O n 1 March 2020 the Australian Modern Award landscape was adjusted to include new provisions for Annualised Wage Arrangements. I’ve been reminded this week, through a large amount of marketing material offering professional services, that one of the clauses requires a review of the arrangements in place after a period of twelve months (or when each relevant employee terminates their employment). That twelve month period starts from last week.
In 2019 and 2020 a number of large organisations were caught out underpaying their employees. Large-scale internal payroll audits were completed across the Australian corporate sector throughout 2020 in part because of these annualised wage arrangement provisions; in part because knowingly underpaying employees became a criminal offence and few people would want to be the first successful prosecution in that space; and also because a number of these large organisations were implementing new HR and Payroll systems to assist them in complying with an increasingly complex Industrial Relations framework and these new best-of-breed solutions uncovered historical inaccuracies. The Fair Work Ombudsman undertook 1,432 workplace audits in 2020 based on “public knowledge reports” and found a 71% non-compliance rate. Of the large organisations who self-reported underpayments, more than AUD$90m (perhaps up to AUD$600m) is now due as back pay.
On 1 October 2019, the Fair Work Ombudsman released the following statement putting employers on notice regarding underpayment of workers:
“The Fair Work Ombudsman will be holding Wesfarmers to account after self-disclosing significant underpayments of its workers. Each week, another large company is publicly admitting that they failed to ensure staff are receiving their lawful entitlements. This simply is not good enough. Companies will be held accountable for breaching workplace laws. Companies and their Boards are on notice that we will consider the full range of enforcement options available under the Fair Work Act, including litigation where appropriate.”
There isn’t data available that discusses positive compliance – noting that 29% of the audits completed by the Fair Work Ombudsman found no compliance issues – and there is no data available on companies that weren’t audited. My personal view is that large organisations aren’t making deliberate decisions to underpay workers. They may be arrogant and trying to skate close to the line when it comes to compliance, and some have been caught out when reviewing past practices, however I’d be surprised if there are large organisations that are deliberately trying to underpay Modern Award entitlements. Australia’s IR framework is complex and not easy to understand, and often the people who are configuring the software solutions that manage time and attendance, and payroll, are not IR experts who understand how the different configuration options may impact statutory entitlements. In the Wesfarmers example above, their public statement illustrates that they identified payroll issues whilst implementing a new payroll software system and subsequently engaged the professional services firm PwC to complete a detailed audit. And the same was the case at Woolworths who identified significant payroll errors for their Modern Award-covered salaried employees of around AUD$500m whilst implementing a new Enterprise Agreement and a new payroll software system. Ignorance is not an excuse, and this is a good reminder that IR requires care and investment to get right.
The rules for annualised wage arrangements that came into effect on 1 March 2020 are located within the various Modern Awards. Employees not covered by a Modern Award are not covered by the rules for annualised wage arrangements. Each Modern Award embeds the annualised wage arrangement rules in a manner which suits the context of the applicable Modern Award. As an example, below is the language used in the Clerks – Private Sector Modern Award:
[Varied by PR719747]
18.1 Annualised wage instead of award provisions
[18.1(a) varied by PR719747 ppc 29May20]
(a) An employer may pay a full-time employee an annualised wage in satisfaction, subject to clause 18.1(c), of any or all of the following provisions of the award:
(i) clause 13.8 (Make-up time); and
(ii) clause 16—Minimum rates; and
(iii) clause 19—Allowances; and
(iv) clause 21—Overtime (employees other than shiftworkers); and
(v) clause 22—Rest period after working overtime (employees other than shiftworkers); and
(vi) clause 23—Time off instead of payment for overtime (employees other than shiftworkers); and
(vii) clause 24—Penalty rates (employees other than shiftworkers); and
(viii) clause 26—Ordinary hours of work and rostering for shiftwork; and
(ix) clause 28—Overtime for shiftwork; and
(x) clause 29—Time off instead of payment for overtime for shiftwork; and
(xi) clause 30—Rest period after working overtime for shiftwork; and
(xii) clause 31—Penalty rates for shiftwork; and
(xiii) clause 32.3—Annual leave loading.
(b) Where an annualised wage is paid, the employer must advise the employee in writing, and keep a record of:
(i) of the annualised wage that is payable;
(ii) which of the provisions of this award will be satisfied by payment of the annualised wage;
(iii) the method by which the annualised wage has been calculated, including specification of each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation; and
(iv) the outer limit number of ordinary hours which would attract the payment of a penalty rate under the award and the outer limit number of overtime hours which the employee may be required to work in a pay period or roster cycle without being entitled to an amount in excess of the annualised wage in accordance with clause 18.1(c).
(c) If in a pay period or roster cycle an employee works any hours in excess of either of the outer limit amounts specified pursuant to clause 18.1(b)(iv), such hours will not be covered by the annualised wage and must separately be paid for in accordance with the applicable provisions of this award.
18.2 Annualised wage not to disadvantage employees
(a) The annualised wage must be no less than the amount the employee would have received under this award for the work performed over the year for which the wage is paid (or, if the employment ceases earlier, over such lesser period as has been worked).
(b) The employer must each 12 months from the commencement of the annualised wage arrangement or upon the termination of employment of the employee calculate the amount of remuneration that would have been payable to the employee under the provisions of this award over the relevant period and compare it to the amount of the annualised wage actually paid to the employee. Where the latter amount is less than the former amount, the employer shall pay the employee the amount of the shortfall within 14 days.
(c) The employer must keep a record of the starting and finishing times of work, and any unpaid breaks taken, of each employee subject to an annualised wage arrangement for the purpose of undertaking the comparison required by clause 18.2(b). This record must be signed by the employee, or acknowledged as correct in writing (including by electronic means) by the employee, each pay period or roster cycle.
