Your guide to annualised salaries and set-off clauses in employment agreements

Annualised salaries provide employers with a way to pay an employee for all of their award entitlements by paying a fixed lump sum salary. It is important for employers to ensure that annualised salary arrangements are coupled with a set-off clause in an employment agreement.

In this article, we discuss what annualised salaries are, whether they are worthwhile, what employers need to do to comply with the law and recommendations regarding ongoing monitoring and compliance.

Author: Farrah Motley, Legal Principal of Prosper Law - an employment law firm.

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What is an annualised salary?

Employers often choose to pay an employee a salary rather than paying an hourly rate in addition to any entitlements owed to the employee under a Modern Award. This is referred to as an annualised salary.

An annualised salary is a payment made by an employer to its employee that is 'all-inclusive' with respect to the relevant Modern Award. In other words, the employer pays an annual salary that covers all award entitlements, rather than paying each entitlement individually.

Many employers seek advice from a workplace lawyer regarding annualised salaries.

Is it worth annualising a salary?

Annualised salaries may seem like an attractive way to remunerate employees because they appear easier to administer by overcoming the need to analyse all the entitlements owing to an employee.

The basic idea behind annualised salaries was to simplify payroll for both employers and employees.

However, for employers like you, they have become increasingly difficult to manage.

Instead of reducing the administrative burden, annualised salaries have meant that employers need to set up a system for employees to clock in and out to keep records, as well as keep records of unpaid breaks and overtime and then conduct audits.

Moreover, the records must be acknowledged by the employee as accurate for each pay period. All of these administrative obligations are significant and have been considered to defeat the purpose of employers implementing annualised salaries.

Implementing agreements on annual salaries can become difficult and time-consuming. For this reason, it is important for employers to assess whether an annualised salary arrangement is appropriate and seek advice from a workplace lawyer.

How to draft an annualised salary set off clause

Employers may wish to rely on contractual arrangements by using a set-off clause to cover the compensation that would otherwise be owed to employees for certain monetary claims under an applicable award.

Under a set-off clause, employees will receive a higher salary than the base rate. It must also specify that the ‘over-award’ component will be treated as if you had fulfilled your obligations to pay other forms of payment that may result from an award, such as overtime, weekend penalty rates, leave loading, and allowances.

Overall, for these set-off clauses to be legally enforceable, they must be appropriately drafted and comply with the relevant statutory record-keeping requirements. That is where a workplace lawyer can help.

Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate

The legal validity of set-off clauses was reaffirmed by the Full Court of the Federal Court in Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate. In Linkhill, the court considered that there should be a:

“close correlation between the nature of the contractual obligation and the nature of the award obligations”

The court examined the history of various court decisions (dating back to the 1967 decision in Ray v Radano) and considered whether or not set-off clauses are valid and/or enforceable in practice.

As a result, the court was satisfied that such clauses are valid and can be enforced as long as they are reasonably worded and the compensation paid is sufficient to fully satisfy the employer's obligations.

In other words, the court found that if the employer and employee agreed that the salary payment could be applied against specific award payment obligations, the clause was valid.

An employment law firm is able to provide employers with guidance on the specific award payment obligations that can be covered by an annualised salary.

How to draft an annualised salary set off clause

You may find the following sample set-off clause helpful in preparing your own set off clause. However, because this area of law is complex, it is advisable to seek the advice of a workplace lawyer.

Your Salary and other employment benefits will be in satisfaction of any payment or other benefit you may have under legislation or any relevant Modern Award (if any) (“Minimum Entitlements”) as far as possible. Employer may offset any amount it pays to you in excess of the Minimum Entitlements against those Minimum Entitlements.

Minimum Entitlements include:

(a) minimum hourly rates for all ordinary and additional hours you work over a 12 month period, whether part of ordinary hours or not;

(b) public holiday and substitute public holiday rates that fall during your ordinary hours of work;

(c) all allowances, including but not limited to:

i. vehicle allowance (including but not limited to petrol expenses);

ii. fares, travelling expenses and travelling time allowance (including but not limited to meal allowance); and

iii. equipment and special clothing allowance.

(d) leave loading; and

(e) overtime and penalty rates.

In Simone Jade Stewart v Next Residential Pty Ltd [2016] WAIRC 00756, the Western Australian Industrial Magistrates Court rejected the approach of an employer that included a generic ‘catch-all’ provision in its contract of employment. In the employment agreement, the set-off clause stated that the annualised salary was “inclusive of any award provisions/entitlement that may be payable under an award”.

Under the annualised salary provision of many Modern Awards, the award entitlements covered must be specified (like the list in the above example clause), so that the employee can ensure they are not suffering any disadvantage by comparing their pay with the award entitlements. If the set-off clause is too general, it is unlikely to be enforceable.

For this reason, it is advisable to seek the advice of an employment law firm to carry out a review of your employment agreements and the Modern Awards that may apply to your

employees.

How can employers ensure they comply with annualised salary obligations?

An overview of annualised salaries

When implementing an annualised salary, employers should ensure that:

• the annualised salary does not disadvantage employees;

• a record must be kept of the starting and finishing times, and any unpaid breaks taken

• regular audits should be taken by the employer to determine whether there has been any shortfall in the amount the employee was paid under the annualised wage arrangement and the amount they would have otherwise been entitled to be paid under the Modern Award

Employers should determine whether they want to use an annual salary arrangement to remunerate employees. If so, employers should review the annual salary paid to each employee. In addition, employers need to make sure employees know how much overtime and penalty hours an employee is required to work without additional pay.

