Simply because an employee earns above the high-income threshold doesn’t necessarily mean that a modern award does not apply. To be a high-income employee, the criteria set out in the Fair Work Act (Act) must be met, including earning above the high-income threshold, and be subject to a ‘guarantee of annual earnings’ for a ‘guaranteed period’.
The Federal Court recently dealt with this issue in the matter of Association of Professional Engineers, Scientists and Managers Australia v Peabody Energy Australia Coal Pty Ltd (the case).
What is a guarantee of annual earnings?
A guarantee of annual earnings is where the employer provides an undertaking to an employee if:
- the employee is covered by a modern award; and
- employee an amount of earnings in relation to the performance of work during a period of 12 months or more; and
- employee agrees to accept the undertaking, and agrees with the amount of the earnings; and
- employee‘s agreement are given before the start of the period, and within 14 days after:
- employee is employed; or
- an enterprise agreement does not apply to the employee‘s employment at the start of the period.
Essentially, a guarantee of annual earnings is a written promise by an employer to an award-covered employee that they will be paid above the “high-income threshold” during a fixed period. The employee must also accept this promise.
If the high-income guarantee criteria have been met, the employee is a high-income employee and the relevant award will not apply to that employee.
The high-income threshold is currently set at $162,000.
The claim was brought against Peabody, a coal mining company, by the union on behalf of 20 redundant employees. The employees were paid an annual salary that exceeded $153,600, being the high-income threshold at the time of their redundancy.
Under the Black Coal Mining Industry Award (the Award), an employer must pay all accrued personal leave entitlements to employees with 70 hours or more of accrued personal leave at the time of their redundancy.
The union argued that Peabody should have paid out these entitlements to the retrenched employees. Peabody argued that the Award did not cover 19 of the 20 employees because they were high-income employees at the time of their redundancy. Additionally, Peabody argued that the employment contracts detailing the annual salaries for each employee constituted “guarantees of annual earnings”.
The Court considered whether the parties’ agreement to an annual salary on the terms set out in the employees’ employment agreement constituted a ‘guarantee of annual earnings’ for the ‘guaranteed period’ under the Act.
The Court stated that “perhaps the strongest indication that a guarantee of annual earnings must be something over and above a mere agreement to pay an employee a specified salary is in” the Act. The Act provides that an undertaking to pay an employee an amount of earnings can only be a guarantee of annual earnings if the employee “agrees to accept the undertaking, and agrees with the amount of the earnings”. The fact that an employee simply agrees to the amount of the earnings – by signing an employment agreement – is not sufficient. The Court stated that “a mere offer by an employer to pay a particular salary is not sufficient to constitute an undertaking to pay, and that an employee’s acceptance of the employer’s offer to pay a particular salary is not sufficient to constitute an agreement to accept an undertaking”.
Additionally, the Court noted that a guarantee of annual earnings must be given for a ‘guaranteed period’. In this case, the employees’ annual salaries were agreed for an indefinite period, or until the agreements were varied or terminated. The Court stated that “the mere fact that the salary is said to be an annual salary does not mean that there is a guaranteed period of 12 months.”
In this case, as there was no valid guarantee of annual earnings, the employees were not high-income employees, the Award applied at the time of their redundancy and were therefore entitled to be paid out their personal leave in accordance with the Award.
If the agreement between the parties is to preclude award coverage, employers should review its employment arrangements with high-income employees and ensure a valid guarantee of annual earnings is implemented. Otherwise, the modern award will continue to apply resulting in continuing obligations under the Award, including paid entitlements such as overtime, penalties and allowances.
For the guarantee to be valid, a guarantee of annual earnings must:
- be in writing and clearly state that the employer is giving an undertaking to pay the employee an amount of earnings exceeding the high-income threshold;
- specify the start and end date of the guaranteed period and the amount of earnings being guaranteed for that fixed period;
- notify the employee that the consequence of accepting the undertaking is that the modern award will not apply to them; and
- have the employee agree to accept both the undertaking and the amount of the earnings.
If you need assistance in understanding your business’ legal obligations, talk to us, we’re here to help.