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Paying an “annual salary” - Don’t let a misunderstanding lead to underpayment claims

Several recently publicised underpayment claims demonstrate that employers often have the genuine mistaken belief that payment of an annual salary to an employee covered by a modern award that is higher than an annual award rate of pay means obligations under the applicable award no longer apply.

This approach usually results in a “set and forget” arrangement, when in reality, merely paying an annual salary higher than the minimum annual award rate does not remove the entitlement of an award-covered employee to be paid all monetary entitlements required by the award including overtime, penalty rates, loadings and

allowances (Award Benefits).

Annualised Wage Arrangements under Modern Awards

An employer cannot decide whether or not a modern award covers an employee. Award coverage is determined by the work performed by the employee.

An award-covered employee is entitled to be paid full Award Benefits in each pay cycle, unless:

the employee is paid an annualised salary/wage permitted under and subject to the relevant award and the employer fully complies with the award requirements (Annualised Wage Arrangements); or
the employee and employer enter into a written “guarantee of annual earnings” which complies with strict Fair Work form and content requirements, under which the employee is paid more than the annually indexed “high income threshold”, currently $158,500.00 until 30 June 2022.

This article does not deal with “guarantees of annual earnings”.

An Annualised Wage Arrangement permits an employee to be paid the same agreed amount in each pay cycle, even if the Award Benefits covered by the arrangement for that pay cycle are higher, over the 12 month period (or lesser period if an employee ceases employment). Of the 121 modern awards, less than 20 of these awards currently include clauses which permit Annualised Wage Arrangements.

The employer must ensure strict compliance with the relevant Annualised Wage Arrangement provisions imposed by the applicable modern award, including (in general terms, given the various Annualised Wage Arrangements differ between modern awards):

providing the following information, in writing, to the employee before the Annualised Wage Arrangement commences:
- details of the calculation of the minimum annualised wage, estimating and specifying each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation, (not merely an increase of the wage/salary using a percentage); and
- details of the “outer limit” restrictions that apply to the number of penalty rate hours and overtime hours which an employee can work within a pay cycle before an employer is required to make an additional payment to the annualised wage in that pay cycle.
compliance with record-keeping obligations, including maintaining a record of hours worked by the employee;
performing a “reconciliation” each 12 months from the commencement of the Annualised Wage Arrangement (or lesser period, if the employee ceases employment), comparing the salary/wage paid to the employee with the employee’s Award Benefits, with any shortfall paid to the employee;
depending on the relevant modern award provision, either entering into a written agreement with the employee or advising the employee in writing that an annualised wage will be paid.

It is also important for employers to be aware that not all awards have provisions that permit Annualised Wage Arrangements.

Annualised Salary Arrangements under Common Law/Contracts

As an alternative to an Annualised Wage Arrangement or a “guarantee of annual earnings”, employees covered by modern awards can be paid annual salaries/wages that rely upon written contractual “set-off” or “offset” arrangements. In general terms, a “set-off” or “offset” clause is a common law creature which enables an employer to pay an annual salary which compensates an employee for underlying award entitlements such as overtime or penalty rates, by including a suitable clause in a contract of employment, which has been the subject of hundreds of years of case law decisions (usually underpayment claims).

The case law has determined that a number of features are necessary for a valid contractual set-off arrangement to be enforceable, including that these employees still must be paid no less than the monetary equivalent of their full Awards Benefits in each pay cycle, which requires calculations at the end of each pay cycle, as opposed to at the end the 12 month salary/wage period.

Employers using contractual set-off arrangements cannot set-off overpayments in one pay cycle against underpayments in another pay cycle, and must comply with the record-keeping obligations.

As such, it is critical that where employers are seeking to rely upon written contractual set-off arrangements these provisions are carefully drafted and employers have appropriate processes in place to maintain records and conduct reconciliations.

Other Important Considerations

Employers should also be aware of the following:

Annualised Wage Arrangements do not displace non-monetary Award obligations and entitlements, including meal breaks, consultation obligations and dispute resolution;
Specific legal advice should be obtained where employees are covered by:
- the Hospitality Industry (General) Award, Restaurant Industry Award 2010 and Marine Towage Award, where recent amendments to annualised salary/wage arrangements have different terms and requirements;
- the Registered and Licensed Clubs Award or Hospitality Industry (General) Award), which permit payment of an “absorption salary” to particular correctly classified employees that significantly reduces obligations to pay additional Award Benefits; or
- an enterprise agreement.
Some of the modern award Annualised Wage Arrangements only apply to those employees classified as “full-time” under the Award, meaning they cannot be applied on a “pro rata” basis to part-time employees.