New annualised salary obligations

What are these new obligations and when do they start?

New annualised salary provisions come into effect in a number of Modern Awards from the first full pay period on or after 1 March 2020. It is therefore important for employers to take stock now and check their annualised salary arrangements for full-time employees, to ensure compliance.

These new requirements impact a number of Modern Awards, including the Clerks (Private Sector) Award 2010, the Banking, Finance and Insurance Award 2010, the Legal Services Award 2010, as well as a number of other Modern Awards. For the full list of impacted Modern Awards, see the website of the Fair Work Ombudsman, click here.

For full-time employees on annualised salary arrangements covered by one of the impacted Modern Awards, employers can still continue to pay annualised salaries, however, you will need to ensure that the arrangements adequately compensate employees for their minimum Modern Award entitlements.

What steps do Employers need to take?

1. Firstly, employers need to have a clear understanding about what Modern Awards cover their business and employees, and ensure you have your employees classified correctly.

2. You need to be clear about the entitlements that are included in any annualised salary arrangements in line with relevant Modern Award, such as minimum wages, allowances, overtime, penalty rates and/or loadings, such as annual leave loading.

3. Employers then need to ensure that the annualised salary they are paying is actually sufficient to cover those Modern Award entitlements. Remember that an annualised salary cannot be less than what an employee would have otherwise been paid over the year under the relevant Modern Award. To ensure this, employers must therefore conduct calculations to determine whether an annualised salary has been set at the appropriate level to properly compensate an employee for the Modern Award entitlements that are included in the annualised salary. Employers cannot just 'set and forget' or just pay 'above Award'. This will not be enough to ensure compliance.

4. Whilst an annualised salary arrangement can include amounts for overtime and/or penalty rates, this is not unlimited, so you will now also need to set 'outer limits' for overtime and/or penalty rates that will operate per pay period. If an employee then works in excess of those 'outer limits' during a pay period, they will be entitled to be paid at the Modern Award overtime or penalty rate for those hours, in addition to their normal salary for that pay period.

5. Enter into a written annualised salary arrangement, in accordance with the provisions of the relevant Modern Award.

6. Keep accurate time and wages records, including start and finish times, as well as breaks taken by employees. These should be completed and signed off by employees each pay period, then checked and retained by the Employer. Employers should retain time and wages records for all Modern Award covered employees, not just those covered by the Modern Awards containing these new obligations.

7. Conduct 12 monthly reconciliations, as well as when an employee's employment comes to an end. Employers need to ensure that employees paid under an annualised salary arrangement have been paid at least what they would have otherwise been paid under the relevant Modern Award for their actual hours worked. If a shortfall has been identified, this must be paid to the employee within 14 days.

8. Actively keep up to date with the Modern Awards covering your business and employees, and remember that the minimum rates in Modern Awards increase from the first full pay period on or after 1 July each year, so conduct annual salary reviews to ensure you are paying at least minimum rates of pay and entitlements.

The new annualised salary requirements under each impacted Modern Award are slightly different, so employers should have specific regard to the relevant Modern Award terms for each annualised salary arrangement in place.

Overall, it will be critical for employers to have a clear understanding of the Modern Awards covering their employees, properly classify employees and conduct calculations to set annualised salaries, or obtain advice on the appropriateness of other arrangements, such as contractual offsets, individual flexibility arrangements or guarantees of annual earnings.

Employers need to have the correct arrangements and practices in place going forward to minimise the risk of underpayments and non-compliance. Even if you have annual salary arrangements in place, you still need to take the above steps to reduce the risk of non-compliance. As we know, failure to comply with the terms of a relevant Modern Award can result in significant damage to a business and its reputation, potential prosecution, and monetary penalties, costs and interest can be imposed as a result of any underpayments or non-compliance.

It is also timely for employers to check that part-time and casual employees, although not covered by the new annualised salary changes, are also being paid in accordance with the relevant Modern Award as well, and that contractor engagements do not fall foul of the sham contracting provisions in the Fair Work Act 2009 (Cth), particularly given the Attorney-General has recently released two discussion papers concerning the imposition of stronger penalties for Fair Work non-compliance and non-payment of wages, including criminal sanctions.

If you need advice or assistance to understand and implement these changes, understand your options and to make sure you implement the correct compliance steps, contact IR Legal Solutions.