LEGAL Guarantee of Annual Earnings

Recently the AFAP has seen an increase of employers attempting to subject their employees to what is referred to as a guarantee of annual earnings.

Pilots should be aware of the formalities of entering into a guarantee of annual earnings, and the effect a guarantee of annual earnings has on entitlements that might arise under the Air Pilots Award 2020.

The Fair Work Act 2009 (Cth) provides that employers and high-income employees may agree to enter into a guarantee of annual earnings. This may be done where:

• The employee is a high-income employee

• A modern award covers the employee, and the employee is not subject to an enterprise agreement

• The guarantee is offered to the employee and accepted within 14 days of either the date the employee is employed or the day on which the employer and employee agree to vary the employment conditions

A high-income employee is defined as an employee who has a guarantee of annual earnings that exceeds the high-income threshold. The high-income threshold is an amount set under the Fair Work Act and is indexed each year. For the financial year ending 30 June 2023, the income threshold is $162,000.

Where the employee is notified before or at the time the guarantee of annual earnings is signed by the employee, and advised that the modern award will not apply to them, then the employee will not be entitled to the various benefits that are conferred by the modern award.

In that decision, the Federal Court had to consider a mining company that had retrenched 20 employees, which during their employment had been paid an amount higher than the high-income threshold (as it stood at the time) under their contracts of employment.

Because this amount was contractually guaranteed, in writing, the mining company argued that the employees were subject to a guarantee of annual earnings, and were therefore not entitled to the payout of accrued personal leave entitlements, a benefit provided for under the relevant award.

Through a detailed analysis of the relevant provisions of within the Fair Work Act, the Federal Court disagreed. Although there was a requirement for the employees to be paid an amount higher than the high-income threshold, it was not an undertaking of the required type. Something more was required. The terms of the terms of the contract of employment were not sufficient to consititute a guarantee of annual earnings.

The Court held that the scheme created by the Fair Work Act and guarantees of annual earnings "includes protections to ensure that the guarantee is identifiable, enforceable and voluntarily accepted by the employee with knowledge that the result will be that the modern award will no longer apply to them". A mere contract on its own was not sufficient.

Special considerations might apply to pilots who are covered by the Air Pilots Award, which for some aircraft provides for minimum salaries higher than the high-income threshold. In light of the Federal Court's reasoning, it would appear that the requirement to pay those rates alone will not constitute a guarantee of annual earnings, There has to be more. The limits of exactly what more is required has not been tested.

Pilots should read any contract of employment carefully to ascertain whether they might be subject to a guarantee of annual earnings. The AFAP is available to review contracts of employments and advise on their contents.

For example, if a pilot and their employer enter into a guarantee of annual earnings in accordance with requirements of the Fair Work Act, then the Air Pilots Award would no longer apply to the pilot. This means that the pilot would no longer be entitled to any conditions derived from the Air Pilots Award, such as loss of licence, rostering protections and the various allowances.

The enforceability of a guarantee of annual earnings was considered by the Federal Court last year in the decision of Association of Professional Engineers, Scientists and Managers Australia v Peabody Energy Australia Coal Pty Ltd [2022] FCA 945.