Is this the end to Annualised Salaries for Award covered employees?

Possibly?

The Federal Court recently delivered its much anticipated judgment in what everyone is calling the Woolworths and Coles decision. This decision has already received unprecedented media attention and has broad implications for: offsetting, annualised salaries, record-keeping obligations and the strict requirements for varying Award conditions.

Key Findings

1. Set Off or "Offset" Clauses: Payments made for each pay period could only be set off against entitlements arising during that same period (ie weekly, fortnightly). That is ‘overpayments’ could not be set off against ‘underpayments’ in a past or future pay period (ie 26 week average in this case). It is irrelevant that an employee may be ‘better off overall’ over a period of a year or other shorter period (26 weeks in this case) - the salary payments must be enough to cover entitlements each and every pay cycle. Further, if there was no express offset clause that dealt with items such as overtime, penalty rates and allowances an employee’s salary could only satisfy the employees' ordinary wages – even if they exceeded the other entitlements, like overtime, penalty rates and allowances.

2. Annualised Salaries: are contractually permissible, but only to the extent they don’t breach Award entitlements and the obligation to ensure that minimum entitlements under an Award are met within each pay period. Further the arrangement must result in actual payment – not just the mathematical calculation of it after the event. Further, in any permissible annualised salary arrangement there still must be a clear indication of the order in which the payment of each entitlement(s) other than ordinary wages is to be allocated. If there is no such express allocation for entitlements other than ordinary wages (ie overtime, penalties, loading or allowances) the allocation would have to be split equally between all elements – which is likely to have the result that larger monetary items such as overtime are likely to be ‘underdone’ and lower monetary items such as allowances are likely to be ‘overdone’ (eg if there is just reference to overtime, penalties, loading or allowances without any express allocation a court would ‘presume’ that the allocation is 25% for each and not any higher amount).

3. Record Keeping: Employers must keep records of hours (even for salaried employees) that incur all penalties, loadings and allowances, not just overtime. Clocking in and out may not be enough. Time records must indicate which of hours hours were ordinary and which were overtime (or incurred other penalties). It is not sufficient to be able to produce the records from other documents, they must be separately kept and readily accessible.

4. Agreements to Vary Award Entitlements: Express specificity is required for an employee to truly "agree" to a variation permitted by an Award (ie ‘global’ permission is not acceptable). In this case accepting a roster with only 10 hours between two shifts meant the employee could only agree to the variation if they were aware they were forgoing their right to a break of 12 hours. Similarly, if an arrangement is going to result in an employee not getting overtime (ie because mutual agreement to vary hours) employers are obligated to explain the consequence not just presume an understanding of the entitlement.

Our Take

Wow! This is a monumental shift to a very well established and entrenched practice of paying annualised salaries and relying on offset clauses in contracts. Employers are understandably very unhappy.

Whilst employees may be rejoicing – it may be a case of ‘be careful for what you wish for’ - as it is likely that as a consequence of this decision, employees will now be subject to more stringent time recording processes and some of the ‘latitude’ provided to employees in the past will be completely eradicated as employers are forced to ‘forensically’ account for each and every hour.

We consider legislative or an Award by Award change to ‘fix this’ is highly unlikely. The most likely remedial avenue will be an appeal eventually to the High Court. The High Court has shown, in its recent history (eg personal leave issue in Mondelez v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union known as the Australian Manufacturing Workers Union (AMWU) [2019] FCAFC 138) that it was willing to go beyond the typical ‘black letter law approach’ of the Federal Court and restore some industrial fairness. Until this happens, Perram J’s decision remains ‘good law’ and compliance is required. Some alternative options in the interim could include*:

A) Annualised Wage Arrangements - these were a recent introduction into some Awards by FWC in the award modernisation processes. Their take-up has been extremely low because of the high administrative burden such processes require. Comparatively, this option may be the ‘lesser of two evils’. Check your applicable Award(s) to see if such an item is available;

B) IFAs - there maybe potential options for pooling of payment arrangements through an IFA. Again, this will require specific analysis of each applicable Award as not all flexibility clauses are the same in every award. IFA’s have the benefits of not having to be strictly approved by FWC like an enterprise agreement are and consider both financial and non-financial benefits. However, careful drafting is required and they can only be separately entered into after a contract of employment has been entered into;

C) Enterprise Agreement - there is good authority (see CFMEU v Fremantle Port Authority [2024] FCA 848) that annualised salaries and offsetting are permissible under enterprise agreements. However, many employers will consider making an enterprise agreement too significant a burden (cost and time) for them. Further, following Perram J’s decision it is likely that BOOT issues as to payment will have to be overcome for approval but provided the monetary amounts are sufficient this should not be insurmountable;

D) Presumptive Record-keeping - whilst never fully tested prior to this decision there has been some favourable commentary regarding providing time and wages record which accounts for the maximum overtime, penalty rates and allowances contemplated by an annualised arrangement. Arguably, an employee could not be any worse off because the amounts are maximised – which accordingly requires maximum payment to be made. However, countervailing arguments can be made that the records are inaccurate (whilst favourable to the employee from an economic point of view) and therefore in breach of the specific requirements under the Fair Work Act and Regulations which Perram J’s decision required literal and strict compliance with;

E) Reviewing/Increasing Salaries - just because Coles and Woolworths were unable to prove that they met the maximum amount due in each pay period doesn’t mean that all other employers’ current arrangements will also fall ‘foul of the law’. It may be the case that Coles and Woolworths paid annualised salaries which were ‘not far enough above’ the Award to provide them with appropriate payments each pay period. We are certainly aware of some employers paying in excess of 40 to 50K above award minimums and the forensic analysis should be undertaken to see if that is ‘enough’ to cover the entitlements required to be paid for each pay period. If it isn’t, then it may require either an increase in salaries across the board to ensure that it does globally or making small extra payments on intermittent occasions to ensure compliance with a specific pay period above the averaged annualised payment amount; and/or

F) Abandon Annualised Salaries - go ‘back to basics’ and require hour by hour/entitlement by entitlement time recording and pay accordingly. This approach will take no consideration of the ‘lumpiness’ employees will have to face in receiving the changing remuneration amounts each pay period and may affect their ability to budget but it is likely to ensure strict compliance as it currently stands.

*please take specific advice as each option is likely to apply differently for each employer and depending on their industry.

Action Items:

Given the findings, employers should take immediate steps to ensure compliance:

• Understand award entitlements: Make sure you identify your correct Award (if any). Then understand the entitlements in terms of payment of remuneration in detail (noting not all Awards are the same).

• Review offset clauses: Check the offset clauses in your contracts and ensure they are well-drafted and capable of dealing with Award requirements for the minimum payments to be made in each pay period including that they allocate amounts to specific overtime, penalties, loadings and allowances.

• Keep accurate records: Ensure you are keeping comprehensive records of all hours worked, including those that incur penalties, loadings and allowances.

• Keep watching this space: This is unlikely to be the end of this matter. Keep up to date so you can be prepared ahead to adjust your business practices.

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