Why should I provide a Guarantee of Annual Earnings?

Together with the 2.9 % increase to minimum wages, the high income threshold has increased from 1 July 2012. This is because the high income threshold is indexed on 1 July each year.

The threshold was $118,100 with an unfair dismissal compensation limit of $59,050. Now, as of 1 July 2012, the threshold has increased to $123,300 with an unfair dismissal compensation limit of $61,650 (or 6 months of the dismissed employee’s wage, whichever is less).

The high income threshold is important because it affects certain entitlements of high income employees, that is, an employee who earns above the high income threshold.

If a high income employee is not covered by a modern award or enterprise agreement, then they are not eligible to make an unfair dismissal claim.

Furthermore, if a high income employee is covered by a modern award or enterprise agreement, and their employer provides a written “Guarantee of Annual Earnings” (“GAE”), and the employee accepts the guarantee, then the terms of the modern award or enterprise agreement, will not apply to the employee. However, for the purpose of making an unfair dismissal claim, they are still considered to be covered by the modern award or enterprise agreement and thus retain their right to make an unfair dismissal claim.

Notwithstanding such employee’s retain their unfair dismissal rights, it makes good sense to enter into a GAE for high income employees who are covered (or potentially covered) by a modern award to ensure that it is made clear that the terms of the modern award (particularly the monetary entitlements) do not apply. While a GAE can be drafted as a standalone document, a written contract of employment is often the best way of dealing with such an agreement. Among other things, the employment contract should clearly set out the employee’s annual earnings plus include a properly drafted ‘absorption’ clause which specifies which monetary entitlements are included in the annual salary. Otherwise, the employee may attempt to claim that award based terms such as span of ordinary hours apply or award based monetary entitlements such as overtime and penalty rates are payable calculated on the annualised salary rate.