Odd bedfellows for some: payroll compliance and the salaried employee

16 February 2021

A photo of two people sitting at a desk and only their hands and forearms can be seen. The person on the left is holding a document in his left hand and a pen in his right hand and is using the pen to point at the document. The person on the right is holding a calculator and inputting a function. On the table are a couple of documents, a cheque, a stack of coins, a pile of notes and an open, blank, lined notebook.

Given the extensive regulation that surrounds the minimum entitlements of employees in the Australian industrial relations system, it is still surprising how often businesses fall into the trap of “setting and forgetting” salaries for their staff. annualized salary

Recent years have seen several major businesses dragged into the realm of scandal because salaries, however generous, failed to keep up with the entitlements attached to the work actually performed by their employees.

Although salaries can be convenient, most notably among employees not regulated by a modern award or enterprise agreement, when applied to employees engaged under one of the aforementioned instruments they can become hellishly complicated to administer.

This article will explore some of the avenues available to businesses to ensure that salaries paid to these employees remain compliant with industrial law.

Provisions under modern awards

Where an employee is engaged pursuant to an industrial instrument, it may be possible to engage such an employee on a salary pursuant to a clause in the relevant modern award that specifically contemplates a salaried arrangement.

These provisions generally take one of two forms – an “annualized salary” provision or an “exemption rate” provision. Presently, these provisions appear in only 24 out of 122 modern awards – 21 with an annualized salary provision, and three with an exemption rate.

While both kinds of provisions allow for an employee to be paid a salary rather than separately compensated for various penalties, loadings and allowances, the means by which they achieve this differs greatly.

Annualized salary provisions

“Annualized salary” provisions operate to formalize, under the terms of an industrial instrument, the “buying out” of specific entitlements by paying a salary. These provisions generally come with several constraints, which in the whole make them less helpful for employers.

First, these arrangements must specify in exact detail the award entitlements that are “bought out” by the salary. It is very easy for entitlements to be missed, especially when businesses attempt to draft such arrangements in-house without the benefit of professional assistance.

Second, the salary in question must be very specifically calculated, and the assumptions on which it is based explained within the salary agreement itself. This has the tendency to result in salaries which are calculated with a minimal margin for deviation from those assumptions.

Thirdly, these arrangements require the employer to specify an “outer limit” or ordinary hours; if the employee works beyond this outer limit, the salary ceases to apply and instead the employee is entitled to be paid according to the strict terms of the award. This means that it is less likely for an underpayment in one period to be set-off by an overpayment in a subsequent period; it is more likely that the employee will “have their cake and eat it too”.

Provisions such as this currently exist in 21 modern awards; given that there are a total of 122 modern awards currently in operation, it may readily be discerned that the limited application of these provisions renders them less useful to business than may be hoped for.

Following a series of decisions by the Fair Work Commission as part of the review of modern awards, the provisions were standardized to a degree across all 21 variants with effect from 1 March 2020.[1] A full list of modern awards with these annualized salary provisions can be found here.

Exemption rates

In contrast, “exemption rate” provisions typically require less exactitude in order to be properly implemented.

These provisions operate on the basis that, if an employee is paid a certain amount above the relevant rate, that additional amount ought to be enough to satisfy any additional penalty rates or loadings to which the employee may become entitled over the course of their employment.

Because of the structure of these salaries rates, they are in most (but not all) cases specified as applying only to managerial staff, usually on the assumption that these employees are largely responsible for setting their own working hours or otherwise having a reasonable level of control over them. Where exemption rates apply to non-managerial staff, it is typically on the basis that the employee must not be worse off over a 12-month period.

The extent of this additional amount varies; however, such provisions presently appear in only three modern awards:

Hospitality Industry (General) Award 2020 – 25% above minimum salary;
Marine Towage Award 2020 – 40% above minimum salary;
Restaurant Industry Award 2020 – 25% above minimum salary.

The provisions in these awards require far less in terms of administration by the employer; generally, such clauses do not require any “outer limits” of work to be set, and the award itself specifies the entitlements that the salary “buys out” rather than requiring the employer to identify these in each agreement.

Although these provisions typically require less administration than an annualized salary provision, they quite often still require that an employer undertake some form of reconciliation to ensure that the employee is no worse off under the exemption rate. This therefore requires accurate time and attendance and payroll data to be maintained throughout the year, even though it may never need to be relied upon.

Provisions under enterprise agreements

As with modern awards, enterprise agreements can include terms which allow for salary arrangements. Annualized salary provisions and exemption rates are not unheard of, but any method of setting a salary which is agreed between the parties and satisfies the Better Off Overall Test may find its way into an enterprise agreement.

Contractual salary arrangements

Since formal salary mechanisms under industrial instruments are few and far between, by far the most common method of setting a salary is through a contractual arrangement, or what is sometimes called a “set off” arrangement.

This is an arrangement by which the employee, through their contract, agrees that any overpayment they receive in their employment can be credited against any underpayments. While these are relatively straightforward when applied to award or agreement-free employees, the situation becomes more complicated when an employee is subject to an industrial instrument.

The first issue, naturally, is that the salary must be high enough to actually compensate the employee for their entitlements under the relevant industrial instrument. Merely paying an employee a salary does not stop the relevant industrial instrument from applying, and this is a mistake that some businesses have made to significant detriment.

The other and potentially more complicated issue is that although the employee may have agreed, through their contract, to credit any overpayments against any underpayments, this only absolves the employer of the liability to make back payments. It does not alter that fact that a contravention of the FW Act may have occurred purely as a matter of timing.

The simplest example of this is in relation to s.323 of the FW Act, which require that employees must be paid “in full … at least monthly”. The result of this is that while an underpayment in February might, contractually, be set-off by an overpayment in May, s.323 of the FW Act was still breached simply by virtue of the delay. Modern awards and enterprise agreements often stipulate even shorter timeframes for “full” payment.

In practical terms, regulators are loathe to engage in prosecution where the employee has already received their full entitlements, whatever the mechanism, however the employer in such a case remains exposed to the risk of pecuniary penalties for contraventions of the FW Act. It is this liability which provisions such as annualized salaries and exemption rates seek to limit.

The long and the short of it

In practical terms, engaging award- or agreement-covered employees on a salary carries with it an element of risk.

Whether that risk is the difficulty of ensuring that all the requirements of an annualized salary provision are satisfied, the risk of blow-out upon reconciling the entitlements of an employee paid an exemption rate, or the risk of periodically contravening the FW Act, no option is foolproof.

Where such arrangements are contemplated, businesses should seek professional assistance to ensure that they are fully appraised of the risks that may arise from these arrangements, and develop strategies to minimise the prospect of these risks manifesting.