A year on – time to audit records of hours for annualised salaries

With the introduction of time and wage recording for award covered employees on annualised wage arrangements (commonly referred to as salaries) occurring 12 months ago, as of 1 March 2021 affected employers must audit the time and wages records for employees working under annualised arrangements, to ensure they have been paid for all the hours they have worked in the last 12 months.

The changes introduced last year were a result of the Fair Work Ombudsman’s ongoing investigations and reports on underpayment of employee entitlements. In recent years, some of the country’s biggest employers have gotten it wrong. These cautionary reports suggest that it is well worth every employer having their employment arrangements reviewed, to ensure they do not fall foul of the Fair Work Act 2009 and related industrial instruments.

Organisations like Woolworths, Coles, Bunnings, Qantas, Super Retail Group, Commonwealth Bank, Subway, Seven Eleven and Michael Hill have had their employment misdeeds documented in the media, and the list goes on. Even some top tier law firms got it terribly wrong by paying graduates salaries that did not cover the excessive amounts of overtime they required those employees to work.

The Fair Work Ombudsman’s 2019-20 Annual Report revealed the depth of the underpayment problem across all sectors, identifying that an astounding $123.5 million was recovered for over 25,000 employees, including $90 million in underpayments that were self-reported by employers over that financial year.

Addressing the issue

In early 2020, because of the ever-increasing reports of wage and salary underpayments, the Fair Work Commission added new rules about annualised wage arrangements (commonly referred to as salaried) to a range of modern awards. The rules started from the first full pay period on or after 1 March 2020 and now that 12 months has passed, employers must reconcile the time and wage records they have (or should have) kept, to ensure they are paying their employees properly. It is critical that employers are keeping time and wages records for all salaried award covered employees who earn under the high-income threshold (which is currently $153,600).

Employers must now carry out an annual reconciliation of their employees' salaries, for relevant employees who were working for the employer 12 months ago. Employers must ensure there is no gap between the annualised wage agreement and what the employee would have earned under the modern award.

Who does it affect?

The rules affect full-time employees who are paid an annual wage under one of the awards that allow for annualised wage arrangements. Award covered part-time and casual employees cannot have annual wage arrangements.

Employers must make sure an employee’s annual wage is high enough to cover the award entitlements that have been included in an arrangement. An employee's annual wage cannot be less than the amount they would have been paid over the year if they were paid all their award entitlements for their work.

As each award is slightly different, it is important that you read the annual wage arrangement clause in the modern award that applies to your workforce.

What is required for an annual wage agreement?

Annual wage agreements provided to employees must include:

• the annual wage that will be paid;
• which award entitlements are included in the annual wage;
• how the annual wage has been calculated, including any assumptions used in the calculation; and
• the maximum (or ‘outer limit’) number of penalty hours and overtime hours the employee can work in a pay period or roster cycle without extra payment.

Additionally, employers must keep a record of start and finish times, as well as unpaid breaks taken for their employees on annualised wage arrangements. These records must be signed off by the worker at the end of each pay cycle. Many businesses have brought in technology for employees to log into electronic timesheets, to maintain payroll efficiency and make it easier to comply with the recording obligations.

The rules effectively require employers to keep two sets of calculations: one data set to capture the amount paid under an annualised wage agreement; and another to show the amount required under the modern award. Maintaining and regularly reviewing these records enables employers to identify gaps between the two and adjust an employee’s pay if necessary. If employers have not prepared for the changes, they are at risk of accumulating underpayments and possibly penalties for breaching their obligations.

When do the annual reconciliations happen?

Employers must undertake a reconciliation of their employees' annual wages:

• every 12 months after the arrangement starts;
• when the arrangement ends; or
• when the employment ends.

Employers must make sure their employees have been paid at least the same amount they would have been paid under the award if they were not on an annual wage, for all the hours they worked. If an employee's annual wage is less than the award payments that they would have received, their employer must pay them the difference within 14 days.

Common award payment errors

In addition to the changes in time and wage recording for salaried employees, there are some other issues that commonly arise in payroll non-compliance, such as:

• incorrectly classifying employees as Modern Award free;
• applying the wrong Modern Award to employees;
• misclassifying employees under a Modern Award or Enterprise Agreement;
• applying annualised salaries that are not sufficient to cover all entitlements arising under the award, especially over time where they do not keep up with increased award rates;
• relying on the BOOT and not documenting annualised arrangements;
• including incentives (food, gift cards, etc.) in lieu of payment;
• incorrectly calculating overtime and penalty rates; and
• poor time and recording keeping.

Regardless of any discussions taking place in the media about industrial relations changes, the modern award terms must be complied with. It is safer to assume that your employees are covered by a modern award because the 121 Modern Awards were created to cover the vast majority of Australia’s workforce.

We recommend that payroll audits should be conducted generally to ensure all staff are paid under the correct award and classification for all their hours worked, unless they have a ‘time off in lieu’ agreement documented for overtime worked.

Do not risk penalties and unnecessary legal costs for non-compliance. If you are unsure whether your organisation complies with its wage and salary obligations, NFP Lawyers can audit your payroll and employee records to ensure you are paying your employees properly. You can reach us at reception@activelaw.com.au or 07 3160 0000.

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The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.