Annualised Salaries - implementing an annualised salary (2024)

An annualised salary arrangement iswhen an employer agrees to pay their employee an annual salary that includes all entitlements in terms of the relevant Modern Award. Annualised salaries seem like an attractive way to remunerate your employees as they appear to be easier to administer as you don’t need to each pay period analyse all the entitlements owing to the employee and don’t need several lines on a payslip. It also aids with budgeting for payroll requirements.

When implementing an annualised salary, employers should ensure that:

• the annualised salary does not disadvantage employees;
• a record must be kept of the starting and finishing times, and any unpaid breaks taken
• regular audits should be taken by the employer to determine whether there has been any shortfall in the amount the employee was paid under the annualised wage arrangement and the amount they would have otherwise been entitled to be paid under the Modern Award

Employers should determine whether they want to use an annual salary arrangement to remunerate employees. If so, employers should review the annual salary paid to each employee. In addition, employers need to make sure employees know how much overtime and penalty hours an employee is required to work without additional pay.

You must ensure that the total annualised salary amount is the same (in other words, not less than) as the amount the employee would have received based on receiving the entitlements individually under the Modern Award.

Where an employee works more than their ordinary hours of work (in other words, they work overtime), they must be paid in terms of the overtime or penalty rates

After every 12 months (or on termination of employment), you must compare the total annualised salary amount you paid to your employer with the amount that the employee would have received under the Modern Award. Where there is a shortfall (in other words, the employee has received too little pay), you must make payment to the employee within14 days.

If, however, your employee resigns or their employment is terminated before having to conduct the 12-month, you must complete the audit earlier.

How is Annualised salary calculated?

Divide the employee’s actual earnings by the number of weeks they worked during the 12-month period.This is the weekly pay rate.Multiply the weekly pay rate by 52 (weeks in a year). This is the annualised amount.

To make the annual comparison, you will have to keep records of when the employee:

• started and finished work; and
• took unpaid meal breaks.

Fair Work will also be requiring businesses to maintain these records for at leastseven years.

Upcoming changes to specific awards

From 1 September 2022, new annualised wage arrangement rules in the Hospitality Award and Restaurant Award apply.

Key changes include:

• rules about what award entitlements can be included in an annualised wage arrangement
• new rules about the maximum number of hours that attract overtime or penalty rates that an employee can work in a roster cycle and be included in their annualised wage (called the ‘outer limits’)
• what needs to be included in a written agreement for an annualised wage arrangement
• extra record-keeping rules
• new rules about ending an annualised wage arrangement.

These changes:

• only apply to full-time employees covered by the Restaurant Award or the Hospitality Award
• don’t apply to people employed as Managerial Staff (Hotels) under the Hospitality Award.

Under the Restaurant Award, an annualised wage arrangement can include payment for:

• minimum award rates for the employee’s classification level
• split shift allowance
• overtime
• penalty rates
• annual leave loading.

When an annualised wage arrangement includes payment for these entitlements there is generally no need to calculate and pay for those entitlements in each individual pay period.

Additional payments

In any roster cycle, an annual wage can only cover an employee working up to a weekly average of:

• 18 penalty rate hours (excluding time worked between 10.00pm and midnight, Monday to Friday)
• 12 overtime hours.

These are called the ‘outer limits’. Sometimes an employee will work more than these hours over a roster cycle. These extra hours aren’t covered by the annual wage. Instead, an employer needs to pay these extra hours at the employee’s minimum hourly rate, plus any penalty or overtime rate on top of their regular wage for that pay period.

Any other entitlements not covered by the annual wage must also be paid separately.

Hospitality Award minimum annual wage — what can be included

Under the Hospitality Award, an annualised wage arrangement can include payment for:

• minimum award rates for the employee’s classification level
• allowances
• overtime
• penalty rates
• annual leave loading
• additional public holiday arrangements in clause 35.3.

When an annualised wage arrangement includes payment for these entitlements there is generally no need to calculate and pay for those entitlements in each individual pay period.

Additional payments

In any roster cycle, an annual wage can only cover an employee working up to a weekly average of:

• 18 penalty rate hours (excluding time worked between 7.00pm and midnight, Monday to Friday)
• 12 overtime hours.

These are called the ‘outer limits’. Sometimes an employee will work more than these hours over a roster cycle. If this happens, an employer needs to pay an employee for these extra hours at the employee’s minimum hourly rate plus any penalty or overtime rate on top of their regular wage for that pay period.

Any other entitlements not covered by the annual wage must also be paid separately.

Calculating the annual wage

Under the annual wage arrangement provisions in the Restaurant Award and the Hospitality Award, an employer needs to pay their employee at least 25% more than the employee’s weekly minimum award rate, multiplied by 52.

Making the agreement and record-keeping rules

The Restaurant Award and the Hospitality Award now include extra record-keeping requirements. Employers need to follow these new rules when paying their employees an annualised wage.

Employers still need to comply with other record keeping and pay slip requirements under the Fair Work Act.

Making the arrangement

An annualised wage arrangement has to be agreed to in writing by an employee and employer. At a minimum, employers need to:

• keep a written record of the arrangement as a time and wages record
• give their employee a copy of the annualised wage arrangement.

The annualised wage arrangement needs to include:

• the annual wage amount
• which award entitlements are included in the annual wage
• the number of overtime and penalty rate hours that the employee can be required to work in a roster cycle without being entitled to an additional payment (called the ‘outer limits’).

SeeDownloadable guide to annualised wage arrangementsto download and use our template agreement for an annualised wage arrangement.

During the roster period

Employers need to record the employee’s:

• start and finish times of work
• unpaid breaks.

Confirming the roster period

At the end of the pay period or roster cycle, the employee needs to:

• confirm that the record is correct
• sign or digitally acknowledge the record.

Annualised wage arrangement reviews and reconciliation

Employers need to review and reconcile annualised wage arrangements:

• at least every 12 months after the arrangement started
• when the arrangement ends
• when employment ends.

This is to make sure their employees get at least the minimum amounts they’d otherwise be entitled to for their work over the year.

Sometimes an annualised wage arrangement may result in an employee getting paid less than what they would normally be entitled to for their work under the award. If an employer finds that they haven’t paid their employee enough over the year, they need to pay the employee the shortfall within 14 days of completing the reconciliation.

Employers also need to pay their employees in each pay period:

• any additional amounts at the relevant award rate for any hours worked beyond the ‘outer limits’ for overtime or penalty hours
• any entitlements that aren’t covered by the annualised wage arrangement.

You can find more information at the Fair Work Ombudsman website including

Employers guide to annualised wage arrangements in the hospitality and restaurant industries Award – which includes a template and checklist to help employers who want to pay employees an annualised wage under the Hospitality Award or the Restaurant Award

Remember:this is a general summary of the changes to the annualised salary provisions. Each Modern Award has its own specific provisions regarding an employers obligation. For example, some Modern Awards require that the employer and employee enter into aformal,written agreementthat details the annualised salary arrangement.So, be sure to check the applicable Modern Award for these specific requirements