Absorption of new monetary obligations: a perspective


Absorption of new monetary obligations: a perspective

Most modern awards contain a ‘model absorption clause’ that allows employers to absorb new monetary obligations - occurring in a modern award or arising from the annual wage review - into the over-award payments that are being paid by an employer.


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Most modern awards contain a ‘model absorption clause’ that allows employers to absorb new monetary obligations — occurring in a modern award or arising from the annual wage review — into the over-award payments that are being paid by an employer.
Australian Business Industrial*, the registered industrial organisation of the NSW Business Chamber (NSW BC), has provided its understanding of this aspect of the modern award system. An edited version of the document prepared by Australian Business Industrial follows.
Model clause
Modern awards form part of the safety net and are not concerned with maintaining over-award.payments. The model absorption provision of most modern awards, which is clause 2 'ommencement and Transition' allows employers to absorb new monetary obligations that arise in a modern award or the Annual Wage Review into over-award payments.
The absorption provision states that “The monetary obligations imposed on employers by this award may be absorbed into over award payments. Nothing in this award requires an employer to maintain or increase any over-award payment”.
This document outlines how an employer can absorb new monetary obligations. It also notes limitations on an employer’s ability to absorb.
Identifying current monetary obligations
The NSW BC recommends that employers check the most recent version of the modern award to determine the current award rates and other monetary obligations. Some of these may be subject to the transitioning provisions. This will identify:
  1. what needs to be paid to meet the award obligations;
  2. the amount of any over-award (or shortfall) currently being paid to the employee.
Provided you are paying at least what is required under the modern award, you are complying with it. You should ensure that your time and wages records document the payment of entitlements that are in the award, particularly any new allowances or penalties that have arisen from the creation of modern awards.
To identify what you might wish to absorb you will need to compare the pre-modern award instrument which to apply against the new modern award (having regard to any relevant transitional rates, penalties or loadings). This will allow you to identify any higher rates of pay, increased or new entitlements, such as allowances and penalties, which may now apply. It is these changes that can potentially be absorbed into over-award payments.
The ‘purpose’ of an over-award payment
Your capacity to absorb over-award payments depends on the nature of the arrangement you have with the employee about the purpose of the over-award payments.
If an over-award payment was directed at satisfying certain obligations, then it cannot be used to absorb other, new obligations that have arisen in the modern award. These arrangements might be described in letters of appointment or contracts of employment.
Check any arrangements you have made with your employees which outline the purpose of an over-award payment. For example, you may have agreed to pay a higher hourly rate to cover incidental overtime, or all the allowances under the award. In this case the over-award payment could not be used to absorb, say, an increase arising from the Annual Wage Review.
Further, check whether an employee’s over-award payment was intended to always be in addition to the award, regardless of what the award is paying. This would also prevent new obligations in the award from being absorbed.
Designing employment arrangements for new employees
If you intend to remunerate future employees on an over-award basis, make sure that you use letters of appointment/contracts of employment which make it clear that the over-award payment is directed towards satisfying all award entitlements that may arise, such as Annual Wage Reviews.
This could also be achieved through including review provisions in your employment arrangements which state that the rate will be reviewed periodically to take into account changes in the modern award.
You should also ensure that an employee’s remuneration continues to pay at least the safety net of wages and entitlements, and at no stage disadvantages the employee with respect to the award and the National Employment Standards.
Examples of how absorption can occur
New allowances
A new allowance which was not in a pre-modern award instrument, but has been introduced in the modern award, can be absorbed into a higher rate of pay when you have provided for absorption in your employment arrangements and you appropriately document doing so in your time and wages records.
The National Minimum Wage increase
Following the Annual Wage Review, most award rates increase by 69c per hour from the first pay period on or after the 1 July 2010. If your employment arrangements provide for absorption of the increase, and you are paying your employees more that 69c per hour above the award rate (including all penalties, allowances and other monetary obligations), you can absorb the increase into your over-award payment.
If, for example, you were only paying 50c per hour over the modern award rate, then you are able to absorb 50c of the 69c increase and increase employees’ pay by only 19c per hour.
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