Does paying an employee an annualised salary satisfy the employer’s obligations under a modern award? By Jeremy Cousins.

It is common for employers to pay their employees an annualised salary on the assumption that doing so will satisfy the employer’s obligations under any applicable modern award. A recent decision of the Western Australian Industrial Relations Commission (WAIRC) casts doubt over this approach, particularly for administrative or clerical employees covered by the Clerks – Private Sector Award 2010 (Clerks Award) who are not provided with a properly tailored employment contract.

Employers paying their administrative or clerical employees pursuant to an annualised salary arrangement should consider reviewing the terms of their employees’ contracts of employment in order to remove, or reduce, the risk of back-pay claims and to avoid potential civil penalties under the Fair Work Act 2009.

The issue

The Clerks Award states that an employer may pay an employee an annual salary in satisfaction of any or all of the following entitlements under the award: (a) minimum wages; (b) allowances; (c) overtime and penalty rates; and (d) annual leave loading. The actual salary paid must be no less than the employee would be entitled to if they were paid effectively on an hour-by-hour basis under the award. The award also states that the employer must “advise the employee in writing of the annual salary that is payable and which of the provisions of [the] award will be satisfied by payment of the annual salary” [at clause 17.2].

In the recent decision of Stewart v Next Residential Pty Ltd [2016] WAIRC 00756 (Stewart case) the WAIRC was required to consider whether an employer could rely on the payment of a $78,000 annual salary to an employee covered by the Clerks Award to discharge its obligation under the award to pay overtime to the employee (for working through her lunch break and at other times). The annual salary was considerably higher than the minimum rates of pay under the award for working standard hours. The employer had failed to provide the employee with a contract of employment which notified the employee about which provisions of the Clerks Award were said to be satisfied by the annualised salary (in breach of clause 17.2 of the Clerks Award). The employee claimed $28,894 in overtime pay, in excess of the $78,000 annual salary already paid to her.

The employee’s contract of employment referred to an annualised salary and stated that” “Your salary is inclusive of any award provisions/entitlements that may be payable under an award”. However, the contract did not refer to clause 17 of the Clerks Award, as was necessary in this case because of the type of work performed by the employee.

The WAIRC was required to determine a preliminary issue of whether or not the employee’s contract of employment excluded the employee’s claim to overtime.

The outcome

The WAIRC found that the employee’s contract of employment did not prevent her from pursuing her claim to overtime pay. This was because the contract did not clearly indicate that the employee’s annual salary included the entitlements she sought to recover.

The WAIRC said: “For administrative ease, it is common for employers to pay an ‘all-inclusive rate’ which is intended to compensate the employee for all award entitlements in relation to their work, which may include minimum wages, overtime penalty rates and leave loading. It is imperative that such intention be clearly articulated in the employment contract because an employer will be unable to meet its award obligations by offsetting award obligations against over-award payments, unless there is specific agreement with the employee about what the over award payments are compensating the employee for.

“The need for specificity is recognised by cl 17(1)(b) of the Award which requires the identification of the specific provisions of the award that will be satisfied by the payment of the annual salary. If a payment is made to satisfy a particular award obligation such as ordinary hours of work, then the excess cannot be set off against a different award obligation such as overtime unless the contract of employment clearly indicates that the excess is paid to satisfy any entitlement to overtime. The requirement for specificity is aimed at removing any doubt about what the annualised payment is for.”

The WAIRC noted that the employee’s contract of employment “lacked the type of specificity” required by the award. The WAIRC’s decision confirmed that the employee could pursue her underpayment claim.

The impact

Employers should review their relevant modern awards and contracts of employment used in connection with annualised salary arrangements. However, while many employers are likely to have some employees covered by the Clerks Award and therefore could be affected by the Stewart case, not all awards contain the same requirement to notify employees about award entitlements which the employer seeks to satisfy by payment of an annualised salary. The Clerks Award is very specific in this regard.

Furthermore, the WAIRC’s decision in the Stewart case is not binding on other courts and it may ultimately be found to contradict earlier case authority to the extent that it indicates an employer may not be able to set-off the annual salary against other award entitlements.

An employer will commit a breach of the notification requirements in clause 17.2 of the Clerks Award where the required information is not provided to a relevant employee. This could lead to civil penalties being imposed. However, it may ultimately be found that where an employer fails to comply with the notification requirements, the employer is still able to apply the annualised salary to set-off any entitlements under the award to overtime and penalties etc. where the annual salary is in excess of the basic award rates of pay and intended to be in satisfaction of all entitlements, even where this is not specifically expressed. However, this would be a risky and uncertain approach given recent cases. Employers should simply ensure that their employment contracts comply with the Clerks Award and are properly effective to discharge the relevant award obligations.

When checking and updating contracts of employment, it is important that employers ensure the relevant modern awards are properly identified and any annualised salary clauses are taken into account, and where necessary, referred to in (but not incorporated into) the contract.

Jeremy Cousins is a Principal of Whitehall Workplace Law. Whitehall Workplace Law can assist AMTIL employer members with all employment law, industrial relations and occupational health and safety matters.