The new modern award system that commenced on 1 January 2010 was introduced with the intention of simplifying the safety nets for various industries or occupations. The monetary entitlements under modern awards that form part of the safety net impose minimum levels of pay in all circumstances. However, things are not so simple once the transitional arrangements in modern awards are considered.

Transitional arrangements inmodern awards

Most modern awards contain provisions that transition employers and employees from their pre-modern award entitlements to the modern award system. The most common transitional provisions are the ‘model transitional provisions’, though some modern awards contain specific transitional provisions. This article focuses on the model transitional provisions.

Model transitional provisions

The model transitional provisions in modern awards provide for the ‘phasing in’ of increases or decreases in certain monetary entitlements in five set instalments of 20 per cent, per year over four years. The phasing in of certain monetary entitlements began from the first full pay period after 1 July 2010 and ends on the first full pay period after 1 July 2014, at which point the modern award entitlements must be paid in full.

The phasing in arrangements in the model transitional provisions apply to the following entitlements only:  

  • minimum wages, including piecework rates and applicable industry allowances  
  • casual and part time loadings  
  • Saturday, Sunday and public holiday penalty rates  
  • evening and other penalty rates, and  
  • shift allowances.  

The model transitional provisions do not cover any other monetary entitlements in modern awards, such as overtime or allowances, other than those specific allowances mentioned above.

For example, where an applicable modern award provides for a minimum wage (e.g. $650 per week) that is higher than the minimum wage payable under a previously applicable premodern award (e.g. $500 per week), an employer is not obliged to pay the higher minimum wage in the modern award from the first full pay period after 1 July 2010. Rather, the employer must at that time pay the (higher) modern award minimum wage less 80 per cent of the difference between the two minimum wages (e.g. 80 per cent of $150). On the first full pay period after 1 July 2011, the relevant percentage will decrease to 60 per cent, and then by 20 per cent each year down to zero per cent for the first full pay period after 1 July 2014.

In this example, the phasing in arrangements have the effect of cushioning, over a period of four years, the additional burden imposed on the employer by the applicable modern award wage rate.

Conversely, where an applicable modern award provides for a minimum wage that is lower than the equivalent pre-modern award minimum wage, an employer must pay the (lower) modern award minimum wage plus a percentage of the difference between the two minimum wages, which decreases as set out above until the first full pay period on or after 1 July 2014. In this case, the phasing in arrangements result in a financial burden on employers, but which slowly phases out over the four year period to 1 July 2014.

Who do the model transitional provisions apply to?

The phasing in arrangements in the model transitional provisions apply to employers and employees to whom the modern award applies. This includes cases where the employer establishes its business after the commencement of modern awards on 1 January 2010. In this situation, employers will need to determine what pre-modern award would have covered them and their employees had they been in business before 1 January 2010. The phasing in arrangements also apply to new employees who commence employment on or after 1 January 2010.

What does this mean for employers?

Determining minimum monetary entitlements for employees is not as simple as providing the amounts set out in an applicable modern award. Each modern award should be checked to see what transitional provisions apply, in order to ensure entitlements are correctly calculated.

Where the applicable modern award contains the model transitional provisions, employers must determine what premodern award monetary entitlements apply to its employees, in order to correctly apply the phasing in arrangements. This is not a simple task, since it involves determining pre-modern and modern award coverage and classifications, and ensuring that corresponding entitlements in pre-modern and modern awards properly ‘match-up’ before the phasing in arrangements are applied. Specific advice is recommended in this regard.

Model transitional provisions and absorption of entitlements into over-award payments

Although the model transitional provisions are primarily focused on minimum monetary entitlements in modern awards, they do also deal with over-award payments, which many employers provide.

The model transitional provisions featured in many modern awards state that “monetary obligations imposed on employers by this award may be absorbed into over-award payments. Nothing in this award requires an employer to maintain or increase any over-award payment”. [our emphasis]

What does this mean for employers?

This provision means that any new or increased monetary entitlements arising from the application of a modern award to an employee can be validly absorbed into (or off-set against) any over-award payments that are made to that employee. However, there are two important restrictions on this. First, this provision can only be relied upon in relation to increases in monetary entitlements arising from the application of a modern award, not in relation to any other monetary entitlements an employer may be legally obliged to pay an employee, for example, as a result of a contract of employment entered into with an employee.

Second, it is a transitional provision and can only be relied upon until 1 July 2014, at which time the transitional provisions cease to operate.

Fair Work Australia (FWA), in "Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union" known as the Australian Manufacturing Workers' Union (AMWU) and Australian Industry Group, [2010] FWA 4488; [2010] FWAFB 4488, recently confirmed that this model provision is not intended to modify the common law principles regarding absorption.

What should employers do?

Employers should ensure that their over-award payments to employees are not expressed as being in satisfaction of a particular ‘incident’ of employment, for example, ordinary hours, overtime, penalty rates, allowances, leave or any other monetary entitlement. The better approach is to ensure that payments are expressed as being remuneration for work performed, so that those over-award payments can properly absorb monetary obligations arising from modern awards.