When reviewing the annual salary, employers need to calculate how many overtime and penalty hours are compensated in a pay period or roster period with the annual salary.

Once an employer is satisfied with the annual salary calculation, employers should notify or agree with the employee in writing about their annualised salary and calculations.

Employers can send employees a letter with the details of the salary calculation or an updated employment contract. However, it is advisable to get the agreement in writing.

A workplace lawyer can provide employers with advice, as well as updated employment agreements.

Keep written records relating to annualised salaries

According to the annualised salary model clauses, you must keep all records of the employee's annualised salary records in writing for seven years.

The records must include the following:

• amount of annual salary

• method of calculating annual salary

• overtime

• penalty rates

• starting and ending times, including unpaid breaks taken by employees

All of these requirements relate to general annualised salaries. In addition, each Modern Award has specific requirements that employers must meet. For example, some Modern Awards require that employers and employees enter into a formal, written agreement detailing the annualised salary arrangement.

Therefore, you must consider the applicability of the Modern Award to specific requirements. The easiest way to do this is to hire a workplace lawyer to carry out this review on your behalf.

Record start and finish times

Many employees do not record their times and attendance. As a result, it can be difficult for employers to accurately calculate the annualised salary amount and compare it to the amount the employee would have received based on Modern Award entitlements.

To ensure an annualised salary arrangement is appropriate and enforceable, employers need to record the employee's start and finish times. In addition, employers need to record not only the employee's start and end times but also the unpaid breaks the employee took.

Employers also need to ensure that these records are acknowledged as a true record by employees on a regular weekly or daily basis.

Employers may wish to consider implementing an automated time tracking solution to keep track of them, instead of keeping these records manually.

Further advice can be provided by a workplace lawyer.

Conduct an audit to compare the salary versus the entitlements

At the end of 12 months or upon the termination of employment, employers must reconcile the hours worked by an employee. Then employers must compare the annualised salary paid with the amount the employee would have earned under the applicable Modern Award.

In case there is a shortfall in the amount paid to the employee, you must pay the amount to the employee within 14 days of the annual reconciliation. Moreover, if an employee resigns or their employment is terminated before 12 months have passed, employers must perform the audit sooner.

A workplace lawyer can provide employers with advice on the best way to audit compliance and ensure wages are accurately paid.

The following steps should be taken to check and ensure compliance with annualised salary arrangements:

Review salaries regularly

Employers should review salaries at least once a year. A more regular review may be required depending on the Modern Award and should be carried out when there has been a change in pay rates under any awards that apply to your industry or employees

Develop a clear mechanism for paying annual salaries and make sure they are followed

Employers need to verify that they are paying annual salaries under an annualised wage agreement or a set-off clause in a compliant way. This includes ensuring that payroll systems (especially where they are automated) are calculating entitlements accurately

Review records and record-keeping practices to ensure compliance with record-keeping requirements

All record-keeping requirements are critical to ensure that employers can monitor and demonstrate compliance with Modern Awards

If you are an employer that needs legal advice regarding each of the above points, contact a workplace lawyer.

Employers need to be careful of Modern Awards that which require entitlements to be paid within a specific pay period. Otherwise, while an annual salary in an employment contract may meet award entitlements over the course of a year, this may still be non-compliant with a Modern Award that requires entitlements to be paid within a specific pay period. This was confirmed by the Court in Annualised WageArrangements [2018] FWCFB 154.

What happens if the salary you are paying is less than the amount owed to the employee under an Award?

An annualised salary shall not be less than the minimum entitlements to which an employee is entitled under the award or registered agreement and the National Employment Standards.

If an employer fails to comply with a Modern Award annualised wage clause, they could face the risk of underpayment claims (also known as wage theft). There are serious financial and reputational risks that may result from claims of underpayment of wages.

The following are examples of where employers have been penalised for underpayment of wages:

• Foxtel underpaid an amount of $4 million to more than 2,000 employees and self-reported the matter to the Fair Work Ombudsman in 2021

• CIMIC (formerly Leighton Contractors) has been accused of not paying hundreds of millions of dollars to workers in its Middle East operations, which demonstrates the reputational risk that companies face by underpaying employees

• a payroll error resulted in an underpayment of $1.8 million by Australia Post to 19,500 former workers

The maximum penalties for breaches of civil penalty provisions, such as the requirement to pay the minimum wage and keep required records of each employee, are up to $13,320 per breach for an individual and $66,600 per breach for businesses. If the breach is a "serious contravention," the maximum penalties increase to $133,200 per breach for individuals and $666,000 per breach for companies.

Further, each State and Territory continues to impose harsher penalties for wage theft. In Queensland for example, wage theft is now a criminal offence and subject to a maximum prison term of 10 years.

If you are an employer and believe you may have underpaid employee wages, you should urgently seek advice from an employment law firm.

How can Prosper Law help?

Prosper Law is Australia's online law firm with experience in providing workplace legal advice to businesses across Australia. Our experience in handling commercial legal matters is second to none.

If you are an employer and need workplace legal advice on annualised salaries and set-off clauses in employment agreements, contact Prosper Law today.

Farrah Motley | Legal Principal

PROSPER LAW - A Commercial Law Firm for Businesses

M: 0422 721 121

E: farrah@prosperlaw.com.au

W: www.prosperlaw.com.au

A: Suite No. 99, Level 54, 111 Eagle Street, Brisbane, Queensland Australia 4000