Annualised Salaries – Common mistakes and recent FWC changes
Annualised salaries, or annualised wage agreements are commonly used by employers to simplify the wage payment process for employees that would otherwise be paid under a Modern Award. The concept is fairly straight forward, annualise an employee’s wages over a 12-month period to pay a set amount in satisfaction of the modern award requirements (loadings, penalties, overtime, allowances etc.)
Central to the premise of annualised salaries, is that the employee should be no worse off under the annualised salary arrangement than they would have been had they been paid each pay cycle for the hours worked. However, these arrangements have led to many instances of underpayments for a variety of reasons including the following all too common reasons:
1. Not accounting for when hours are worked
Many employers simply use the base rate of pay to calculate the salary amount regardless of when hours are typically worked. When calculating an annualised salary it is important to account for all penalties and loadings the employee would otherwise be entitled to considering the actual hours of work and the applicable Modern Award.
For example, if an employee is required to work on a weekend or public holiday, they may be entitled to penalties, if they work an afternoon or night shift, or outside a specified span of hours they may be entitled to loadings.
2. Underestimating the number of hours worked and how these hours are calculated
Many annualised salary agreements include a phrase such as ‘your salary includes reasonable overtime hours’. The agreement may also specify the number of weekly hours the annualised salary compensates the employee for.
However, employees may work more hours per week than the annualised salary compensates them for. Commencing work 15 minutes early, working late to cover a no show, or popping into the office’ on a weekend to catch-up on some paperwork for a few hours - these additional hours can add up quickly. In most cases where the average weekly hours worked across a roster cycle exceeds 38 hours per week these hours should be calculated at overtime rates, not the base rate of pay.
3. Not understanding the nuances of the relevant Modern Award
All Awards have nuances that need to be understood and accounted for. For example, the General Retail Industry Award (GRIA) requires full time employees to have two consecutive days off per week and work no more than five consecutive days per week. Where six days are worked in a single week, the GRIA requires employees to have three consecutive days off in week two. There is also a specific clause to allow permanent employees that regularly work Sundays time off every four weeks.
4. Taking a one size fits all approach
Let’s take a look at an organisation that has 50 Assistant Store Managers (ASMs). Under the GRIA, these ASM’s would typically be classified as a Retail Employee Level 4. It is a common practice to annualise the salaries of these employees, however problems can arise with taking a one size fits all approach and making assumptions regarding the number of hours worked and when those hours are worked.
Making such assumptions may result in a combination of overpayments and underpayments, even if ‘on average’ the employer is paying as much under the annualised salary agreements as they would under the Award – it is unlikely every ASM will be working the same number of hours and generally the same shifts.
Confusing? Yes, it can be.
And it can also be an expensive exercise for employers that fail to address each of these issues when entering into annualised salary agreements – the additional money owed can add up very quickly.
These common mistakes can add up quickly
Let’s look at a simplified, illustrative, non-Award specific (is that enough caveats?!) example of an employee who agrees to an annualised salary arrangement. James is paid for 40 ordinary hours per week and his employer estimates that James will, on average, work five hours of overtime each week. James employer calculates his salary as follows:
40 ordinary hours x $22.50 = $900
5 hours OT per week x $33.75 = $168.75
James base salary is $1068.75 per week or $55,575 p.a.
However James actually works one afternoon shift per week that attracts a 20% loading. He also works 6 public holidays each year (200% penalty) and works one Sunday per month (200% penalty). James was also asked on 10 occasions during the year to work back after the end of his scheduled shift (at an average of two hours per occasion) and worked an additional 10 shifts (eight hours each) to cover some unexpected sick leave. The number of additional hours worked totaled 100. Under the Award, James was also entitled to additional allowances (meal allowances and a crib break allowance) on 20 occasions.
If we were to calculate the total amount James would have earned had he been paid per the relevant Award it would look something like this:
38 ordinary hours x $22.50 x 52 weeks = $44,460
Annual afternoon shift penalty cost = 7.6 hours x $4.50 x 52 weeks = $1,778.40
Sunday penalty cost = 7.6 hours x $22.50 x 12 months = $2,052
OT cost (base) 7 hours x $33.75 x 52 weeks = $12,285
OT (additional hours) = 100 hours x $38 (blended OT rate) = $3,800
Public Holiday costs 7.6 hours x $22.5 x 6 PH = $1026
Allowance costs 20 x $15 = $300
Leave Loading 17.5% x $22.50 x 7.6 hours x $20 days = $598.50
James would have earned a base salary of approximately $66,300 under the Award, or $10,725 more than his annualised salary.
