In a case brought by the Fair Work Ombudsman (FWO) against two supermarkets (Coles and Woolworths), the Federal Court of Australia ruled that annualized salaries did not meet weekly pay entitlements such as overtime pay and penalty rates (i.e., higher-than-normal rates of pay for working particular hours or days) established by modern awards. Awards are industry or occupation-based agreements that establish the minimum employment terms and conditions in addition to the National Employment Standards and may, or may not, apply to managers and highly paid staff, depending on the award.
At issue was the use of contractual set-off clauses in annual salary arrangements (for Woolworths, semiannual) where the level of salary paid was intended to cover variable weekly (for Woolworths, two-week) pay entitlements such as overtime pay, penalty rates and leave loading, with the expectation that salary for weeks when such entitlements apply would be offset by weeks when they do not apply, provided that over the long term, total salary paid satisfied award requirements.
In its decision, the court ruled:
While the case brought by the FWO was specific to the two retailers and is subject to appeal, the ruling set off shock waves across Australian industry; the court broadly rejected the set-off principle while the use of annualized salary arrangements and contractual set-off clauses for employees covered by awards and enterprise agreements is widespread. Both companies concerned have already made multimillion dollar remediation payments and expect to set aside additional funds for that purpose, which some estimate may reach as high as AU $1 billion (in total) for claims going as far back as 2013.
Employers should review their use of any salary arrangements with set-off clauses for staff covered by awards or enterprise agreements to ensure compliance going forward with the FWA's pay and timekeeping requirements, as well as examine potential exposure related to past pay periods.
