One Minute Summary

• Following a recent Federal Court decision involving retail giants Coles and Woolworths, employers are unable to use offset clauses in employment contracts to cover potential underpayments in one payment cycle, due to extra hours worked, against over award payments made in other payment cycles where no additional hours were worked.
• Where an employee receives an annual salary paid in equal weekly/fortnightly instalments, employers will need to check whether that employee is covered by a Modern Award.
• Employers should not assume that employees are Award free. Multiple professional and white collar positions are covered by Awards.
• The Court also clarified employer record keeping obligations stating that such data should be easily accessible and not require reconciliation or interrogation between different sets of data.
• This decision is likely to create an unacceptable and unnecessary payroll burden on many employers and will hopefully be appealed to the High Court. In the meantime employers must determine their real exposure.

Where an employee receives an annual salary paid in equal weekly/fortnightly instalments, employers will need to check whether that employee is covered by a Modern Award.

If they are, the next step is to assess whether the over award component paid to that employee is sufficient to cover any additional hours or penalties worked by them during each payment cycle.

Following a recent Federal Court decision involving retail giants Coles and Woolworths, employers are unable to use offset clauses in employment contracts to cover potential underpayments in one payment cycle, due to extra hours worked, against over award payments made in other payment cycles where no additional hours were worked.

This means that they cannot average payments across multiple payment cycles (or annually) to ensure minimum Award entitlements are correctly paid in each cycle.

In the Woolworths and Coles matters retail managers were paid an annual salary in equal instalments. In some payment cycles, when standard 38 hours were worked, the managers were paid above the applicable Award minimum. In peak retail cycles they were expected to work additional hours without additional remuneration. Coles and Woolworths had offset clauses in the retail manager’s employment contracts that effectively allowed an averaging approach so that, overall, they were still paid above the Award.

However, the Federal Court rejected this approach and stated that employers must ensure employees are paid at least the Award minimum entitlement in each cycle.  Employers need to calculate the actual hours of work against what the employee would have received under the Award, including overtime, shift penalties and weekend penalties – paid at the appropriate Award classification minimum rate. In a payment cycle, where that calculation showed they were underpaid compared to the Award, they would need to be paid the shortfall.

Are your employees covered by a Modern Award?

For some employees the answer is obvious. Traditional blue-collar positions are traditionally Award covered. Clerical roles are also Award covered.

What about engineers?  It might be a surprise to some employers that there is an Award that covers engineers which has minimum wage rates as well as shift and weekend penalties, and overtime. The Award also covers information technology employees and researchers.

There are other professional level or traditional white-collar positions covering finance, health professionals, medical practitioners, etc who are also covered by an Award.

Of particular concern, in relation to this Federal Court decision, could be sales representatives or real estate sales staff whose income may vary considerably between pay cycles based on sales. This will depend on how and when commissions are paid.

While the Award rates are not particularly high once you apply overtime and various penalties the differential could quickly disappear.

What about supervisors and line managers?

There is no one clear answer to this question. Awards are usually industry or occupation based. We would need to examine this on a case-by-case basis. It is more likely that supervisors would be covered by an Award than higher level managers.

Is there a way around this Federal Court decision?

From the various commentary surrounding this decision there is no obvious clever employment contract clause to circumvent the simple clear legal principle in this decision.

However, some Awards have an annualised salary or averaging provision which could assist. We would need to examine that carefully and how it can be implemented.

Record keeping – employer obligations

The Federal Court decision also clarified employer obligations for record keeping under the Fair Work Act and Regulations.

Woolworths and Coles had failed to keep records of when the retail managers worked any overtime or when they may have been entitled to penalty payments. This information could only be determined from rosters.

The Court stated that under the Fair Work Regulations the overtime records needed to be in a format readily accessible to a Fair Work inspector. The data needed to clearly show the components of an employee’s wages such as ordinary hours worked, different leave payments, different overtime rates, shift penalties and weekend penalties.

Having to work from two sets of data (rosters) that need to be reconciled or interrogated was not acceptable. Most payroll systems should be set up to ensure that both the payslips and records comply with this. However, where certain employees receive an annual salary intending to cover all such additional hours, the data may not be recorded in the payroll system or pay employee records.

Penalties for Contraventions

You may recall the ACTU and Government talking about ‘wage theft’ over the last 12+ months. This resulted in significant increases in penalties for employers for breaches of the Fair Work Act or Awards/Enterprise Agreements. From January this year the maximum penalty increased to $495,000 per contravention or $4,950,000 per serious contravention – or three times the amount of the underpayment if it is greater. For ‘intentional underpayments’ the penalties are multiple times those amounts.   

Commentary

This decision is likely to create an unacceptable and unnecessary payroll burden on many employers and will hopefully be appealed to the High Court. In the meantime employers must determine their real exposure.

Employers should audit those employees who they thought were probably Award free.

1. Check whether there is a Modern Award covering those employees?
2. What is the applicable classification and wage rate?
3. What other additional payments could apply: overtime, shift or weekend penalties? 
4. What is the payment cycle that applies to those employees? (A fortnightly payment cycle would be more beneficial than a weekly cycle.)
5. Undertake several potential excessive hours scenario calculations.

Once you have completed the above you will get an idea whether they may be a potential exposure.  

Specific Wage Components Within A Wage Cycle

Further to the concepts discussed above, it is recommended that if an employee is paid an amount of money which is intended to cover allowances or penalties within a wage cycle that those items are specifically listed as being covered by that total payment. For example, if someone is entitled to a first aid allowance or uniform allowance (or other similar payment) and are paid a flat rate ‘which covers all entitlements under an Award’ – and those payments are not specified – the employee could simply state they received an over-award wages payment and did not receive their allowances.

It is recommended these components be listed on the payslip as individual items. Failing this the employment contract should state words to the effect of “your wage covers the following additional allowances/entitlements…and list out the names of the allowances”.  

Hunter Employee Relations can undertake compliance audits for Award covered and potentially Award covered employees. Please contact Michael to discuss your requirements.

Kind Regards
Michael Schmidt
M 0438 129 728
[email protected]
www.hunteremployeerelations.com.au

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Not written by AI – all typos etc are unfortunately mine!