Contractual Provision Fails to Exclude Overtime Payment

A recent decision of the Industrial Relations Court in Western Australia (the Court) has sounded a warning about the common practice of providing annualised salaries for staff covered by a Federal Modern Award.^[1]

Background

The Court in this case dealt with a preliminary issue of whether a written contract of a former employee, Simone Stewart, (Stewart) excluded the overtime provision (and the provision for meal breaks) under the Federal Clerks – Private Sector Modern Award 2010 (Clerks Modern Award).

Stewart was employed as an administrative co-ordinator for a period of about two years for a residential building company Next Residential Pty Ltd (Next Residential).

She also entered enter into a written contract under which she was paid an annual salary which was $78,000.00 at the time of her termination from Next Residential.

A term of the written contract provided for the annualised salary in the following terms:

Your ordinary hours of work are from 8.00am to 5.00pm Monday to Friday with a one (1) hour lunch break. You are expected to work, on average at least 40 hours per week, however there will be times when you will be required to work reasonable additional hours as necessary to ensure that the requirements of the position are met. Your remuneration takes these additional hours of work into account and no further payment will be made for extra hours worked.

The Clerks Modern Award, which regulated the annualised salary arrangement, provides in clause 17 as follows:

17. Annualised salaries
    • 17.1 Annual salary instead of award provisions
      • An employer may pay an employee an annual salary in satisfaction of any or all of the following provisions of the award:
        • clause 16—Minimum weekly wages;
        • clause 19—Allowances;
        • clauses 27 and 28—Overtime and penalty rates; and
        • clause 3—Annual leave loading.
      • Where an annual salary is paid the employer must advise the employee in writing of the annual salary that is payable and which of the provisions of this award will be satisfied by payment of the annual salary.
    • 17.2 Annual salary not to disadvantage employees
      • The annual salary must be no less than the amount the employee would have received under this award for the work performed over the year for which the salary is paid (or if the employment ceases earlier over such lesser period as has been worked).
      • The annual salary of the employee must be reviewed by the employer at least annually to ensure that the compensation is appropriate having regard to the award provisions which are satisfied by the payment of the annual salary.
    • 17.3 Base rate of pay for employees on annual salary arrangements
      For the purposes of the NES, the base rate of pay of an employee receiving an annual salary under this clause comprises the portion of the annual salary equivalent to the relevant rate of pay in clause 16—Minimum weekly wages and excludes any incentive-based payments, bonuses, loadings, monetary allowances, overtime and penalties.

The Position of the Parties

Stewart argued that Next Residential did not comply with clause 17 (1)(b) of the Clerks Modern Award in that her employer did not identify the specific provisions of the Clerks Modern Award to be satisfied in consideration for the provision of her annualised salary.

Her position was that the effect of the compliance failure was that she was entitled to overtime and lunchbreak payments not provided during her employment at Next Residential.

In response, Next Residential maintained a position that Stewart was not entitled to what she was claiming because she had explicitly agreed through an explicit term in her written contract to an annualised salary in accordance with the Clerks Modern Award.

Next Residential argued that the annualised salary term of the written contract was explicit with a clear intention that the salary provided for under it was to be ‘inclusive of any award provision or entitlement that may be payable under the Modern Award.’

Decision of the Court

The Court acknowledged that the final sentence of the annualised salary term attempts in the broadest possible way to include within the annualised salary ‘any’ entitlements that may be payable under a Modern Award.

At the same time the Court assessed that the words as contained in the final sentence of the annualised salary term created uncertainty with respect to various issues, including the Modern Award to which it refers and the entitlements under a Modern Award that it purports to cover.

The Court also discussed the need for specificity in the annualised salary term in the context of the no disadvantage test, indicating that:

“The written contract of employment did not identify the applicable award nor did it provide which award provisions were to be satisfied by the payment of the annual salary. It lacked the type of specificity required by clause 17(1)(b) of the Clerks Modern Award. The requirement for specificity is crucial because a worker must be able to compare their annual salary to award entitlements so that the no disadvantage test can be properly considered. That could not be done in this instance.”

In conclusion the Court found that Steward’s written contact did not exclude her claim because the annualised salary term did not ‘clearly indicate that (Steward’s) annual salary included those entitlements (overtime and lunchbreak payments) that she now seeks to recover’ in her claim.

Comment

The decision of the Court highlights again the legalistic nature of Federal Workplace Laws.

Steward’s claim dealt with a very common provision utilised by employers to exclude the operation of Modern Award terms, in particular, payment for overtime in return for an annualised salary.

A key lesson from the decision is that employers need to ensure that their annualised salary provision contained in their contracts of employment contains the necessary specificity required to achieve its objective of excluding the operation of overtime and other terms under the Modern Award.

DW Fox Tucker Lawyers is currently working with a number of its employer clients to review their annualised salary provision as contained in contracts of employment for their staff.

Contact our team if you would like us to review your contracts of employment.