Annualised wage arrangements: Have you considered all of your options?

Effective 1 March 2020, new annualised wage provisions will be inserted into a number of modern awards.

As an employer, you may have considered whether entering into an annualised wage arrangement is necessary or appropriate for your business. Importantly, the Fair Work Commission has confirmed that relying on a contractual off-set clause under an employment agreement is a suitable alternative to complying with an annualised wage arrangement. Employers therefore have a choice between continuing to rely on a contractual off-set clause, or adopting the annualised wage provisions under a modern award.  We set out briefly below some key considerations for employers when deciding which option is best for their business. For a detailed analysis of these options and the new annualised wage provisions, we invite you to read our recent article here.

Annualised wage arrangements under modern awards

Adopting an annualised wage arrangement approach may be worthwhile if employees’ hours of work fluctuate significantly from pay period to pay period. By entering into an annualised wage arrangement, an underpayment in one pay period  can be corrected by an over payment in another pay period, without fear of award breach, provided award minimums are met over the course of a year.

However, employers who enter into an annualised wage arrangement under a modern award will be required to understand and comply with significant record-keeping, auditing and related obligations, as detailed in our recent article.

Contractual off-set arrangement

Alternatively, employers may choose to rely on a contractual off-set clause, which effectively confirms that an employee’s annualised wage is compensation for all hours worked (including any applicable overtime/penalties) and satisfies any financial entitlements they would otherwise be entitled to receive under the relevant award. This approach requires that the annual wage paid to employees satisfies award entitlements in each pay period and therefore will only be appropriate if an employee’s annual wage is sufficient to satisfy award minimum entitlements in any given pay period.

Relying on a contractual off-set clause allows employers to pay an annualised wage without the burden of complying with the additional onerous record-keeping and related obligations required by the annualised wage provisions under modern awards.

However, either way, employers must comply with record keeping obligations under the Fair Work Act 2009 (Cth) and Fair Work Regulations 2009 (Cth), and must understand what is built in to an annualised salary to ensure it does indeed meet award minimums. A “set and forget” approach is not sustainable.

Which option is best?

The answer to this question depends on the nature of the employer’s business, and particularly the extent to which employee hours vary from pay period to pay period. Whilst a well drafted contractual off-set clause is perhaps a less burdensome way to pay an annualised wage which satisfies award entitlements, it may not be appropriate if employees’ hours vary greatly from week to week, in which case entering into an annualised wage arrangement under a modern award may be worthwhile.

Gadens can assist in advising on which approach is best for your organisation and can assist to amend your employment contracts if necessary.

Authored by:

Siobhan Mulcahy, Partner
Katie White, Lawyer