Annual Salary: 2 easy ways to contract staff

In Australia, many employees are entitled to an Award – which includes an hourly rate of pay. However, many employers prefer to pay full-time employees an annual salary.

This obviously raises the question: How can you pay an employee a salary when their entitlements are calculated hourly?

In the following guide, we’ll show you exactly how to set up an annualised salary arrangement legally and stay compliant.

What is an annualised salary? An annualised salary is a type of agreement that allows you to pay an employee a uniform weekly wage in full satisfaction of all award minimum weekly wages, allowances, overtime and penalty rates, and annual leave loading.

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Setting up an annualised salary

The technical legal word for an annualised salary is an absorption agreement. It’s called an absorption agreement because the agreement ‘absorbs’ all of their pay and entitlements. This is a big hint that you can’t use annualised salaries to avoid paying employees their entitlements.

By paying an employee an annualised salary, you can pay the employee the same wage regardless of the hours they work in that week, although it must be enough to cover entitlements they would incur. Many businesses set up annualised salary contracts to avoid having an unpredictable wage bill.

Typically, certain entitlements are covered by the annual salary as part of the arrangement. In effect, this means a fixed component of a weekly or monthly salary to be appropriated as payment for these entitlements.

An annualised salary can be set up under an annualised wage arrangement under a modern award, or a set-off clause in an employment contract. We’ll explain how to do either of these solutions below.

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1. How to set up an annual salary under a modern award

Some modern awards include a provision for making an annualised wage arrangement (AWA) between employers and full-time employees covered by the award. The AWA allows the employer to make an agreement to discharge award entitlements, like minimum wages, allowances, overtime rates, penalty rates, and annual leave loadings.

The exact clause may differ between modern awards. In some awards where employees typically work stable hours, like banking, an AWA doesn’t require the employee’s agreement. Other awards, like manufacturing, do require the employee’s agreement.

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Overtime and Outer Limits

Outer limits rules govern how many overtime or penalty rates an employee on an annual salary can work each period before they are entitled to top-up payments. This is in place to stop businesses from salarying staff and making them work excessive overtime and penalty rate hours.

The limits vary between each Award. For example, under the Hospitality Award, workers on an annual salary can’t work more than 18 penalty rate hours, or more than 12 overtime hours. If staff end up working more than these hours they are entitled to additional pay.

These averages apply over each roster period. If the employee on an annual salary works more than these hours, such hours will not be covered by the annualised wage and must separately be paid for in accordance with the applicable provisions of the award.

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Pay loading

Some Awards require that employees on an annual salary receive a minimum pay loading for being salaried compared to their weekly earnings. For example, the Hospitality Award requires a 25% pay loading.

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Specifying Hours

Typically, the AWA needs to specify the number of overtime hours an employee on an annual salary in a pay period or roster cycle that are covered by the annualised wage. If an employee works more than this amount in that period, they’ll need to be paid overtime.

The AWA also needs to specify the outer limit of ordinary hours in the period. Again, the employee will earn overtime if they exceed this limit. This specification can’t be less than the outer limits defined by the award.

At the end of each pay period, if the employee has worked more than the maximum penalty hours or overtime hours specified in the arrangement, you will have to top-up the employee’s wage.

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Writing your AWA

The AWA ultimately needs to be in writing. It should specify:

• The annualised wage payable
• The award entitlements being discharged
• How the annualised wage has been calculated by component:
  • The overtime & penalty assumptions used
  • The outer limit number of ordinary hours
  • The outer limit number of overtime hours

You have to give the employee a copy of the AWA, and keep a copy yourself. To terminate an AWA, you need to give the employee 12 months notice, or terminate it mutually by written agreement.

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How do I know if my annualised salary is enough?

On the anniversary of the commencement of the annualised salary, or when the employee leaves the business, you need to calculate the amount of pay the employee would have received under the award compared to their salary. If their salary is less than this amount, they need to have the shortfall paid within 14 days.

This process is called an annualised salary reconciliation and is complicated. If you pay someone a salary who is also covered by an award, you need to reconcile the salary against the award. For Australian employees paid a contractual annual salary, that’s every pay run.

You should use a modern Workforce Management System to perform an annual salary reconciliation. The system can check the annual salary amount against the exact hours the employee works. Trying to calculate the annual salary comparison manually is a bad idea and likely to be incorrect.

Tanda has developed Wage Compare, which can automate this process for you. For a simple guide on how to use Wage Compare, check out the help guide here.

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What happens if I don’t comply with the AWA rules?

If you don’t comply with the AWA rules you are in breach of the Award clause and can be fined. A single breach for an individual could cost $18,780 and up to $93,900 for a corporate employer. Serious contraventions could mean a maximum penalty of $187,800 for an individual and $93,900 for a body corporate employer.

A serious contravention is when the business knowingly contravenes the provision as part of a systematic pattern of conduct.

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2. How to set up an annualised salary arrangement through a set-off clause

The second way to make an annualised salary arrangement with an employee through a set-off clause within their contract. The time to use this arrangement is when the emplopyee isn’t covered by an Award that requires an AWA.

A set-off arrangement allows you to rely on a payment of wages in accordance with a contractual provision to remove an obligation to pay wages arising under and enterprise agreement or an award.

A standard set-off clause might look a bit like this:

“You are paid an annual salary of $70,000. This is paid in full satisfaction of any monetary entitlements to minimum wages, overtime, loadings, allowances and penalties to which you may become entitled under a modern award, other industrial instrument or relevant legislation applicable to your employment.”

Four ways to tell if your set-off clause is legally compliant

1. Is the employee subject to an award containing the model AWA clause?
2. If yes, does the set-off clause in the contract sufficiently identify the award entitlements that are being paid?
3. If yes, have they actually been paid?
4. Will the employee be engaged on a full-time basis and regularly work hours attractive overtime and penalty payments? If yes, it’s probably better to just use an AWA.

How to keep your set-off clause compliant

If you do use a set-off arrangement, make sure you regularly do the following:

• Review annualised salaries and working arrangements against modern awards.
• Develop procedures for taking accurate records of working hours. Always use an electronic time and attendance system that stores the records digitally.
• Review AWAs annually and rectify any underpayments that have not been set-off.