Changes to Modern Award annualised salary provisions – what does this mean for employers?

By Kristy Peacock-Smith, Jessica McDonald


As part of its 4-yearly review into Modern Awards, the Fair Work Commission (FWC) recently introduced three new model annualised salary clauses across 22 Modern Awards. The new clauses, which took effect from 1 March 2020, impose a number of onerous obligations on employers in respect of the calculation of annualised salaries, reporting requirements and annual reconciliations.

The decision follows a significant number of high profile underpayment cases in recent years, colloquially known as 'wage theft' cases. Impacted Awards include the Banking Finance and Insurance Award, the Clerks – Private Sector Award, the Telecommunications Services Award, the Hospitality Industry (General) Award, and the Restaurant Industry Award.

Annualised wage arrangements

Impacted Awards fall within one of three categories of model clause.  Whilst there are differences between the model clauses regarding the requirement for employee agreement and the methods by which an employer calculates the annualised salary, the following obligations are common across each of the new clauses:

  1. to record in an annualised salary arrangement the provisions of the Award which are satisfied by the annualised salary and record the method by which the annualised salary has been calculated, including specifying each separate component of the annualised salary and any overtime or penalty assumptions used in the calculation of the annual salary;
  2. to set and record the'outer limits' on the number of overtime hours or other penalty-rate hours which are to be taken as paid for by the annualised salary arrangement;
  3. to pay employees (in addition to the annualised salary) for any hours worked which exceed those outer limits in accordance with the applicable provisions of the Modern Award, noting that any additional amount must be paid in the same pay cycle as the hours worked; and
  4. to conduct a reconciliation of the annual salary paid to the employee against the amount that would have been payable under the Modern Award every 12 months, or on termination of employment. Where a short fall is identified, this must be rectified within 14 days.

Contractual set-off provisions

Despite the introduction of the new model clauses, the FWC has confirmed that the new clauses do not invalidate the common practice of an employer and an employee agreeing to an all-inclusive salary under a common law contract set off provision.

An appropriately drafted set-off clause in a contract of employment therefore remains a viable alternative for employers in order to avoid the complexities associated with the calculation of annualised salaries; in particular setting the outer limits of overtime provisions.

However, significantly, even where employers rely on contractual set-off provisions, the record keeping and reconciliation obligations set out in point 4 above (particularly in respect of overtime) continue to apply.

So what does this mean for employers?

For employers with employees covered by one of the impacted Awards, employers have the option of whether to implement an annualised wage arrangement under the relevant Modern Award, or to (continue to) rely on common law contractual set off provisions.

Whilst the administrative requirements associated with set-off provisions are undoubtedly less burdensome, there are still a number of important steps employers should take in making any such decision:

  • Review employment contracts to check if they do in fact contain an effective set-off provision. Ensure that the provision is clearly drafted to identify the Award entitlements that are 'covered' by the annualised salary.
  • Review systems of recording employees' hours of work that fall outside the employees' normal span of hours to ensure any hours worked in excess of these times, weekends or on public holidays is recorded.
  • Conduct an annual reconciliation of the actual amount paid to the employee compared with entitlements under the Award.
  • Ensure annual Award pay rate increases are adequately covered by the employee's annual salary.