Most employers who pay an over-award payment do so for a number of different reasons:
- an attempt to pay “market” rates to attract or retain quality staff
- to avoid the administrative hassle of having to calculate extraneous allowances and other payments each week, eg rostered overtime, annual leave loading, meal allowance, special rates, fares, and travelling allowance, etc
- to “package” an employee’s remuneration into an annualised or “total” wage.
The problem for employers is that the courts and industrial tribunals have sometimes ordered employers to pay an employee’s entitlement under the applicable award or agreement, despite the existence of an over-award payment allegedly compensating the employee for certain entitlements. However, there are certain precautions that an employer can make to avoid any double-counting.
The inclusion of any payments provided by an industrial instrument under an employee’s total wage or salary may change the nature of these payments to form part of the employee’s ordinary pay. This can mean that any entitlement that is calculated on an employee’s ordinary pay under an award, agreement, National Employment Standards, or a State/Territory statute, could change. Compensating for an entitlement under an award or an agreement may not necessarily achieve the purpose the employer had originally intended.
For example, annual leave loading is payable under a specific circumstance (ie in addition to an employee’s ordinary pay when taking annual leave). However, many employers have incorporated this entitlement into an employee’s total wage or salary, meaning it is no longer “annual leave loading” because it is now payable every week, regardless of an employee’s absence on paid annual leave.
In the absence of a written contract of employment detailing the absorption, the employer is still liable to pay the annual leave loading. Employers in this situation may be exposed to a “double-dip” by their employees. Unless specific reference is made in the employee’s contract of employment, the nature of the loading changes and, subsequently, could form part of the employee’s ordinary pay.
Put it in writing
The first question to ask is: what is the over-award payment compensating for?
This should be clarified when offering the job to the employee. The letter of offer of employment should specifically identify the entitlements compensated for by the over-award payment. The parties may have agreed to certain payments being covered by the over-award payment, however, unless this is detailed in writing, the employer may have difficulty refuting any subsequent claim by an employee before the relevant court that a particular payment has been absorbed into the employee’s ordinary pay.
The types of payments which often form part of an over-award payment include: regular rostered overtime, annual leave loading, and ad hoc allowances such as special rates (hot work, cold work, confined space, etc).
Overtime becomes over-award payment
The payments that constitute part of an employee’s ordinary pay have been determined by courts and tribunals over the years.
A matter that involved a large household chemical company and a dispute over an employee’s redundancy payout illustrates the problems faced by employers on this issue.
The company was paying a supervisor an “overtime allowance” to compensate for working overtime hours. The case involved a claim by the employee that the “allowance” should have been included in the employee’s redundancy payout and other termination payments. The employer paid the employee entitlements such as redundancy pay, annual leave plus loading, and long service leave upon termination of their employment.
The company argued that the allowance related to overtime and, therefore, should not be included in the employee’s ordinary pay. Generally, overtime payments are not included in an employee’s ordinary pay for the purposes of awards or agreements, National Employment Standards, Superannuation Guarantee, or other State/Territory employment legislation, the “overtime allowance” being excluded from these calculations in this case.
The tribunal asked: is this allowance intended to apply only in circumstances where the employee works extraordinary hours on an ad hoc basis or is it, in effect, a normal incident of the employee’s remuneration for the performance of his/her duties so that it becomes a component of the salary package?
The tribunal determined that the “overtime allowance” was part of the employee’s ordinary pay. Consequently, it ordered the company to adjust the employee’s payout with respect to redundancy pay, annual leave, and long service leave. The rationale was that the employee received the same amount of remuneration each week, regardless of whether overtime was worked by the employee in a particular week. Crossley v Colgate Palmolive Pty Ltd  NSWIRComm 72 (5 March 1999)
National Employment Standards
The National Employment Standards provide a maximum number of weekly work hours of 38 per week, with provision allowing for reasonable additional hours. Employers may be confused whether the additional hours in excess of 38 are regarded as overtime or ordinary hours for the purposes of calculating employment entitlements, or “ordinary pay” under various employment statutes, including annual leave and personal/carer’s leave under the Standard. This will depend on the nature of the payment for additional hours.
An over-award payment which compensates for the payment of overtime and does not relate to the number of overtime hours worked by the employee each pay period would be included in an employee’s “base rate of pay” for the purposes of annual leave and personal/carer’s leave (including compassionate leave), whereas payment which fluctuates based on the number of overtime hours worked each pay period would not be considered part of the base rate of pay, as it is separately identifiable as payment for overtime.
Calculation of award provisions
Another common issue for employers is whether penalty rates and payments expressed as a percentage of an employee’s ordinary pay are calculated on the employee’s “actual rate of pay” or the appropriate award rate. This will depend on a number of factors.
The level of over-award payment would need to be equal to, or greater than the amount the employee would have received had the entitlements been calculated on the appropriate award rate classification.
Where the level of over-award payment does not equal the amount payable under the minimum provisions of the applicable modern award or enterprise agreement, the employer would breach the Fair Work Act 2009, with an employee able to recover any underpayment through the Fair Work Ombudsman.
Transitional provisions – absorption
The question of absorption of over-award payments in relation to modern awards was determined by Fair Work Australia in its decision Award Modernisation  AIRC 2/9/09.
It was determined that over-award payments could be absorbed. The model clause in modern awards reads: “The monetary obligations imposed on employers by this award may be absorbed into over-award payments. Nothing in this award requires an employer to maintain or increase any over-award payments”.
Fair Work Australia subsequently confirmed that an employer is generally entitled to absorb modern award entitlements into over-award payments Manufacturing and Associated Industries and Occupations Award – AMWU v AiGroup FWAFB 4488.