30 August, 2022
If I pay my employee enough, can we agree that no modern award applies to them? As a general rule, the answer to this question is no. However, it is possible for employers to provide a ‘guarantee of annual earnings’ which, if done correctly and in accordance with the Fair Work Act 2009 (Cth) (“Fair Work Act”), results in the award’s provisions having no application to the employee.
In this EMA note, we briefly explore the easy trap that employers can fall into in relation to a guarantee of annual earnings and then set out the steps to ensure your guarantee of annual earnings is compliant with the Fair Work Act.
Without getting too technical, it is important to first clarify the difference between when a modern award covers an employee and when it applies to that employee. In short, a modern award covers an employee if it is expressed to do so. Modern awards each include a ‘coverage’ clause that describes who it covers.n nA modern award applies to an employee if it covers them, is in operation, and there is no provision of the Fair Work Act that excludes its application to that employee. One example of an exclusion is if the employee is a ‘high income employee’.
An easy mistake to make would be to assume that a ‘high income employee’ is simply an employee on a high income. A ‘high income employee’ is a term defined in the Fair Work Act as a full-time employee who has a ‘guarantee of annual earnings’ for a ‘guaranteed period’, where the guarantee of annual earnings is greater than the high income threshold. As at the date of writing, the high income threshold is $162,000. While these criteria are met, the terms of an award will not apply to the employee.n
So, does this mean that our contract can state the employee’s salary and provide that the award will not apply? The answer to this is no, and this is the exact issue addressed in the recent Federal Court decision of Association of Professional Engineers, Scientists and Managers Australia v Peabody Energy Australia Coal Pty Ltd (“APESMA v Peabody”). nIn APESMA v Peabody, relevant employees were covered by the Black Coal Mining Industry Award 2010. Peabody argued that the employees’ salaries in their contracts constituted a guarantee of annual earnings equal to their salary. This was rejected by the Court—the promise to pay the employee a salary for an indefinite period did not constitute an agreed guarantee of annual earnings.n nA guarantee of annual earnings is an undertaking given by an employer to an employee which:
A guarantee of annual earnings can apply for a period shorter than 12 months for certain employees, such as employees employed for a period less than 12 months.n
It is important to note that there is nothing in the Fair Work Act, nor anything in APESMA v Peabody, that states that a guarantee of annual earnings cannot be included in a contract of employment. However, while it may be possible to incorporate the guarantee into a contract, it will be a complicated drafting process and will likely require amendments every year.n nWe recommend that any guarantee of annual earnings is kept separate to an employee’s contract of employment. The guarantee should clearly include the following elements:
The timing of the guarantee is also important. If the employee has been employed for more than 14 days, or it has been more than 14 days since the employee’s terms and conditions have last been varied, the employer will ot be able to enter into the guarantee. The employer and employee will have to agree to vary the employee’s terms and conditions—for example, by an increase in the employee’s wage.n
A guarantee of annual earnings as described in this EMA Note applies to national system employees who are covered by a modern award. It does ot apply to national system employers covered by an enterprise agreement. If you are a state-system employer, we recommend checking your applicable legislation to confirm whether an equivalent arrangement is available.n nIt is also important to note that a guarantee of annual earnings will not deprive the employee of protection from unfair dismissal.n nThis is a complex area of industrial law and it is crucial that employers have everything in order if they wish to rely on a guarantee of annual earnings. We are available to assist in drafting, reviewing, or providing advice in relation to your specific situation and any employees with which you want to enter into a guarantee of annual earnings.
This EMA Note is not comprehensive advice about your situation and does not cover all your obligations. If you require further information or advice, please contact your Consultant.
EMA Consulting is not a law firm and therefore does not provide legal advice or services. The information contained within this document and associated material is general in nature and should not be relied upon. If you require specific advice on a particular matter, we recommend that you contact EMA Consulting on 08 8203 1700. Subject to the matter at hand, your EMAC Consultant may recommend that you obtain formal legal advice. If formal legal advice is required, upon your written instruction EMAC will brief your matter to a legal practitioner for this purpose. The contents of this document and associated materials do not represent legal advice.