Many employers prefer to pay their employees an annualised salary due to the ease of paying the same amount each pay period. There are many options for implementing an annualised salary arrangement, such as via a common law contract set-off clause, negotiation of an enterprise agreement, entering into an individual flexibility arrangement or by using the new modern award annualised salary clause.

As a result of changes to modern awards in 2020, some modern awards now contain an annualised salary clause, which enables an employer to pay those award staff an annualised salary in accordance with that clause, which is meant to cover the employee for stipulated award entitlements.

If you have implemented annualised salary arrangements for your award-covered employees, it is important to check on an annual basis whether that annualised salary still compensates those employees for the applicable award entitlements. If there is a shortfall, this may result in underpayment claims, penalties, legal action, audits by the Fair Work Ombudsman, bad publicity and disgruntled employees.

You will need to check if your modern award(s) contain the model annualised salary clause. While there are differences between the clauses in each award, essentially, they require an employer to:

• notify the employee of the arrangement;
• notify the employee of the annual salary amount;
• keep a record of the amount payable;
• record the clauses of the modern award satisfied by the annualised salary arrangement;
• outline the method of calculation of the annualised salary arrangement;
• record the outer limit of the number of ordinary hours or overtime hours each pay period/roster cycle that are covered by the annualised salary arrangement;
• pay penalty rates or overtime rates to an employee where these outer limits are reached, in addition to the annualised salary;
• conduct a reconciliation of the annualised salary against the award entitlements, every 12 months or on termination of employment, to ensure no underpayment has occurred and if it has occurred, that it is rectified within 14 days; and
• keep timesheets, recording in writing start and finish times and unpaid breaks taken, which must be verified in writing by the employee.

If you want to implement an annualised salary arrangement with an award-covered employee (whether via a modern award clause, enterprise agreement, common law contract set-off provision or individual flexibility agreement), it is important to think about the entitlements you need to cover and do some calculations to determine what a lawful annualised salary amount will be, prior to implementing it. For example, you should consider what overtime, penalty rates and other allowances need to be covered. This will assist in reducing the risk of underpayment claims.

By Kelly Godfrey