Termination of employment and guarantee of annual earnings

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Termination of employment and guarantee of annual earnings

The termination of employment entitlements of employees, who have been provided with a ‘guarantee of annual earnings’ sufficient to take them outside the modern awards, can create some payment issues for employers.

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The termination of employment entitlements of employees, who have been provided with a ‘guarantee of annual earnings’ sufficient to take them outside the modern awards, can create some payment issues for employers.
 
This question was recently received by WorkplaceInfo.
 
We have an employee whose annual salary is $120,000 pa and is employed on a guarantee of annual earnings arrangement.
 
This means the provisions of the applicable modern award don’t apply to the employee.
 
The employee’s salary is structured so that in his first year of employment he receives $20,000 during the agreed ‘probation period’ of three months, and $100,000 is paid during the remaining nine months of employment.
 
The employee has been employed for three months and we are not satisfied with the employee’s performance. The employee has been counselled on various issues during the probation period but this has had little effect on his performance.
 
We have decided to terminate the employee’s employment.
 
The employee has been paid $20,000 for the first three months of employment, as per the contract of employment.
 
Is the employee entitled to an average of their guaranteed annual earnings for the three months of employment or is payment as provided under the contract of employment?
 
If the employment is terminated by the employer, the employee has only received the equivalent of $80,000 pa under the guarantee of annual earnings arrangement. The arrangement guarantees the employee the equivalent of $10,000 per month during the period of employment.
 
Section 328(2) of the Fair Work Act 2009 requires the employer to ensure that for the period of employment prior to the termination, the employee is paid earnings at the guarantee annual earnings rate, meaning the company should have paid the employee a total of $30,000 for the three months of employment.
 
In this case, the company would be required to pay a further $10,000 ($30,000 – $20,000).
 
However, the requirement of the employer to pay the annual equivalent of the guarantee to the employee on termination does not apply where the employee terminates their employment of their own volition.
 
Source: Paul Munro, IR Consultant.
 
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