In the most comprehensive judgement on the issue to date, a senior member of Fair Work Australia (FWA) has expressed the view that an employee can agree to a salary sacrifice arrangement that reduces the employee’s take-home pay below the relevant minimum award rate, without breaching the award.

Until now, there had been some speculation that the effect of the minimum salary obligations in awards, together with the statutory obligation to comply with awards, meant that an employee and employer could not create a salary sacrifice arrangement that resulted in the employee’s take-home pay falling beneath the award minimum (click here for Legal Update 26 Nov 2009 – Legal uncertainty for salary sacrifice arrangements), unless via enterprise bargaining.

This had caused considerable concern for many employers including those in the not-for-profit sector who benefit from tax friendly treatment of benefits provided under salary sacrifice arrangements, using them as significant attraction and retention tools.

However, in exercising its dispute settlement powers under the Fair Work Act 2009 (Cth) (Act) in Casey Grammar School -v- Independent Education Union of Australia [2010] FWA 8281, FWA has practically put the matter beyond doubt.

The question arose when an employee of Casey Grammar School asked to salary sacrifice approximately half of her annual salary into superannuation. The School refused because it would result in the employee’s annual take home pay being only $40,130.82; less than the minimum of $54,850 required by the Education Services (Teachers) Award 2010.

The School and the Independent Education Union of Australia sought clarification from FWA on the issue.

Vice President Lawler of FWA confirmed that the proposed salary sacrifice arrangement would not result in a breach of the award obligations to pay minimum rates of pay, provided the requirements for deductions from wages set out in the Act were met.

The power exercised by FWA in reaching its decision is not one that determines the issue conclusively beyond the parties to the dispute. However, in our view, it is a decision that may be safely relied upon by employers and employees to continue to enter into a salary sacrifice arrangement that may have this effect.

Implications for Employers

Employers can now have more confidence agreeing to salary sacrifice arrangements that cause the employee’s take-home pay to fall below minimum award obligations, provided the arrangement meets the wage deduction requirements of the Act.

The wage deduction requirements of the Act are that:

  • the deduction is authorised in writing by the employee
  • the written authorisation specifies the amount of the deduction, and
  • the deduction is principally for the employee’s benefit.

Wage deductions may also be authorised by an award or an enterprise agreement.

Employers should still ensure salary sacrifice arrangements are consistent with ATO rules about effective salary sacrifice, and do not breach the employee’s existing employment contract or any applicable collective or enterprise agreement.