We pay ‘over award’ so don’t need to worry about the award: WRONG!

Analysis

We pay ‘over award’ so don’t need to worry about the award: WRONG!

Many businesses believe that paying an employee above-award rates will satisfy the requirements of any modern award that applies. That assumption is often way off, says lawyer Joe Murphy.

By Joe Murphy

Many businesses believe that paying an employee above-award rates will satisfy the requirements of any modern award that applies. That assumption is often way off.  
 
Most businesses in Australia will have at least some employees who are covered by a modern award. 

Whether an employee is covered by a modern award will depend on whether their job involves performing the duties and responsibilities set out in the classifications section of any particular modern award and/or if the business operates in an industry covered by a modern award (where that is relevant).

There are a few things that will have no affect on whether a modern award applies to an employee:
  • the employee’s job title
  • the amount the employee is paid under their contract of employment
  • an employee has agreed to waive their entitlements under a modern award.
However, there are a number of options that are available to employers and employees when seeking to vary the affect of the terms of a modern award, or otherwise satisfy the financial benefits an employee is entitled to under the terms of a modern award.
 
Those options are:
  • individual flexibility arrangements
  • annualised salaries
  • an agreement to a guarantee of annual earnings 
  • a salary that compensates the employee for the financial entitlements payable under a modern award, consistent with a contractual set off clause
  • an Enterprise Agreement under the Fair Work Act 2009 (Cth).

Individual flexibility arrangements


All modern awards provide the ability for employers and their employees to agree on an individual flexibility arrangement (IFA). This varies the effect of specific terms of a modern award in order to meet the genuine needs of an employer and an individual employee. An employer is required to ensure an employee covered by an IFA is better off overall under the IFA compared to the modern award.
 
An IFA under a modern award may only be used to vary arrangements for when work is performed, overtime rates, penalty rates, allowances, and leave loading.  Procedural requirements for establishing and terminating an IFA also apply.

Annualised salaries


Some modern awards provide employers with the ability to pay an employee an annual salary in satisfaction of the minimum weekly wages, allowances, overtime and penalty rates, and annual leave loading.

If an employer wants to implement an annualised salary then the first thing to ensure is that the applicable modern award provides for annualised salaries to be implemented.

If an annualised salary is an option, an employer must ensure the salary adequately compensates an employee in relation to the minimum entitlements under the modern award that are specifically covered by the annualised salary.

Guarantee of annual earnings


A modern award will not apply to an employee when the employee is paid in accordance with a guarantee of annual earnings of at least the high income threshold (being $142,000 from 1 July 2017).  

A guarantee is an undertaking: 
  • offered within 14 days of commencing employment (or on another agreed date)
  • to pay the amount of earnings during a period of 12 months or more 
  • is agreed to in writing.
Irrespective of the existence of a guarantee of annual earnings, an employee is not excluded from commencing an unfair dismissal claim if the employee believes they have been unfairly dismissed.

Contractual set-off


Simply ‘paying over award’ is not enough to displace all the obligations and entitlements under a modern award. However, courts and tribunals recognise that employers can choose to pay an employee a salary, provided it compensates the employee for at least the amount he/she would have been paid in lieu of the particular entitlements intended to be covered by the salary.

Employers should ensure any set-off clause in a contract of employment properly references the relevant modern award entitlements intended to be covered by the set off. However, a set-off clause will not satisfy non-financial entitlements or obligations arising under a modern award and these must still be complied with.

Enterprise agreement


If an employer has established an enterprise agreement with its employees, then any relevant modern award will not apply to the employees covered by the agreement.  

What is the best option for your company?


Putting to one side the option of an enterprise agreement (a discussion for another day), we rank the options as follows:
  1. A guarantee of annual earnings offers the best overall protection, given the terms of the relevant modern award will not apply to an employee while the guarantee is at play. The  procedural requirements of implementing the arrangement and keeping it updated as necessary are the most difficult parts of this option.
  2. IFAs are more limited than a guarantee of annual earnings in that the parties are limited to dealing with the five items referred to above. It does provide some added benefit in that the flexibility ‘trade-offs’ can sometimes be non-financial and it can apply to employees earning less than the high income threshold.  Like a guarantee of annual earnings, the procedural requirements for IFAs can be onerous to stay on top of.
  3. Annualised salaries are one of the common ways employers manage their financial obligations under modern awards. Where it is available, the challenge is to make sure an employee is paid at least what the employee is required to be paid under the modern award, the process of which can defeat the purpose of implementing one in the first place.
  4. Having a set-off clause in your contracts of employment is the easiest option to implement. However, set-off will usually carry the most risk in circumstances where it involves a poorly drafted clause and/or it is not a formally recognised process under the Fair Work Act or a modern award.
‎Joe Murphy is a director at Australian Business Lawyers & Advisors. Both WorkplaceInfo and ABLA are part of the New South Wales Business Chamber.
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