The annualised wage arrangement has been seen by employers for some time as an easy alternative to the burdensome task of strictly complying with the complex pay provisions of Modern Awards.

In the interest of creating consistency in the regulation of these arrangements, a Full Bench of the Fair Work Commission (FWC) has handed down a decision to vary a number of Modern Awards so that they include one of four ‘Model’ annualised wage clauses.1 Taking effect from 1 March 2020, these Model Clauses will significantly change the way that employers enter into and manage annualised wage arrangements during the course of their employees’ employment.

What is an annualised wage?

In an annualised wage arrangement, an employer pays its employee a pre-determined, fixed annual salary in full satisfaction of all Award entitlements of the employee, including minimum weekly wages, allowances, overtime, penalty rates and annual leave loading. The arrangement has mutual benefits, lessening the administrative burden and associated costs incurred by the employer whilst increasing the employee’s predictability of their take-home pay. 

Background to the change

In early 2018, as part of its 4 yearly review of Modern Awards, the FWC commenced its investigation into the lack of uniformity across the range of annualised wage clauses in the various Awards that dealt with the issue.2 The FWC proposed the introduction of four variant Model Clauses to govern these arrangements; the first two being suitable for employees who work reasonably stable hours, and the second two being suitable for employees who work highly variable hours or significant ordinary hours which attract penalty rates. The FWC sought further submissions in respect to these Model Clauses. 

Earlier this year,3 the FWC decided that Model Clauses 1 and 3 would become the standard annualised wage clauses in a number of Awards, while certain provisions from Model Clauses 2 and 4 would be inserted into only a few Awards. The FWC invited further submissions on this decision and, following consultation with various stakeholders, has now confirmed this decision. A number of rather prevalent Awards will be affected by this change, including the Clerks - Private Sector Award 2010 and the Banking, Finance and Insurance Award 2010.

How will employers’ obligations change? 

Model Clauses 1 and 3 are in generally consistent terms but there are some key differences between them. Model Clause 1 contains the following:4  

1.

An employer may decide to pay a full-time employee an annualised wage in satisfaction of minimum weekly wages, allowances, overtime penalty rates, weekend and other penalty rates and annual leave loading.

2.

If an annualised wage is to be paid, the employer must advise the employee of this in writing and must keep a record of:

a)

the annualised wage that is payable;

b)

the provisions of the Award that will be satisfied by the annualised wage;

c)

 the method by which the annualised wage was calculated, including specification of each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation; and

d)

the outer limit number of ordinary hours which would attract penalty rates under the Award and the outer limit number of overtime hours which the employee may be required to work without being entitled to an amount in excess of the annualised wage.

3.

If an employee works hours in excess of either of the outer limits specified above, those hours are not covered by the annualised wage and must be paid separately in accordance with the applicable Award provisions.

4.

The annualised wage must not be less than the minimum amount payable to the employee under the Award for work performed over the year for which the annualised wage is paid.

5.

Each 12 months following the commencement of the annualised wage arrangement or upon termination of the employment, the employer must calculate the remuneration that would have been payable under the Award for the relevant period and compare it to the annualised wage actually paid to the employee. Any shortfall must be rectified by the employer within 14 days.

6.

The employer must keep a record of the start and finish times (and any unpaid breaks taken) for each employee who is a party to an annualised wage arrangement. This record must be signed by the employee or acknowledged as correct in writing (including by electronic means) during each pay period or roster cycle.

The main difference between Model Clause 1 and 3 is that under Model Clause 3, the employee must agree to be paid an annualised wage (i.e. the employer cannot unilaterally make this decision).5 This agreement may be terminated by either party by giving 12 months’ notice to the other party.

What should employers do now?

Employers are likely to experience some difficulty in interpreting and implementing these changes, and then monitoring their annualised wage arrangements for compliance with the applicable Award. While these changes do not commence until 1 March 2020, employers should start preparing for these changes from now by:

a)

Reviewing any Awards that cover their employees to better understand their employees’ pay entitlements;

b)

Calculating whether their employees are better off overall by receiving their current annualised wage than if they were paid strictly in accordance with the applicable Award;

c)

Reviewing their payroll and rostering systems and processes to ensure that they are able to record their employees’ start and finish times, as well as any unpaid breaks taken; and

d)

Consult with their employees about these changes and what this will mean for them.