Question: Can award entitlements such as penalty rates, allowances, and loadings be included within an employee’s salary or wage? One of our goals is efficiency in record keeping and calculating payroll.

Answer: It is common practice to include award entitlements within a salary or rate of pay, which is usually fine so long as:

  • an employee's total remuneration is no less than their award/enterprise agreement requires;
  • there is a written agreement acknowledging that certain award entitlements are included within an employee’s remuneration; and
  • employers keep adequate records of hours worked and duties performed.

In the case of any employees who have a guarantee of earnings in place and who are paid above the high-income threshold (‘HIT’), this becomes a moot point as modern awards do not apply to them because their income is deemed adequate compensation for all award entitlements. The high-income threshold as of now (April 2023) is $162,000 per annum.

For employees below the HIT (or above the HIT without a guarantee of earnings), the employee’s specific award/enterprise agreement is very important as many have clauses that will describe exactly how certain entitlements can be included within the salary or rate of pay.

For instance, a small number of modern awards incorporate a similar concept as they have a ‘salary absorption’ clause that exempts managerial staff from specific award entitlements above a certain salary threshold. The Hospitality Industry (General) Award 2020 is one such award.

Many modern awards now incorporate an “Annualised Wage Arrangements” model clause which details the minimum requirements for such an arrangement:

1.       The clause first lists those penalty rates, allowances and loadings that can be included within an annualised wage.

2.       It requires that a written agreement be made specifying:

  • which of the provisions of the award will be satisfied by payment of the annualised wage;
  • the method by which the annualised wage has been calculated, including specification of each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation; and
  • the maximum limit on what the annualised wage will cover whereby any hours worked beyond that limit would earn additional pay in accordance with the award.

3.       At least once every 12 months employers must calculate the total remuneration an employee would have earned if paid according to the award i.e. earning the award minimum rate plus all other applicable award entitlements (e.g. penalty rates, allowances, loadings etc) for the exact hours they worked. If their annualised wages fall short of the award, and the shortfall wasn’t made up in the relevant pay cycle when it occurred, then employers must backpay that shortfall in the annual review.

4.       The employer must keep a record of the starting and finishing times of work, and any unpaid breaks taken, by each employee for the purpose of undertaking the 12 months comparison mentioned above. This record must be signed by the employee each pay period or roster cycle.

Many employers question that fourth point as they hope to avoid such onerous time and record-keeping requirements. The good news here is that in practical terms employers only really need to keep records of hours worked and duties performed outside of those that the annualised wage has been calculated to cover. For example, let’s say an annualised wage was calculated to compensate for an average of 45 hours work per week (inclusive of applicable overtime and shift penalties under their award), and presumed no weekends or public holidays would be required. Then employers only need to record hours outside those parameters i.e. hours beyond 45 per week, and any weekend or public holiday hours, or when the employee was filling for another on higher duties. Then these extras would have to be paid for separately within each pay cycle, to comply with the annualised wage clause.

Another way to incorporate award entitlements into a higher salary or rate of pay is through a written Individual Flexibility Agreement (IFA). However, the two major drawbacks to an IFA  are that firstly they cannot be made a condition of employment (i.e. they can only be made with an existing employee, not a new candidate) and secondly, either party can unilaterally cancel the agreement with 13 weeks’ notice.

Thus, the approach that is generally the most recommended when wanting to incorporate award entitlements into an employee’s remuneration while ensuring that they are not underpaid, and minimising the record-keeping burden, is to use a compensation for legal entitlements clause or offset clause in an employee’s common law contract. Such a clause should make clear that both parties agree that the remuneration specified in the employment contract compensates the employee for any award entitlements (such as wages, overtime, allowances, penalties, and loadings) that may arise for any hours worked in the course of employment.

Of course, the remuneration provided must meet or exceed what the award requires for the same hours and duties performed. It is highly recommended that employers seek legal advice on the drafting of such clauses and ensure the correct award that covers the employee (if any) is identified as well as the relevant classification.

The bottom line:  Employers can incorporate award entitlements into a higher remuneration, so long as a written agreement is in place, specifying what entitlements are compensated for and employers ensure an employee’s remuneration does not fall below what the award requires. Employers must maintain adequate records of work performed because the onus of proof is always on employers in answering any underpayment claim.

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Disclaimer: While all due care has been taken in the preparation of this information, it is believed to be accurate but no warranty of accuracy or reliability is given and no liability is accepted for errors or omissions or loss or damage suffered as a result of a person acting in reliance thereon. This information is not legal advice. If a legal opinion is sought please contact your legal advisor.