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Given the rapidly changing employment landscape last year, it was easy for employers to forget that in March 2020, some modern awards were varied to include provisions relating to annualised wage arrangements.

We are now one year into the annualised wage provisions which, much to the dismay of many employers, look set to stay. In this special e-update, we provide a summary of the annualised salary provisions, outline the requirements for employers and what they should be doing already, and provide guidance to employers on how they can become compliant with the new award requirements.

How did we get here?

It is not uncommon for employers to remunerate employees by way of an annualised wage or an annualised salary. These annualised salaries were intended to compensate the employee for the minimum rates of pay and other award specific monetary entitlements, such as penalty rates for work performed outside of ordinary hours, overtime, allowances and loadings, that the employee would have otherwise been entitled to receive under the relevant award.

Employers were attracted to the administrative ease of annualised salaries as they generally meant that once the salary was set, employees were paid the same amount each pay period and ongoing significant payroll adjustment or review was not required.

As part of the review of modern awards conducted by the Fair Work Commission (the Commission), the issue of annualised wages and salaries arose. The Full Bench of the Commission concluded that clauses providing for annualised wage arrangements could be included in modern awards, but that safeguards were required to ensure that employees were not disadvantaged.

Accordingly, the Full Bench developed model annualised wage arrangements clauses which incorporate safeguards.

The model clauses require employers to:

• Pay a full-time employee or agree with a full-time employee an annualised wage which satisfies identified provisions of the award;

• Disclose methods of calculation of the annualised salary;

• Undertake time recording;

• Conduct annual reconciliation calculations or reconciliation on termination of employment; and

• Identify the “outer limits” of overtime and penalty hours to be worked under the arrangement.

In March 2020, 18 modern awards were varied by the Full Bench to include the model annualised wage arrangements clauses. These modern awards included the Clerks – Private Sector Award 2020, Manufacturing and Associated Industries and Occupations Award 2020, Banking, Finance and Insurance Award 2020 and the Pharmacy Industry Award 2020.

What are the requirements?

Generally, the annualised salary provisions in the awards require employers to advise or agree with the employee in writing:

• The salary that is payable;

• The provisions of the award that are satisfied by the salary;

• The method by which the salary was calculated, specifying each component and any assumptions used; and

• The outer limit of hours that the employee may be required to work that would attract a penalty or overtime in each roster cycle or pay period without an entitlement to additional pay.

A key feature are the safeguards to ensure that the annualised salary does not disadvantage employees. These safeguards require employers to record the time and attendance of employees and to conduct an annual reconciliation each 12 months from the commencement of the annualised salary or upon termination of employment comparing what the employee would have earned under the award to the annual salary paid. If the employee was not paid enough under the annualised salary, then the employer is to rectify the shortfall within 14 days.

Monitoring of work hours also allows employers to quickly detect when the outer limits of overtime and penalty hours compensated by the annual salary have been exceeded – in such case the employer should pay the employee any additional amounts owing as soon as possible, calculated in accordance with the award.

How can employers achieve compliance?

Affected employers should firstly determine if they currently use and wish to continue to use an annualised salary arrangement to remunerate employees.

Where an employer wishes to use the annualised salary arrangements, they should conduct a review of the annual salary paid to each employee.

In particular, employers should ensure that they understand the outer limits of overtime and penalty period hours that an employee may be required to work without additional payment beyond the salary. The annual salary review should calculate how many outer limits of overtime and penalty hours in a pay period or roster cycle the annual salary will compensate.

Once the employer is satisfied with the calculation of the annualised salary, the awards require employers to advise or agree with the employee in writing about their annualised salary and the calculations that have been used to come up with that salary amount, including the specific modern award components that make up the salary, and the outer limits of ordinary hours or overtime hours.

This may be achieved by way of a letter to the employee setting out the matters relating to the calculation of their salary as set out above, or an updated employment contract. Where relevant, the employer should also seek the agreement of the employee in writing.

After setup is complete, time and attendance records should be kept to monitor outer limits hours and also to allow the annual reconciliation to be done.

Summary of obligations and final comments

In summary, under the new annualised salary award obligations, employers should:

• ensure that all employees who are covered by the affected modern awards are advised in writing of (or agree to) their annualised salary and the calculations that have been used to come up with that salary amount and outer limits;

• ensure that employee records are accurate and up to date and that time attendance records of start and finish times and unpaid breaks are kept and countersigned by the employee;

• ensure that any employees who work in excess of the ‘outer limits’ compensated for in their salary are paid for any excess hours in each pay period or roster cycle; and

• conduct regular reviews and reconciliations (at least once every 12 months from the start of the arrangement) of an employee’s annualised salary against the award provisions, to ensure that there is no shortfall. Regular reconciliations (e.g. monthly) may be compiled to complete the required annual reconciliation.

The annualised wage arrangements look set to stay which means that employers will need to take steps to compliance as soon as possible, if these obligations have not already been attended to.