The first annual reconciliation of annualised salaries under modern awards

2020 was a big year which also brought the new annualised wage arrangements that came into effect in 18 modern awards in the first full pay period after 1 March 2020.

Changes were made to these awards regarding annualised wage arrangements for full time employees, including the requirement to notify employees in writing of the annualised salary payable to them and how the annualised salary had been calculated. Additionally, employers are required to undertake a reconciliation of any annualised wage arrangement every 12 months and on the termination of employment.

On 1 March 2021, being 12 months from the commencement, employers using the annualised wage provisions will be required to undertake the first reconciliation to calculate the amount of remuneration that would have been payable to the employee under the applicable modern award and compare it to the amount of the annualised wage actually paid to the employees.

What is involved in the annual reconciliation process?

In the annual reconciliation, employers should compare the amount the employee was actually paid during the year against the amount they would have been paid if they had been paid the minimum entitlements under the award. Any shortfall is paid at the award rates. Minimum entitlements will include all relevant penalty rates, overtime and allowances due under the award.

Note: this process is not the same as the process of paying additional overtime or penalty shift hours above the outer limits each pay period throughout the year. This reconciliation is based on amounts paid, not hours.

Does the reconciliation have to occur monthly or annually?

For most of the awards, the reconciliation must take place each 12 months from the commencement of the annualised wage arrangement, on the anniversary of the employee entering into the annualised wage arrangement, upon termination of employment and upon termination of the annualised wage arrangement. 

Employers must check the relevant award clauses!

By example from the CLERKS—PRIVATE SECTOR AWARD 2020 [MA000002]

(b) The employer must each 12 months from the commencement of the annualised wage arrangement or upon the termination of employment of the employee calculate the amount of remuneration that would have been payable to the employee under the provisions of this award over the relevant period and compare it to the amount of the annualised wage actually paid to the employee. Where the latter amount is less than the former amount, the employer shall pay the employee the amount of the shortfall within 14 days.

Is the 12 month reconciliation the same month for everyone each year? What about new employees?

The reconciliation must occur on the anniversary that the annualised wage arrangement is entered into. For new employees, the annualised wage arrangement may be entered into on the commencement of their employment and the annual reconciliation would occur 12 months from its commencement.

If we have discovered that we had to pay a lump sum amount as a result of the annual reconciliation process, how is this taxed?

Being a lump sum payment, tax the payment as you would for any back pay using marginal tax rates calculation.

Is the lump sum amount as a result of the annual reconciliation process subject to superannuation?

Only items of the shortfall that were OTE would be subject to superannuation.

Is the annual reconciliation based on the minimum wage in the award or the current rate the employee is paid?

The comparison is between the amount paid to the employee over the year and the minimum amount due under the award. Any shortfall is paid at the minimum rates from the award.

When estimating the minimum entitlements under the award you should include ordinary hours worked (at the award rate), overtime (as per award guidelines), penalty rates, allowances.

Note: Some overtime clauses require overtime paid at the award rate (e.g. Clerks award), some require it to be paid at the actual ordinary hourly rate of the employee (e.g. Manufacturing award) so be careful with this.

Note: In order to meet the above requirements, the employer should have kept a record of the start and finish times of work (including unpaid breaks) for an employee paid an annualised salary under a modern award for the preceding 12 months, which in hand will make the annual reconciliation process much easier. This record should have been acknowledged by the employee for each pay period as well. CLICK HERE to view the original schedule of determinations for annualised wage arrangements.

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