Can I pay my employees an annualised salary instead of a wage under a Modern Award?

Many employers are faced with a myriad of wage rates, overtime, penalties, allowances and other entitlements when calculating an employee’s remuneration. This can make processing payroll a stressful and burdensome process, especially if an employer employs many staff.

It is for this reason that employers frequently ask our lawyers, ‘is there a simpler way to remunerate my employees?’

Salary compared to individual entitlements under a Modern Award

Many employees across Australia will be covered by a Modern Award. These are documents which are created and updated by the Fair Work Commission (FWC) which set minimum terms and conditions of employment, minimum wage rates, overtime rates, allowances, penalty rates and other entitlements of covered employees.

Modern Awards also include several entitlements and allowances specific to different industries (for example, the General Retail Industry Award 2020 contains a cold work allowance for employees principally employed on any day to enter cold chambers or to stock or refill refrigerated storages such as dairy cases or freezer cabinets).

Terms regarding minimum wage rates, overtime, penalties, entitlements and allowances do not preclude an employer from paying employees an annualised salary or a ‘loaded rate’ which satisfies or is more beneficial than the entitlements an employee would otherwise receive under a Modern Award.

Calculating whether an employee’s salary meets or exceeds their entitlements under their applicable Modern Award can be a difficult task which may require specific financial and/or industrial expertise or skills such as those of a bookkeeper, accountant, HR advisor/ consultant or a legal advisor in more complex situations. The ramifications of miscalculating an employee’s entitlements and consequently resulting in an underpayment are significant and outlined below.

Several Modern Awards contain specific limitations or requirements when applying annualised salaries, so be sure to check or request legal advice as to whether the applicable Modern Award contains any such limitations.

Why would I choose to pay an annualised salary?

An annualised salary can ease the administrative burden of the payroll process on a more regular basis, particularly if a given worker’s pattern of work is predictable.

Calculating an appropriate salary or loaded rate which would meet or exceed the entitlement an employee may have under a Modern Award will require careful attention to detail. However, if calculated correctly and reviewed regularly (especially when rates in the Modern Award change), an annualised salary or loaded rate may assist in reducing administrative processes associated with processing payrolls over time.

As outlined below, it is essential you have the required contractual paperwork in place if you will be applying an annualised salary or loaded hourly rate.

Why would I choose to pay the Modern Award rates?

Remunerating employees exactly in accordance with the relevant Modern Award may be a safer option for some employers, providing they correctly interpret and pay the entitlements.

The FWC undertakes an annual wage review which usually sees an increase of wages and entitlements on an annual or more frequent basis. If an employer pays in accordance with the Modern Award, they will be able to rely on updated pay guides released by the Fair Work Ombudsman to work out the correct remuneration entitlement of their employees for each pay period.

If employers have opted to pay their employees an annualised salary or loaded hourly rate, they should review their employees’ salary or loaded hourly rate each time the FWC updates the entitlements in the relevant Modern Award to ensure that it meets or exceeds any amendments to wages, overtime, allowances, penalty rates and other entitlements.

On Friday, 2 June 2023, the FWC announced a 5.75% increase to all Modern Award minimum wages. Employers that have opted for annualised salaries should review and potentially amend the remuneration they pay their employees to ensure it satisfies the new minimum wage rates and entitlements. This can be a tedious and challenging task to undertake on an annual or more regular basis, however, some employers may prefer to undertake the review from time to time as required, rather than regularly calculating entitlements in each pay cycle.

Employment Contracts and Annualised Salaries

If an employer seeks to implement annualised salaries for its employees, the first step is to consult and seek agreement from employees to do so.

If the employee agrees to be paid an annualised salary, it is essential this arrangement is documented appropriately. The ideal way to document the arrangement is in a contract of employment.

The contract of employment should be carefully drafted to state the annualised salary is inclusive of all Modern Award entitlements payable to an employee (such as wages, penalties, allowances, overtime, etc). Crucially, the contract of employment must include a ‘offset clause’ which would allow for an overpayment of one type (such as wages) to cover an underpayment of another (such as overtime). These clauses are complex and legalistic, we strongly advise you seek legal assistance to ensure your contracts of employment protect you as best as possible from underpayment claims.

MGA TMA provides suitable contract templates to members free of charge. Please contact our legal team to obtain copies of templates which suit your needs.

MGA TMA strongly recommends you do not enter into any annualised salary or loaded hourly rate arrangement unless you are certain you have taken all necessary steps to protect yourself from wage underpayment claims –this includes making the necessary calculations (and reviewing them regularly) and having the necessary contracts of employment in place.

What happens if I have underpaid my employee?

Some Modern Award require employers to undertake a 12-month audit to ensure that employees are remunerated at the award rate, or above. This is good practice even if an employee’s Modern Award does not require it.

If an employer discovers that an employee has been underpaid in their review, then they should take immediate steps to make the necessary backpay and ensure the employee is paid correctly in future.

Steps in rectifying the underpayment

The first step in rectifying an underpayment is to calculate how much money an employee is owed. This will be the difference between what the employee was entitled to (or what they should have been paid) and how much the employee was actually paid. There may need to carefully consider taxation and superannuation implications and potentially seek professional advice.

Once you have calculated how much an employee is owed, you should speak with the employee and advise them of the underpayment and explain how much money they are owed. You should advise the employee when they can expect to receive the backpay (on the next pay day).

If you are unable to afford paying the necessary backpay, you should seek legal advice immediately.

Penalties for non-compliance with National Employment Standards

The underpayment of employees or noncompliance with minimum remuneration entitlements can attract significant financial penalties for employers and their managers personally if an employee is successful in their claim. These penalties may be imposed by a court order and can be up to $16,500 for each contravention for individuals, and up to $82,500 per contravention for companies.

Serious contraventions can attract penalties of up to $165,000 per contravention for individuals and $825,000 per contravention for companies. These higher penalties are typically imposed in circumstances where employers are aware that they are in breach of workplace laws or where there is a systemic pattern of conduct affecting many employees.

In some parts of Australia, underpayments are considered ‘wage theft’ and attract criminal penalties for companies and individuals involved. Those penalties include significant fines and, in some cases, imprisonment.

A case-by-case approach

Neither of the options discussed in this article are right or wrong. Each business has different needs and operational requirements that will see benefits in both methods, and a business should consider which method will work best for them.

If members require any assistance in choosing the right approach for their business or have any questions regarding Modern Awards or annualised salaries, please do not hesitate to contact our Employment Law team for tailored legal advice.

The above article is provided for general information purposes only. Nothing in this article should be construed as legal advice. Members requiring assistance or advice should contact our Employment Law team on 1800 888 479.