As part of the Fair Work Commission's (FWC) ongoing review into the effectiveness of modern awards, the payment of annualised salaries is the latest change which will impact on employers in the professional services industry.

Paying an annualised salary is often seen as a way to avoid meticulous compliance with modern award clauses, including those dealing with hours of work, overtime, allowances and annual leave loading. Many employers rely on these arrangements assuming they are legally compliant.

From 1 March 2020 employers will face a broad range of new obligations with which they must comply in order to ensure that these annualised salaries meet the legal requirements as set out in modern awards. The changes amend certain modern awards and could see employers who pay an annualised salary but fail to meet new conditions exposed to fines of up to $63,000 per occasion, potential underpayment claims and significant reputational damage.

The time to review your arrangements is now. Whilst the changes do not take effect until March 2020, the amendments are onerous and will require a significant degree of planning to get right.

So what has changed?

The FWC have sorted the impacted modern awards into 3 categories with various levels of obligations.

For our clients in the professional services industry, the impacted awards are likely to fall within Category 1. This will include the Banking, Finance and Insurance Industry Award 2010, Clerks-Private Sector Award 2010 and the Legal Services Industry Award 2010. Currently, these modern awards simply require an employer to identify what clauses of the modern award the annual salary covers and ensure that employees are not worse off under the annualised salary arrangement.

Some employers will introduce an annualised salary through an Individual Flexibility Agreement or through a contractual clause effectively stating that the annual salary is being paid in satisfaction of a number of identified award entitlements such as overtime, penalty rates and allowances. From March 2020, employers will need to comply with a number of additional onerous requirements before they can absorb award entitlements into an annual salary.

Thankfully, the Professional Employees Award 2010 will not be impacted and any employees who are "award free" will be able to continue on their current salary arrangement (however it can be a good time to evaluate their salary too!)

Although there is no requirement for a Category 1 employee to agree to be paid an annualised salary, the following checklist will need to be satisfied to comply with the new changes:

  • As per usual, advise the employee of their annualised salary and which provisions of the award that it contemplates.
  • Advise the employee of how this salary has been calculated, including what portion is attributable to wages for time worked and then any overtime or penalties that have been built into the salary.
  • Specify the "outer limits" of the salary, that is the maximum ordinary hours and overtime hours an employee can work under the salary (effectively, advising an employee when they stop being paid for their work).
  • Pay an employee, in addition to the annual salary, for any hours worked which exceed the "outer limits" in accordance with the applicable provision of the modern award (that is, pay the employee the applicable overtime and penalty rates under the applicable modern award).
  • Keep records of the start and finish times and unpaid breaks for each employee and have employees sign or acknowledge the record as accurate in each pay or roster cycle.
  • Each 12 months from the commencement of the annualised salary arrangement (or on termination of employment), calculate the amount which would have been payable to the employee under the modern award and compare this against the annualised salary. If a shortfall is identified, the employer must rectify this within 14 days (i.e., pay the shortfall to the employee).
  • Keep records in relation to the above.

How do you prepare?

If you wish to continue or introduce an annualised salary arrangement which complies with award requirements, you should prepare for the changes by taking the following steps prior to March 2020.


Why should we care?

You may be aware that underpayment of salaried staff has sparked the interest of the regulator, the Fair Work Ombudsman and many entities have been self-reporting. Whilst the Fair Work Ombudsman "encourages corporates to cooperate with the Fair Work Ombudsman" they have quickly pointed out that "admission is not absolution". The Fair Work Ombudsman have been clear they will consider the full range of enforcement options available to them; including, requiring an employer to enter into an enforceable undertaking (i.e., a written promise they will repay any underpaid employees) and potential court action where appropriate.

Whilst key changes will likely be needed to comply with the new annualised salary clauses, we would also caution employers to take the time now to look back over any modern award covered employees paid an annualised salary to assess whether any underpayment liability is likely to have occurred.

For assistance managing the changes or to discuss ways to "future proof" your business, please contact us.

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