying a higher flat rate may also be competitive in your industry and appeal to a broader talent pool.
Deciding to pay employees flat rates may also be easier to manage from a payroll and accounting perspective in the short term. However, if you are not adequately compensating your employees for the hours they work, you could face penalties from the FWO. As the minimum wage and modern award rates change, your business needs to be aware of all minimum entitlements and consistently ensure the flat rate of pay compensates for all allowances and penalties.
Determining how to legally pay employees a flat rate can be time-consuming and daunting. It is important to get the right information and advice. A good first step is having a structured payroll system in place which creates appropriate payslips and assists with record keeping. A good payroll system is vital to protecting your business and avoiding claims in the future.
Better Off Overall Test
To pay employees a flat rate, you will usually require a registered agreement or enterprise agreement. The Fair Work Commission (FWC) must approve such agreements before you can implement them. To be approved to pay employees a flat rate, you need to pass the better off overall test (BOOT).
The BOOT determines whether employees are better off under the new agreement than they would be under the relevant award. The FWC does not want protections contained in modern awards to be weakened under a registered or enterprise agreement.
You can also pay employees a flat rate through their own individual flexibility arrangement (IFA). You and the employee must agree to the flat rate. This IFA will also need to pass the BOOT, and ensure the employee is better off with the flat rate than they would be under their award.
You can offer your employees a higher rate of pay than the award, or add another incentive to a lower flat rate. You would need to highly incentivise a lower flat rate. The FWC is unlikely to approve a flat rate that is lower than what the award prescribes.
Flat Rates Are Not Always Cost-Effective
Although a flat rate may seem like a more cost-effective option, your flat rate needs to include all penalties and entitlements. You will also need to pay the applicable superannuation entitlements in addition to the hourly rate.
A flat hourly rate needs to pass the BOOT, and is usually included in a registered or enterprise agreement. The costs of entering into these agreements are significant. There are a number of stages to implement an enterprise agreement rate, including:
- bargaining and negotiation;
- drafting the proposed agreement;
- explanation of terms;
- notice of vote;
- vote to approve; and
- application to the FWC for approval.
If there are any amendments required after you submit the application to the FWC, this delays the process further.
A registered or enterprise agreement may be in place for up to four years. As a business, you need to consider whether this is the most appropriate employment structure. Although the agreement remains in force for a number of years, your flat rate may continue to fluctuate depending on changes to the modern award and the minimum wage each year. Therefore, even with an agreement in place to pay employees a flat rate, you will still need to monitor your compliance with the BOOT.
Making a Decision
If you want to pay employees a flat rate, there are many things to consider. Firstly, you need to understand the minimum rate you have to pay your employees. You can then determine whether the payroll and accounting benefits of a flat rate outweigh:
- the cost of the flat rate itself (taking into consideration penalty rates, overtime and allowances);
- the cost and length of the registered or enterprise agreement process; and
- the need to continue to monitor compliance.
If you want to pursue the flat rate process, you should discuss your proposal with your employees. Their agreement will make the process a lot smoother. If they reject your offer, you may be in breach of their employment agreements, modern awards and the national employment standards if you implement a flat rate anyway.
Paying employees a flat rate can seem appealing. However, you need to ensure you are meeting all minimum entitlements. If you would like to understand how you can potentially pay a flat rate, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.
Was this article helpful?
We appreciate your feedback – your submission has been successfully received.