Legal Update

Annualised Salaries and Implications for Employers

Authors: Emma Pritchard, Greg Robertson & Sabine Ford-Arthur

INTRODUCTION

Underpaying employees on annualised salaries has recently become a multimillion-dollar issue for Australia’s largest retailer Woolworths. Any business with annualised salary arrangements should immediately be reviewing and reconciling its pay arrangements for Award covered employees to ensure compliance.

On 3 October this year, the CEO of Woolworths Group, Brad Banducci, revealed the massive underpayments, dating as far back as 2010 and affecting at least 5700 salaried staff. Correcting these underpayments could cost the Woolworths Group as much as $300 million in back pay alone. Fair Work Ombudsman (“FWO“) Sandra Parker has been frustrated by the “disturbing number of large corporates publicly admitting that they have underpaid staff”, warning that “breaking workplace laws will end in a public enforcement outcome.” With Parker stating that the FWO intends to extensively investigate the issue of annualised salaries across the nation, it is now more important than ever to seek professional legal advice as to whether your salary arrangements comply with the requirements of the relevant Modern Award. It is also necessary for employers to understand the impact of the decision of the Fair Work Commission (“FWC“) in July 2019 (part of its Four Yearly review of Modern Awards) on Annualised Wage Arrangements, which finalised the terms of three new standard “annualised wage arrangement clauses” to replace the existing clauses in over twenty Modern Awards, effective from 1 March 2020. This decision needs to be read with two earlier decisions (February 2018 and February 2019).

WHAT ARE ANNUALISED SALARIES?

Employers often choose to rely on flat salary arrangements in order to avoid the complexities associated with Modern Award monetary entitlements, such as hourly rates, overtime rates, loadings and allowances. An annualised salary allows employees to receive a rate that is either equal to or better than the rate under the relevant Modern Award. Such an arrangement can benefit both employees and employers; employers because the arrangement tends to be less administratively complex resulting in administrative cost savings; and employees because it provides more income predictability assisting both budgeting and raising home finance. Such arrangements are sometimes made as part of a contract of employment, subject to whether the relevant Modern Award makes provision for annualised payments in accordance with the permission given for such clauses under section 139(1)(f) of the Fair Work Act 2009 (“Fair Work Act”).

However, a concern for employers electing to pay their employees an annualised salary has been whether the arrangement is sufficient to compensate for the actual hours worked by employees, where a failure to meet that level of compensation exposes employers to the risk of underpayment claims and penalties for breaches of the Award.

WHY ARE PEOPLE GETTING THEM WRONG?

Tracy Angwin, chief executive of the Australian Payroll Association, identified a lack of regular payroll compliance audits as the cause behind the issue Woolworths is currently facing. “The underpayment goes as far back as 2010, which shows a lack of reviewing payroll systems to ensure that employee pay is being calculated correctly,’’ she says. “Often, companies fall into the trap of adopting a set-and-forget mentality to payroll systems, which can lead to major underpayments such as this one.” It is unlikely a business is paying its employees correctly if there is no effective system of recording the number of hours worked, as the amount of overtime a staff member has completed cannot be determined and compared to the annualised salary arrangement. Businesses without a sophisticated HR department managing payroll records are limited in their ability to comprehensively review contracts, Awards and rates of pay, or perform annual reconciliations reassessing annualised salary arrangements. This can often result in unintentional yet detrimental underpayment of staff with expensive consequences and potential reputational damage.

COMING CHANGES TO THE REQUIREMENTS

Quite independent of the reports of underpayment, changes to the annualised wages clauses in Modern Awards are soon to be implemented. Following review of annualised salary clauses by the FWC as part of its Four Yearly Award review, new standard annualised wage arrangement clauses will replace the existing annualised wage clauses in nineteen existing Modern Awards and be included in additional Modern Awards, effective from March 2020. There are different forms of the proposed clause, two for Awards that the FWC considers are in industries that have employees who work reasonably stable hours, and two for other Awards where employees work highly variable hours or significant penalty rates. Modern Awards affected may be small in number but include Awards covering significant numbers of employees, including, for example, the:

• Clerks–Private Sector Award 2010;
• Manufacturing and Associated Industries and Occupations Award 2010;
• Local Government Industry Award 2010;
• Banking, Finance and Insurance Industry Award 2010;
• Restaurant Industry Award 2010; and
• Hospitality Industry (General) Award 2010.

The new clauses introduce several notification, recordkeeping and wage reconciliation requirements on employers who pay their Award-covered employees annualised salaries. In addition, employees who work highly variable hours or significant ordinary hours will be required to consent to the annualised wage arrangements given the attraction of penalty rates to the hours worked. Examples of some of the new requirements imposed on employers include:

• Keeping records of how the annualised salary has been calculated to factor in any overtime or penalty rates;
• Making additional payments to employees if hours exceed those specified in their annualised salary arrangements;
• Keeping records of starting and finishing times as well as unpaid breaks, which must be signed by employees (or in some cases, electronically acknowledged as correct) each pay period;
• Conducting a reconciliation every 12 months to calculate whether the employee has been better off on the annualised salary arrangement compared to the relevant Modern Award.

The need to keep records of start and finish time, the need to obtain employee sign-off as to accuracy and the need for yearly reconciliation will of course add to the administrative cost (and make annualised arrangements less attractive to employers) but the Commission considered that without these arrangements employees would never know whether they were better off under the annualised arrangements.

Given the significance and number of new requirements coming into force on 1 March 2020, it is crucial for employers to understand how the FWC’s decision will impact the day-to-day running of business and establish effective procedures which comply with the annualised wage arrangements clauses.

WHAT YOU NEED TO DO, AND HOW CAN WE HELP?

It is essential that any employer using annualised salaries now reviews their contracts of employment, their policies and HR practices in place, to ensure that come March 2020, the annualised salary regime will still comply with the law. While the Award changes do not take effect until March 2020, cases such as Woolworths show that a review of salary arrangements should be undertaken sooner rather than closer to March. Even if current practices comply with the new requirements, in some industries there will be new requirements for consent and additional record keeping.

Complexities in the terms of Modern Awards often cause confusion, leading to unintended Award breaches and exposing employers to a high risk of underpayment claims. For example, inconsistencies in actual employment arrangements and the arrangements of an annualised salary can arise from difficulties in understanding the rules around roster patterns, rates for grades of employees, part-time or full-time classifications, the maximum number of shifts a staff member is permitted to work, length of times between shifts and the number of days off. Additionally, implementing periodic audits, training on formal policies and checking matching annual salaries to the time actually worked can require professional assistance, given the complicated nature of such procedures and the seriousness of risk exposure.

Our team at Harmers Workplace Lawyers possess the necessary expertise to help you avoid the dilemma Woolworths has found itself in by reviewing your annualised salary arrangements against the Fair Work Act and the relevant Modern Award. Contact us to obtain assistance in formulating arrangements that comply with the FWC’s new requirements.

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