FWO issues some guidance on new annualised wage clause

You will recall previous bulletins informing you that new rules for annualised salaries will apply to award-based employers and employees. These changes will apply after the end of the pay period finishing after 1 March 2020.

The new rules appear in 19 modern awards, including the Clerks, Banking Finance Insurance and Manufacturing awards. They only apply to full-time employees.

The new rules apply to an annualised wage arrangement that seeks to ‘buy out’ monetary entitlements under the award to minimum wages, allowances, overtime and penalty rates, and annual leave loading.

It is not clear whether an employer that already relies on a ‘set-off’ or ‘absorption’ agreement to meet these award obligations, needs to comply with these new rules in respect of an employee who is subject to one of these 19 awards. An example of a set-off clause is:

“You are paid an annual salary of $70,000. This is paid in full satisfaction of any monetary entitlements to which you may become entitled under any applicable award.”

The Full Bench of the Fair Work Commission that developed the new rules has stated on two occasions that employers do not need to comply with these new rules, so long as the contractual set-off clauses are properly drafted and other legal requirements are met (such as ensuring no award underpayment occurs within relevant pay periods). In the above example, for instance, the clause should probably identify which award entitlements are being satisfied by the annualised wage, e.g. overtime, loadings, allowances and penalties.

The Fair Work Ombudsman (FWO) has stated on its website that “employers can still pay all employees an annual salary without using annual wage arrangements in an award, as long as it covers all of their minimum entitlements. Employers should consider getting independent advice to make sure they're paying their employees enough.”

The FWO will be issuing guidance material regarding compliance with the new rules in about April or May 2020.

Ultimately, this issue will only be finally resolved in the Courts. In the meantime, it is prudent to do the following:

  • Determine those of your employees who are paid an annualised salary and who will be subject to an award containing these new rules.
  • Ascertain whether the set-off clause, if any, contained in your employment contract with these employees sufficiently identifies the award entitlements that are being satisfied by the annualised salary.
  • Ascertain whether in fact this has been achieved, by comparing the salary amount against award entitlements over a relevant period. Any underpayment should be rectified and consideration given as to whether disclosure of the underpayment should be made to FWO.
  • If it is expected the employee will regularly work hours attracting overtime and penalty payments, consider whether the annualised salary method is still appropriate and, if so, whether the new award rules should be observed to avoid any argument that the set-off provisions in the contracts are defective.