The employer must identify and specify the applicable award in the contract of employment to minimise exposure to successful underpayment claims.

Employers often elect to pay their employees an annualised salary, with the intention of simplifying the employment relationship and fully satisfying all entitlements the employee may have under a relevant industrial award.

However, the recent decision of Simone Jade Stewart v Next Residential Pty Ltd [2016] WAIRC 00756 serves as a stark reminder to employers that care is needed in drafting employment contracts to avoid exposure to successful overtime and penalties claims for salaried employees.

What was the case about?

Ms Stewart, an employee of Perth building company Next Residential Pty Ltd, claimed nearly $30,000 in unpaid overtime from her employer, alleging that she was made to work through her lunch breaks and other overtime hours.

Next Residential denied the claim and asserted that all additional hours she worked were set off by early finishes or late starts at other times. Further, Next Residential argued that Ms Stewart was not entitled to the alleged amounts, as her employment contract contained an annual salary.

Ms Stewart's contract also contained a clause which provided that her $78,000 annual salary was "inclusive of any award provisions/entitlement that may be payable under an award".

However, the Magistrate disagreed, finding that the contract did not clearly indicate which award it referred to and which award entitlements were intended to be included in the annual salary. Magistrate Cicchini stated that it was "obvious" that the parties were not alert to the applicable award, "let alone the provisions which were to be included".

The relevant award (Clerks Private Sector Award 2010) provides for an employer to pay an annualised salary to cover the minimum wage, overtime, penalty rates and annual leave loading. However, the award requires that "where an annual salary is paid the employer must advise the employee in writing of the annual salary that is payable and which of the provisions of this award will be satisfied by payment of the annual salary."

Magistrate Cicchini also held that not all award entitlements are capable of being included in an annual salary, including meal breaks.

Employer must be specific

The award provided that if an employee was to be engaged on an annual salary, that salary must be no less than the employee would have received under the award. As such, it was found that an employee must be able to compare their annual salary to the award to confirm that they are not disadvantaged, and this cannot be done if it is not clear what entitlements are included in the salary.

The Commission held that Ms Stewart's claim was not excluded by her employment contract, as the contract was uncertain and did not clearly indicate that the annual salary included overtime. As a result, the door is now open for Ms Stewart to proceed with her underpayment claim.

What should employers do to avoid a similar claim?

If employers intend to pay an annualised salary in satisfaction of terms and provisions in a relevant award, the employer must identify and specify the applicable award in the contract of employment to minimise exposure to successful underpayment claims.

For the avoidance of any doubt, the relevant employment contract should also contain a clear clause that specifies which provisions of the award will be satisfied by the payment of the annual salary.