Imagine paying an employee an annualised salary well above their award wage only to have the employee pursue a claim for unpaid award entitlements after they leave.

You might think this will never happen to you because your employment contract expressly provides that all and any award allowances and entitlements are included in the annual salary you pay.

That’s what building company Next Residential thought.

Despite having an “all-inclusive/set-off” clause in its employment contract a Court has ruled that the clause did not cover certain entitlements in the Clerks — Private Sector Award 2010. Next Residential may have to pay the ex-employee for allowances under the award despite the salary being significantly above the award rate.

The Court found that the “all-inclusive/set-off” clause did not sufficently specify which entitlements were included in the annualised salary. As a result, the Court held that the annualised salary did not exclude payment of the award allowances and entitlements.

What happened?
Next Residential employed an administration coordinator. She started on a salary of $75,000 and this was increased to $78,000 by the time her employment came to an end. As Next Residential calculated it, this was well above the award rate, including all allowances and entitlements under the award.
Next Residential’s written employment contract with the employee included a provision that the salary was –

“inclusive of any award provisions/entitlement that may be payable under an award”.

After the employee left, she claimed overtime and meal break entitlements (she said she was required to work through her meal breaks) and she argued that these award allowances were not excluded by the express term in the employment contract. Next Residential did not identify which specific award provisions/entitlements were satisfied by the much higher than award, annualised salary.

The Court agreed with the employee, and held that the clause in the employment contract did not:
specify the award provisions to be covered by the annualised salary clause; or
clearly indicate that the annual salary was to include the particular entitlements the employee sought to recover.

The Court also ruled that:
the clause “lacked the type of specificity required” by the award itself, and this resulted in the worker being denied the ability “to compare the annual salary to the award entitlements, so that the no-disadvantage test [could] be properly considered”; and
since the clause didn’t even specify the particular award, the parties cannot have turned their minds to the award entitlements which were to be subject to the set-off or annualised salary.

Any attempt to set-off against an award in the “broadest possible way” and “to include within the annualised salary ‘any’ award provisions/entitlements that may be payable under ‘an’ award”, may well create uncertainty about which award is referred to and which award provisions are covered.

What does this mean for you?
Off the shelf “standard contracts” with “standard clauses” for an annualised salary can be risky because standard off the shelf clauses will probably lack the required specificity.

It is important that an employment contract provide a degree of specific application to an individual employment situation. While a standard “template” document will streamline the process, it must be reviewed and customised for the individual employment, award and entitlements to be covered in the annual remuneration.

At the very least, the parties must identify which award (if any) applies to the employment and which individual entitlements are covered by the annualised salary.
Employers who pay an annualised salary rather than each individual award entitlement should review their employment contracts to ensure that the annualised salary clause specifies the applicable award and the particular entitlements to be covered by the annualised salary. This includes employers who had their standard employment contracts drafted by lawyers some time ago as based on this decision, it would now seems clear that it is not sufficient to say “if an award applies to your employment, then the award entitlements are covered by the annualised salary”. You may be at risk – like Next Residential – of still being liable for penalty rates and allowances unless you customise your employment contracts.

Overly standard contracts may be a costly risk.

If you are unsure whether your employment contract is effective to exclude award entitlements and allowances in favour of an annualised salary, then contact us. If you suspect or know that your employment contract is too “standard” or is not sufficiently specific to incorporate award allowances, contact us.