Employment
The Right to Disconnect from Work
The right to disconnect is now part of Australian law. The right to disconnect will start in 2024 for large employers and in 2025 for small employers. There are some
An annualised salary provides employers with a way to pay an employee for all of their award entitlements by paying a lump sum annual salary. It is important for employers to ensure that annualised salary arrangements are coupled with a set-off clause in an employment contract.
In this article, we discuss what annualised salaries are. We also discuss whether they are worthwhile and what employers need to do to comply with the law. There are also some helpful recommendations regarding ongoing monitoring and compliance.
Employers often choose to pay an employee a salary rather than paying an hourly rate. It is also intended to cover any entitlements owed to the employee under a Modern Award. This is referred to as an annualised salary.
An annualised salary is a payment made by an employer to its employee that is ‘all-inclusive’. All inclusive means it covers everything owed under the relevant Modern Award. In other words, the employer pays an annual salary that covers all award entitlements, rather than paying each entitlement individually.
Many employers seek advice from a workplace lawyer regarding annualised salaries.
Annualised salaries were introduced as a way to simplify payroll for employers and employees. However, they have become increasingly difficult to manage. Instead of reducing administrative burden, employers now need to set up systems for employees to clock in and out, keep records of unpaid breaks and overtime, and conduct audits.
These administrative obligations have been considered to defeat the purpose of implementing annualised salaries. Employers should assess whether an annualised salary arrangement is appropriate and seek advice from an employment lawyer.
Employers may wish to rely on contractual arrangements by using a set-off clause. This clause covers compensation that would otherwise be owed to employees for certain monetary claims under an applicable award.
Under a set-off clause, employees will receive a higher salary than the base rate. It must also specify that the ‘over-award’ component will be treated as if you had fulfilled your obligations to pay other forms of payment that may result from an award. This includes entitlements such as overtime, weekend penalty rates, leave loading, and allowances.
Overall, for these set-off clauses to be legally enforceable, they must be appropriately drafted. They must also comply with the relevant statutory record-keeping requirements. That is where a workplace lawyer can help.
The legal validity of set-off clauses was reaffirmed by the Full Court of the Federal Court in Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate. In Linkhill, the court considered that there should be a:
“close correlation between the nature of the contractual obligation and the nature of the award obligations”
The court examined the history of various court decisions (dating back to the 1967 decision in Ray v Radano) and considered whether or not set-off clauses are valid and/or enforceable in practice.
As a result, the court was satisfied that such clauses are valid and can be enforced as long as they are reasonably worded and the compensation paid is sufficient to fully satisfy the employer’s obligations.
In other words, the court found that if the employer and employee agreed that the salary payment could be applied against specific award payment obligations, the clause was valid.
An employment law firm is able to provide employers with guidance on the specific award payment obligations that can be covered by an annualised salary.
You may find the following sample set-off clause helpful in preparing your own set-off clause. However, because this area of law is complex, it is advisable to seek the advice of a workplace lawyer.
Your Salary and other employment benefits will be in satisfaction of any payment or other benefit you may have under legislation or any relevant Modern Award (if any) (“Minimum Entitlements”) as far as possible. Employer may offset any amount it pays to you in excess of the Minimum Entitlements against those Minimum Entitlements.
Minimum Entitlements include:
In Simone Jade Stewart v Next Residential Pty Ltd [2016] WAIRC 00756, the Western Australian Industrial Magistrates Court rejected the approach of an employer that included a generic ‘catch-all’ provision in its contract of employment. In the employment contract, the set-off clause stated that the annualised salary was “inclusive of any award provisions/entitlement that may be payable under an award”.
Under the annualised salary provision of many Modern Awards, the award entitlements covered must be specified. An example is the list used in the above clause. This is so that the employee can ensure they are not suffering any disadvantage by comparing their pay with the award entitlements. If the set-off clause is too general, it is unlikely to be enforceable.
For this reason, it is advisable to seek the advice of an employment law firm to carry out a review of your employment contract and the Modern Awards that may apply to your employees.
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