Do you pay annualised salaries? 3 steps to avoiding underpayment risks

Do you pay annualised salaries? 3 steps to avoid underpayment risks

There are three steps employers should follow to help ensure employees are paid what’s owing to them – so that your organisation avoids the risk of underpayments, write Gordon Williams and James Wells

“To annualise or not to annualise – that is the question.” If you currently rely on annualised wage provisions within modern awards it may be time to rethink if you want to continue doing so – particularly in light of the number of wage underpayment cases in recent times.

This is because the Fair Work Commission (FWC) handed down a decision earlier this year, finalising the review of the annualised wage provisions in a number of modern awards – with the result that, from 1 March 2020, the annualised wage provisions in 19 modern awards will change – including one that will affect many employers – the Clerks Private Sector Award 2010.

If you’re wondering what an annualised wage provision is, they allow employers to pay their employees an annualised wage that is high enough, over the course of a year, to cover or ‘buy out’ various award entitlements including ordinary hours, penalty rates and loadings etc. This is instead of having to calculate and pay employees their award entitlements for actual hours worked in each pay period or roster cycle. This is an attractive option for many employers as it removes much of the administrative burden of paying irregular amounts each pay period or roster cycle.

However, the FWC was persuaded that changes were necessary because of numerous examples of employers relying on annualised wage arrangements in circumstances where employees’ salaries were less than their award entitlements for actual hours worked.

Annualised wage provisions and avoiding underpayments
With the issue of underpayments front of mind, the new annualised wage provisions will require employers to take much more care when relying on annualised wage arrangements.

Essentially, there are two model clauses, and the common features of both are as follows:

  1. Only full-time employees can be on annualised wage agreements;
  2. Employees must be told in writing:
    • how their annualised wage is calculated and what it compensates them for e.g. ordinary hours, overtime, allowances, leave loading etc; and
    • the outer limits of their ordinary hours in each pay period, and for work performed outside of these, employers must pay overtime at the applicable penalty rate;
  3. There must be an annual reconciliation (on the anniversary of commencement of the annualised wage agreement) or on termination of employment, and any shortfall against the award entitlements must be paid within 14 days; and
  4. There must be a record kept of start and finish times, as well as unpaid breaks – the employee must also acknowledge the accuracy of the record for each pay period/roster cycle.

“New annualised wage provisions will require employers to take much more care when relying on annualised wage arrangements”

The first model clause does not require employee consent. The second model clause does require consent, an agreement in writing and may be terminated by the employer on 12 months’ notice. Employers will need to check which awards cover their employees – and which model clause therefore applies.

Clearly, relying on the new annualised wage provisions will come with increased administration and compliance costs. Failure to comply with these stringent requirements could lead to penalties for breach of a modern award – even if no underpayment has actually occurred.

To annualise or not to annualise
So the question arises, do you want to annualise or not?

If yes, you will need to revisit your current payroll and record-keeping systems to determine how you can comply.

If no, the good news is that timesheets (or the good old days of punching the timecard) and paying each pay period based on actual hours worked, is not the only alternative.

The FWC has confirmed that the common law principle of ‘set off’ is not limited by these changes. This concept is fairly well settled, allowing employers to rely on a well-drafted clause in an employment contract to apply any over-award payments against any amounts due for actual hours worked in the relevant pay period or roster cycle. This is not a new concept – but it must be set up properly for it to work.

Of course, these ‘set off’ clauses still require employers to meet their minimum award obligations – meaning regular audits and reconciliations to ensure employees are being paid correctly. In fact, many underpayments arise because this is not done on a regular enough basis.

“It is important to go to back to first principles to ensure you are paying your employees correctly in accordance with the modern award that applies”

3 steps to cover off
Whether you use the new annualised wage provisions, or rely on the ‘set off’ principle, it is important to go back to first principles to ensure you are paying your employees correctly in accordance with the modern award that applies. This means you need to:

1. Ensure that you have carefully considered modern award coverage of your employees, including the correct role classification;

2. If you intend to use an annualised wage provision under the modern award, perform the necessary calculations, advise employees of the required information and implement appropriate record-keeping systems;

3. If you will rely on the ‘set off’ principle instead:

  • check that your employment contracts include a well-drafted clause – that covers all the relevant award entitlements you are seeking to include;
  • perform calculations and hypotheticals to ensure that employees are actually receiving enough salary each pay period or roster cycle to cover their entitlements for all hours worked in that period (including any overtime, penalty rates allowances etc). One of the challenges with ‘set off’ is that it needs to be considered each pay period or cycle – it may not be possible to rely on over-award payments from other periods to meet your obligations in the present one;
  • comply with your current record-keeping obligations in the Fair Work Act and Fair Work Regulations – which may include details of overtime worked; and
  • most importantly, conduct regular audits and reconciliations.

Getting this right will help ensure employees are paid what’s owing to them and your organisation avoids underpayments.

With the current government indicating that it will criminalise ‘wage theft’ – this is not something that your organisation can simply ignore.

James Wells is a lawyer in the workplace team at MinterEllison, and has broad experience in general employment matters, industrial relations strategy and disputes, discrimination law, workplace investigations and work health and safety.

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