18.3 Base rate of pay for employees on annualised wage arrangements
For the purposes of the NES, the base rate of pay of an employee receiving an annualised wage under clause 18 comprises the portion of the annualised wage equivalent to the relevant rate of pay in clause 16—Minimum rates and excludes any incentive-based payments, bonuses, loadings, monetary allowances, overtime and penalties.
How did these changes come about?
The Full Bench of the Fair Work Commission made a decision in 2018 regarding annualised wage arrangements ensuring:
- There should be a requirement for individual agreement to be reached with the relevant employee before an annualised salary arrangement is introduced in circumstances where the working hours of the employee are highly variable from one week to the next or over the course of a year;
- Where the annualised salary arrangement is by agreement, it should be terminable by the employer or employee at annual intervals upon notice;
- The annualised salary arrangement should be in writing;
- In no circumstances should an annualised salary clause in a modern award permit or facilitate an employee receiving less pay over the course of a year than they would have received had the terms of the modern award been applied in the ordinary way, and it is essential that the clause contain a mechanism or combination of mechanisms to ensure that this does not happen. The Full Bench has identified three types of mechanism to ensure this:
- A requirement for a minimum increment above the base rate of pay, prescribed in the annualised salaries clause itself, including an outer limit on the number of overtime or penalty rate hours which are compensated by the increment;
- A requirement that the arrangement identify the way the annualised salary is calculated; and
- A requirement that the employer undertake an annual reconciliation or review exercise, and be required to keep records of overtime and penalty rate hours; and
- Annualised salary arrangements should only have application to full-time employees unless a workable proposition can be identified for the application of such provisions to part-time employees.
This led to a consultation period which formally evaluated submissions from a variety of Unions and employer groups. Following the consultation period the Fair Work Commission determined to implement standard annualised wage arrangement rules across the various Modern Awards which subsequently came into effect on 1 March 2020 (noting that not all of the principles outlined in 2018 were implemented).
Who doesn’t this apply to?
Workers who are covered by an Enterprise Agreement are not covered by a Modern Award. Such workers should consult their relevant Enterprise Agreement regarding terms and conditions for annualised wage arrangements.
Workers covered by a Guarantee of Annual Earnings – a written arrangement that allows an employer to pay an employee the high income threshold or higher over 12 months or more – will not receive entitlements from a relevant award.
A number of employers, occupations and industries are not covered by Modern Awards. For example, most State and Territory employers are governed by State-based industrial relations legislation and instruments. If you’re unsure if there is a Modern Award for your occupation contact the Fair Work Ombudsman on 13 13 94 or use their Award Finder service.
Key Process Changes
Many employers undertake an annual salary review process already so the impact of an annual reconciliation shouldn’t be too burdensome – in theory. However what the annualised wage arrangements rules require is that this reconciliation takes place annually from the commencement of the annualised wage arrangement rather than at a fixed annual date for all employees as would usually occur during a salary review process. This means that these reconciliations will occur, staggered, throughout the year as contract anniversaries come around, and also when each relevant employee leaves the business.
Time Keeping Requirements
Inherently linked to the requirement to complete an annual reconciliation is enhanced timekeeping requirements. Under the annualised wage arrangement rules all related employees need to sign or acknowledge as correct a record of hours worked, held by the employer, for every pay period or roster cycle. These records must be used as part of the annual reconciliation referenced above. This is quite common for hourly employees, however this is rather novel for employers of professionals and for those on annualised wages.
Contracts of Employment, or related documentation, may also needed a refresh. Each employee working under an annualised wage arrangement must have the methodology used for calculating the annualised wage explained. The Contract of Employment must also explicitly state the outer limit of hours used in the calculation of the annualised wage. This outer limit is relevant, not only for the annual reconciliation, but also because any hours worked outside this outer limit within a pay period or roster cycle need to be managed in accordance with the terms of the relevant Modern Award and paid/processed in that same pay period or roster cycle. These hours worked outside this outer limit are not covered by the annualised wage arrangement.
Fair Work Commission and other cases
I’m not aware of any cases that have come before the Fair Work Commission dealing with a dispute around the annualised wage arrangements provisions of the Modern Awards, and I’m not aware of any related civil proceedings either. This doesn’t mean that there haven’t been disputes and settlements, just that none have progressed through to a hearing or trial (that I’m aware of). This does pose a challenge for employers as there are no decisions or judgements which may be referenced in setting policy or procedure. For example, some questions that immediately come to mind are:
- If an Annual Reconciliation was conducted in December as part of a company-wide salary review process, is that sufficient for the Annual Reconciliation requirement under the relevant Modern Award? If not, how close to the twelve-month anniversary must the review be completed and what is a reasonable time frame for completion?
- Does the outcome of the Annual Reconciliation need to be communicated to the employee?
- Can time-keeping acknowledgements be administered by exception? For example, can a Contract of Employment include language that has the employee acknowledge that they agree in advance that all hours worked in a pay period or roster cycle are as defined in the Contract of Employment unless the employee formally follows whatever process the employer has in place to adjust hours (e.g. an application for overtime form)? This way the only records that need to be reviewed each pay period, roster cycle, or twelve month period are the exception forms.
- Can a generic Guarantee of Annual Earnings clause be sufficient to offset the annualised wage arrangements provisions? For example, can a clause that says that if at any time the employee’s earnings exceed the High Income Threshold then the employee agrees that they are the covered by a Guarantee of Annual Earnings and the relevant Modern Award no longer applies?
It’s still early days with this new requirement and perhaps we’ll start to see the Fair Work Ombudsman and the Fair Work Commission publish in this space now that the initial systematic Annual Reconciliations are coming due.