The Federal Court’s recent ruling against Woolworths and Coles has shone a spotlight on major compliance risks with all-inclusive salary arrangements.

Here’s what employers need to know:

• Pay period compliance is necessary – all-inclusive salaries need to result in employees receiving at least the same amount that they would have under their applicable modern award in each pay period.
• Rosters and clocking data aren’t enough – pay records for employees on all-inclusive salaries need to set out details of any separately identifiable entitlement an employee was entitled to in that pay period.
• Interpreting modern awards and enterprise agreements is no easy feat – employers need to verify they are interpreting key issues correctly.

All-inclusive salaries – not as inclusive as we thought

An all-inclusive salary is an annual salary which is intended to compensate an employee for minimum entitlements they would otherwise receive under an applicable modern award or enterprise agreement (EA). This includes minimum award wages, and any additional amounts such as allowances, penalties, leaving loading, and overtime.
It has always been the case that the amount of an all-inclusive salary needs to be at least equal to what the employee would be paid under the relevant modern award or EA. How often this comparison is required to be undertaken wasn’t clear – until now.

Woolworths argued they should be allowed to compare all-inclusive salaries against modern award entitlements over a 26-week period as set out in employees’ employment contracts. The Court rejected this, finding the Fair Work Act 2009 (Cth) and applicable modern award required the comparison to be done in each individual pay period.
The result? The amount of an all-inclusive salary paid to an employee in each pay period needs to be at least equal to what the employee would get under the relevant award or EA. Any excess in one pay period cannot be used to make up a shortfall in another.

Ordinarily, a decision such as this would help inform employers how offsets should be properly drafted to be effective over a year. The Court, however, doubted contract clauses could be “resurrected by careful drafting”.

Record-keeping – the devil is in the detail

All-inclusive salaries are often labelled ‘set and forget’. The truth is that employers must keep the same records for employees on all-inclusive salaries as for those paid under the award.
The law requires employers to keep records of:

• the details of any incentive-based payment, bonus, loading, penalty rate, or other monetary allowance an employee is entitled to; and
• if a penalty rate or loading applies for overtime, the number of overtime hours worked each day, or when the employee started and finished overtime.

 

Woolworths and Coles asked the Court to determine whether they needed to keep these records for employees on all-inclusive salaries, since these amounts are included in the salary.

The answer was yes. Employees are still entitled to these amounts under the award even if paid as part of an all-inclusive salary, so records must be kept.

Woolworths and Coles also asked if rosters or clocking data were enough to show overtime hours worked each day, or when overtime started and finished.

The answer was no. While it is possible to calculate each of the individual entitlements from the data, records must be ‘readily accessible’ and ‘capable of being copied and made available to an employee or former employee upon request’. Data that needs extra analysis, as was the case with Woolworths and Coles, does not meet this requirement.

The same outcome applies in relation to penalties, loadings and allowances. Employers are obligated to maintain records which identify why these separate entitlements are payable and sufficient information which enables employees to understand how the amount has been calculated.

Not keeping records can lead to more than just fines. Employers who don’t keep records may have to prove they didn’t underpay employees if a complaint is made.

Modern award and EA clauses – the sting in the tail

All-inclusive salaries and record keeping took the spotlight, but there were plenty of other takeaways about modern awards from the decision.

‘Agreement’

Modern awards (and most EAs) let employers and employees change certain entitlements ‘by agreement’. For example, they may agree to extend daily maximum ordinary hours from 10 to 12. But what does ‘agreement’ mean?

If an employee gives up an entitlement under an award, it must be clear they know about the entitlement and are agreeing to give it up. Using the above example, simply stating in a contract that the employee may work up to 12 ordinary hours is not enough, as it doesn’t show that the employee knew the usual maximum is 10 hours or that they agreed to give up two hours of overtime. Employees need to show an employee understands what the ordinary state of play is, and what they are giving up.

This also applies to other agreements such as those extending the span of hours, reducing the rest period between shifts, and taking time off instead of being paid for overtime. These agreements are very likely to be treated as invalid unless there is a clear explanation provided to the employee of what they are giving up by entering into the agreement.

When overtime is ‘required’

Debate often arises over whether an employer has ‘required’ an employee to work overtime hours. A couple of useful clarifications were given in the case.

It was accepted overtime is not ‘required’ when an employee adjusts their own working hours to meet their own convenience.

However, employment contracts often require employees to work ‘reasonable additional hours’ necessary to perform their duties or as required by the employer. It was accepted that this clause authorises the employee to work overtime reasonably necessary to perform their duties, without being expressly required by the employer on each occasion.

Employers who have a clause to this effect in their contracts should ensure their expectation of working ‘reasonable additional hours’ aligns with employees to avoid potential issues.

Overtime and leave or public holidays

Overtime rules often apply to ‘hours worked’ in certain circumstances, but what happens if an employee takes leave, or a public holiday falls on a day they were rostered to work and they elect not to work on that day?

Consider this: Phil usually works 38 hours in 7.6-hour days, Monday to Friday. He takes a day of personal leave on Wednesday, then works an extra two hours on Friday. Should he get overtime for those extra two hours?

Yes – Phil’s leave on Wednesday counts as ordinary hours, so the two hours he has ‘actually worked’ on Friday are overtime.

Employers need to review the way their payroll systems treat leave and public holidays to ensure they align with this outcome.

While the decision seems likely to be the subject of appeal, the above outcomes reflect the law as it currently stands. Any appeal process is likely to take years to reach a conclusion, meaning the above will reflect the law for at least the medium term. Source Workplace has carefully considered the decision and is working with clients to respond by managing risk without compromising operations. Please reach out to the team if you need help navigating these workplace challenges.