If James is one of 20 employees on an annualised salary with similar assumptions and actual work practices the liability can quickly run into the hundreds of thousands of dollars per annum, let alone over multiple years including superannuation liabilities and interest payments.
What is the impact to employers?
The changes introduced by the FWC require employers to maintain better record keeping, be transparent when calculating annualised salaries and review arrangements to ensure underpayment does not occur. While there are variations in the annualised salary clauses across the affected modern awards, the following obligations are largely consistent in the new annualised salary clauses:
An employer is required to advise an employee and keep a record of:
the amount payable;
the terms of the modern award satisfied by the ‘annualised wage arrangement’’; and
the maximum number of ordinary hours and overtime hours in a given pay period or roster cycle that are compensated for.
Any amounts worked in excess of the maximum ordinary hours and overtime hours must be paid in addition to the annualised salary.
Employers are required to conduct a reconciliation every 12 months (or on termination of employment) against the amounts payable under the modern award.
Employers are required to keep written records of starting times, finishing times and unpaid breaks taken, which must be signed or acknowledged by the employee as correct.
Practically what does this mean for employers and is it enough?
So, via the modern award updates the FWC is placing greater level of accountability on employers to reduce the risk of underpaying employees under an annualised salary agreement. But what risks remain, and importantly, what can employers can do to minimise these risks?
The FWC requires employers to conduct annual reconciliations. However, employers conducting reconciliations at 12 months might just be in for an expensive surprise per the illustrative example above. Conducting quarterly reconciliations where many employees are working under an annualised salary agreement, or half yearly where there are only a few employees working under these agreements, allows an employer to correct any discrepancies before they get out of hand.
Providing clear workforce policies that guide work practices can help reduce additional hours being worked. For example, it is not uncommon for Assistant Store Managers to remain behind and fill a shift when an employee calls in sick at short notice. Organisations quite rightly set labour budgets, however these can quickly blow out when shifts require filling at short notice. Rather than explaining labour cost increases to management, the ASM may perceive it to be easier to complete the shift and avoid the discussion.
It is also common for employees to pop into the office on a weekend to catch up on a few hours of paperwork – even when they are not rostered. It doesn’t matter that the employer doesn’t endorse these practices, the fact the hours have been worked means they have to be accounted for in any annualised salary arrangement (or paid as a ‘top up’ on reconciliation).
Organisations that set clear policies in regards to work practices, communicate these policies and monitor the actual work practices are on the front foot and can proactively manage work practice trends as they occur. Of course, to monitor work practices, organisations require accurate data and thus consistent record keeping is a must.
Ensuring employees clock in and out for the start and end for all shifts and breaks can be a challenge at the best of times. Add into the mix an employee on an annualised salary and the challenge increases significantly. Written records must now be kept, and acknowledged by employees as being correct. The FWC doesn’t state specifically how often this needs to occur, but each pay cycle (prior to approval for payment) makes sense.
The wash up and next steps
Annualised salary arrangements are typically undertaken to simplify the payroll process and provide certainty of earnings to employees, however, given the additional governance required over such arrangements, you may wonder if the additional obligations imposed by the FWC negates these advantages.
The next 12 months will be interesting to see if there is a decrease in the number of annualised salary arrangements – we suspect there might. However they still have their place where mature organisations understand their workforce, are able to accurately calculate annualised salaries (avoiding the common mistakes detailed above), have clearly defined workforce policies and robust time and attendance systems that allow transparent monitoring of work practices.
Impact HRT have extensive experience reviewing annualised salary arrangements, conducting regular reconciliations and providing practical, operationally focused advice where under and/or over payments exist. Contact us for a no obligation, confidential discussion about any workforce issue you may have.
The information provided in this article is general in nature and should not be relied upon for any specific or individual scenario. Always seek qualified assistance in navigating employment and labour law.
