With special thanks to our Australian colleagues Michael Michalandos and Carmel Foley for this post.
This briefing contains a summary of everything an employer in Australian needs to know about the operation of the award system.
Why this is important?
We have prepared this briefing because there has been a high incidence of employers in the information technology industry failing to have regard to the application of modern awards in their workforce or misunderstanding how these awards operate. In particular, many employers have issued employment contracts which do not identify the applicable award and do not contain provisions which comply with the award.
This may result in a potentially serious compliance issue which could cost the business a significant amount of money in terms of back-payments, penalties, and potential reputational damage.
What is an award?
Modern awards (or, simply, “awards”) are industrial instruments created by the Fair Work Commission (FWC) that set and regulate minimum terms and conditions of employment for certain employees in Australia. Currently, there are 122 awards and almost all businesses in Australia will employ award-covered employees. Awards operate in a similar way to legislation and their application can only be circumvented in very limited circumstances.
Who do awards cover?
Awards generally fall into one of two categories: “industry awards” or “occupational awards.” Some awards apply on both an industry and occupational basis, for example the Professional Employees Award 2010 (Professional Employees Award) which, for example, covers engineers on an occupational basis but also covers employers operating in the “information technology industry” (as defined) on an industry basis.
Industry awards cover employers who operate in particular industries, and their employees whose roles fall within a classification contained in that award. For example, employers operating in the “banking, finance and insurance industry” (as defined) will be covered by the Banking, Finance and Insurance Industry Award 2020. Not all employers are covered by an industry award.
Occupational awards cover employees performing certain occupations, irrespective of whether or not their employer falls within the coverage of an industry award. For example, employees who perform work that is wholly or principally administrative in nature will generally be covered by the Clerks – Private Sector Award 2010 (Clerks Award), unless an industry award with clerical classifications applies to their employer. While multiple awards may be relevant to one employer, each employee may only be covered by one award at any one time.
Case law provides that whether or not an employer is in a particular industry is a question of fact, determined by the “substantial character” of the enterprise of the employer. The enterprise of an employer can have more than one character and be in more than one industry. However, a character must be substantial before it can be concluded that the employer is in a particular industry. Determining whether a character is “substantial” requires a consideration of the employer’s business as a whole, and all of its employees.
Industry Focus: What Award may be in play in the Technology & IT Sector?
An employer in the Technology and IT Sector can be covered by more than one award. For example, receptionists, data entry clerks, administrative assistants or other employees performing roles which are predominantly clerical or administrative in nature will be covered by the Clerks Award. In addition, employees who are graduate or professional information technology employees will be covered by the Professional Employees Award as that award applies to the IT sector (as defined). Employers and employees within the telecommunications subset of the sector may be covered by the Telecommunications Services Award 2010 or the Professional Employees Award.
Why is it important that you conduct an award review?
Businesses must have regard to the awards that cover it and its employees when preparing its employment contracts, and more broadly, when putting in place workforce management and financial planning strategies because awards set out employee’s entitlements to minimum pay rates, hours of work, breaks, allowances, penalty rates and overtime etc.
It is extremely important , therefore, that employers conduct an award review and analysis to ascertain:
- Do you know which awards apply to each of your employees?
- Do you know which classifications your award covered employees fall under?
- Are you complying with all of your award obligations?
- Are your employment contracts consistent with the applicable awards ?
Can you just contract out of an award?
No. Awards form part of the minimum safety net for award covered employees in Australia and employers cannot contract out of applicable awards as doing so will amount to a breach of the Fair Work Act 2009 (Cth) (Fair Work Act). It is also a common misconception that if an employer pays an employee above award rates, the award doesn’t apply. It does!
However, there are certain instruments which enable an employer to circumvent the application of the award or provisions of the award. These are a guarantees of earnings, an individual flexibility agreement, and an enterprise agreement. Special rules apply to each of these instruments which an employer must comply with before they are operative. In relation to an individual flexibility agreement and an enterprise agreement, a key condition is that the employee or employees are better off overall under the instrument. A key condition of a guarantee of earnings is that the employer guarantees that an employee will earn remuneration which will exceed a high income threshold for a period greater than 12 months. The high income threshold is currently $148,700, but increases from year to year on 1 July.
Do you have to tell your employees which awards cover them?
There is no general statutory requirement to inform individual employees of their Award coverage. However some awards do require notification. For example, the Clerks Award requires an employer to advise an employee in writing of their classification and any changes to their award classification. The consequences of breaching a modern award, which includes failing to advise employees of their classification in writing, are set out below.
Further, any representation made by an employer that an employee is not covered by an award, where he or she is in fact covered by an award, carries with it the risk that an unlawful “misrepresentation” of “workplace rights” has occurred. This can also attract civil penalties. Employers should take care to not make any positive statement that certain employees are not award covered and as a result, are not entitled to award benefits, without first understanding whether an award may apply to the employee.
Can you pay an annual salary in lieu of award benefits?
Some awards allow employers to pay annualized salary in lieu of award benefits. However, employers must ensure that the annual salary paid to employees is at least equal to or greater than the total amount an employee would have received under the applicable award (including penalty rates, overtime, allowances, annual leave loading etc.).
In addition, annualized salary changes were made to a number of awards (e.g. Clerks Award) earlier this year and employers now face a range of new obligations which employers must comply with to ensure it meets the legal requirements set out in the impacted awards which include onerous notification and reconciliation requirements. More information regarding the annualized salary changes is available here and here. We expect similar amendments will be made to the Professional Employees Award in mid-2020 as a result of a recent decision by the Fair Work Commission.
Do awards change?
Yes and there are a number of reasons why awards change. Some examples include the yearly increase to award rates – award rates increased by 3.0% on 1 July 2019 and we expect the FWC will announce this year’s increase in late May or June 2020. In addition, awards can change as a result of the FWC’s four yearly review of awards or by way of determinations issued by the FWC varying awards. Recently, awards have changed as a result of applications made by unions and/or employer associations in response to COVID-19.
What is the consequence of breaching an award?
Failing to comply with the terms and conditions of an award can have significant financial and non-financial consequences for employers and any staff involved in the contravention. Financial consequences include compensating employees for any underpayments that may arise because employees have not been paid in accordance with the terms of the award, paying interest, prosecution by the FWC for breach of the Fair Work Act, and the imposition of civil penalties.
A breach of an award can result in a Court ordering:
- For a body corporate, a maximum penalty of AUD $63,000 for each individual breach of an award;
- For a body corporate that has committed a serious contravention, a maximum penalty of AUD $630,000 for each individual breach of an award (a “serious contravention” will arise where an employer knowingly contravened an award, and the contravening conduct was part of a systemic pattern of conduct relating to one or more other persons); and/or
- For any individual involved in the contravention, a maximum penalty of AUD $12,600 for each individual breach of an award or $126,000 in the case of a serious contravention.
Non-financial consequences include reputational damage, in particular having regard to the “wage theft” headlines in the media.
Key Takeaway – Prioritize conducting an award review
Awards are bespoke to Australia and they covers many industries and occupations including professionals. Conducting an award review will ensure you are aware of the awards which apply to your business and employees allowing you to take steps to ensure compliance and in turn, mitigating the risk of breaching an award and future proofing your business.
Baker McKenzie lawyers can assist you in undertaking an award analysis to ensure compliance with awards and workplace laws generally.