The Fair Work Ombudsman, the workplace regulator, has substantial powers to enforce compliance with workplace laws and regularly investigates and prosecutes employers who fail to pay employees lawfully.
In addition to the cost of defending prosecutions and rectifying underpayments, sizeable civil penalties can apply for non-compliance with monetary and non-monetary modern award obligations. From 1 January 2025, the stakes will become significantly higher, with the introduction of a new criminal offence for intentional underpayments following the recent ‘Closing Loopholes’ reforms to the Fair Work Act 2009 (Cth).
In this joint article by Moore Australia and Gadens, we discuss five prevalent myths and pitfalls relevant to employee payment practices, shedding light on common misconceptions relevant to modern award obligations. By exploring these issues, we aim to help employers prevent underpayment claims, civil penalties and prosecution for non-compliance.
1. But we pay over the award?!
The notion that paying employees an ‘over-award’ rate absolves employers of award obligations is indeed a common misconception. This myth often arises from a misunderstanding of the legal framework governing employment relationships.
Even when employees are paid an ‘over-award’ rate, they are still entitled to receive at least the minimum stipulated by the applicable award, including overtime, penalty rates, loadings, allowances and all other monetary benefits for all hours worked in each pay period. In addition, other non-monetary entitlements under the award such as breaks and consultation obligations also continue to apply.
As discussed in more detail below, employers must also ensure that their employment contracts clearly specify which award entitlements are being discharged by any over-award payments. Failure to do so can leave employers vulnerable to underpayment claims, civil penalties and prosecution for non-compliance.
2. The risks in a ‘set and forget’ approach to employee pay
By now employers should be aware of the annual national minimum wage review process, which usually results in increases to modern award rates each financial year and requires employee pay to be reviewed on a regular basis.
However, the Fair Work Commission also has the power to review awards and make decisions to change them outside of the national minimum wage review process. This can lead to minor changes, such as correcting errors, or it can lead to major changes. A major change to an award can include changing entitlements, pay structures and obligations for employers and employees covered by an award.
For example, the Professional Employees Award 2020 (PE Award) was amended in September 2023 to introduce new obligations on overtime pay, penalty rates, record keeping obligations for employers and exceptions for employees on annualised wage arrangements over a certain level. These changes represented a significant change to the PE Award and required employers to carefully consider how different cohorts of employees were impacted by the changes to remain complaint.
Employers that set employee pay at a lawful level at one point in time, but who then fail to stay up to date on changes to applicable awards risk underpaying employees and may fail to comply with related non-monetary award obligations.
3. Modern award annualised wage arrangements – the extra obligations that employers forget
Annualised wage arrangements are available under certain modern awards and involve employers paying an employee an annual salary which exceeds the minimum award rate by at least a certain amount in satisfaction of specific award provisions.
Annualised wages can make the payroll processing significantly simpler for employers, especially when employees’ work hours fluctuate significantly between pay periods. These arrangements allow for any deficits in one period to be balanced out by surpluses in another, ensuring adherence to award requirements over the course of a year.
Despite the benefits, implementing modern award annualised salary arrangements demands careful attention to a range of award obligations which employers commonly overlook. These obligations can differ between awards, but can include informing employees which provisions of the modern award are covered by the annualised wage, keeping records of each employee’s hours of work, and conducting annual reconciliations.
Understanding the difference between modern award annualised wage arrangements on the one hand, and the use of annual salaries with a common-law contractual set off clause on the other, may avoid employers unintentionally failing to comply with award obligations.
4. It’s fine to pay a flat rate for all hours worked
A flat hourly rate means employees receive a consistent rate of pay for every hour worked.
Although it may seem straightforward to implement a flat rate, doing this in a way that complies with award obligations requires employers to ensure that the flat rate is set at a high enough level that it compensates employees for all applicable penalties, overtime and other monetary entitlements under the applicable modern award based on the employee’s specific pattern of work.
Where hours of work are fixed and overtime hours are predictable, setting a flat rate may be possible. However, employers risk non-compliance with award obligations where hours of work fluctuate from pay period to pay period, where employees work large amounts of unexpected overtime, and where the flat rate does not keep up with increases to minimum wage rates.
5. Why do we need a ‘set off’ clause?
Employers should include set off clauses in all employment contracts to clearly explain that the salary is paid in compensation for all award entitlements, and that any over-award payments may be ‘set off’ or ‘offset’ against an employee’s entitlements at law. Where appropriate set off clauses are used, they can ensure transparency and give the employer protection when underpayment claims are made.
Failing to include a well-drafted set-off clause in employment contracts and failing to ensure that salaries are set at a high enough level to exceed all modern award obligations (giving the set off clause work to do) may result in a finding that the fixed annual remuneration does not satisfy all payment obligations under the applicable modern award.
This could result in separate payments to employees in addition to the fixed annual remuneration, even in cases where the fixed amount technical exceeds all payment obligations under the award.
A well-drafted set-off clause and advice on its proper application alongside sound record-keeping practices are crucial to ensure employers fulfill their obligations and protect against wage underpayment claims.
What can employers do?
Employers should stay informed and up to date with the relevant award obligations and ensure compliance by implementing adequate safeguards if they opt to remunerate employees other than strictly in accordance with award entitlements.
These precautions should include the use of robust set off clauses, sound wage-setting approaches, regular pay audits, and implementing time and attendance and record keeping practices which meet minimum legal obligations to mitigate the risks of underpayment and non-compliance.
If you would like to discuss any of the points in this article further, please contact your local Moore Australia Advisor.
