Four Modern Award transition tips

With July 1 as the start date for the “transition” to pay arrangements under Modern Awards made under the Fair Work Act, there has been some activity from Fair Work Australia (FWA) and the Fair Work Ombudsman (FWO) to try and help employers understand their obligations.

The Fair Work Ombudsman has recently issued its “Guidance Note No 7”. Guidance Notes are a bit like tax office rulings. They indicate the FWO’s view of the law, and the approach they will take to prosecuting for breaches of the law, but they are not binding law and may be changed as a result of the decisions of FWA or the Courts. This Guidance Note focuses on the transitional arrangements which have been included in all Modern Awards to assist employers adjust wages, penalties and other payments over a period of five years, rather than having to bear an increase, or try to decrease (as to which, more later), to the new award standard in one hit.

The transitional provisions typically provide for an annual phasing of 20% of the difference between “old” award rates prior to January 1, 2010 and Modern Award rates. Because of the transfer of industrial relations regulation power to the Commonwealth from New South Wales, South Australia, Queensland and Tasmania, there are rules which apply to employers previously covered by State awards – Victoria has been a fully fledged part of the national system since 2004, and WA has chosen to go it alone.

The phasing in provisions apply to the following Modern Award entitlements:

  • minimum wages;
  • casual and part-time loadings;
  • Saturday, Sunday and Public Holiday penalty rates;
  • evening and other penalty rates;
  • shift allowances.

Can wages be phased down?

In theory, yes. In practice, employers face three issues in attempting to apply the phasing in provisions to reduce wages paid to employees. First the transitional legislation accompanying the Fair Work Act enables FWA to make “take home pay” orders to ensure that current employees cannot be worse off than their current rate of pay. Second, employers will more than likely be bound by their contract of employment to pay the existing rate of pay, rather than any lower rate. Third, even if an employer chose to phase in lower minimum rates for new employees, it is a fair bet that increases to Modern Award minimum rates over time will cover the current difference between old and new rates before the end of the five year phasing in period.

No overtime phasing in

There has been some controversy about whether the phasing arrangements apply to overtime rates, there being some confusion about whether penalty rates for overtime falls within the “other penalty rates” stipulation. The FWO’s position, confirmed by decision of a Full Bench of FWA, is that differences in overtime penalty rates apply from January 1, 2010 and are not part of the phasing in arrangements. The FWA decision, handed down on June 25, 2010, backs the FWO position.

Employers should also note that the phasing in provisions do not apply to hours of work provisions or to allowances.

What if I already pay above award rates?

The Modern award transitional clause also suggests that employers should be able to “absorb” higher monetary obligations imposed by Modern Awards into payments which are being made by employers over and above minimum obligations. The FWO’s guidance note indicated that this could only apply on a like-for-like basis;  that is if an over award payment was for wages then it could only be offset against a higher obligation in relation to wages and not, for instance, in relation to penalty rates.

The Australian Industry Group made an application to clarify that any increased obligation of employers could be absorbed into above minimum payments. In the end, FWA indicated that the transitional provision allows the absorption of all “monetary” obligations, whether wages, overtime, penalty rates or otherwise.

There are two observations to be made about this aspect of the Full Bench decision. First, it seems that there is still some scope for argument about precisely how this provision is intended to apply – certainly both the AIG and the ACTU claimed a victory of sorts. It will remain to be seen whether the FWO changes the Guidance Note as has been urged by AIG. Second, employers should be aware that this is a transitional provision only. It will not have ongoing effect and employers should still ensure that any intention to include overtime or other payments in a single above minimum rate is clearly provided for in the contract of employment and potentially also in an Individual Flexibility Agreement under the award.

How do I know if I have the right rate?

In many cases identifying the relevant comparison rates for the purpose of the phasing in provisions will be relatively straightforward, as there have not been substantial alteration between pre-modern and modern award provisions. However, in some cases classification structures will have been altered, an, as pointed out by he FWO,  it is important that in calculating any phase in of increased rates, employers are comparing apples with apples. The classifications applicable under the old awards must be carefully matched to the relevant classification under the modern award. The FWO has provided a translation document which is currently in draft.

There are a range of other issues arising from the transition to modern awards and employers need to be clear that their obligations under old awards may not have stood still. Advice should be obtained from the FWO or an independent adviser about the meaning of transitional provisions, the FWO’s Guidance Note and any decisions of the Courts or FWA.

This article was originally published on where Peter is a regular contributor.

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