Annualised salaries and setting off award entitlements

Another case has emerged as a beacon for those employers who seek to achieve award compliance by paying employees annualised salaries or as it is sometimes called “an all-inclusive rate”. The objective generally is that the annualised salary is intended to be paid in full settlement of any and all award entitlements which might apply to the employee’s remuneration, including for example overtime and penalty rates. There has been a long-standing practice of employers including so-called set-off clauses in employment contracts, with the object of providing a single rate intended to compensate a person fully for any payment obligations arising under an award or otherwise under the law. Set-off provisions are also used where the employer provides some but not all financial entitlements under the award.
The Fair Work Act tackles the issue fairly and squarely in Div 3 Part 2-9 of Chapter 2 (secs 328-33A) by making in a somewhat clumsy way provision to the effect that awards do not apply to high income employees. A high income employee is an employee who:
• has accepted a written guarantee of annual earnings
• is guaranteed to earn an annual amount which is more than the high income threshold, currently $138,900.. The high income threshold changes each year as a result of the Fair Work Commission’s annual wage reviews.
That process is somewhat clumsy and most employers try and achieve the same outcome by making an agreement with an employee (or frankly by legislating it upon him or her) to the effect that the annualised salary will be deemed to be paid in lieu of the cumulative amounts provided for by the separate entitlements laid down by a modern award or enterprise agreement.

There has however been some judicial; controversy about the efficacy of this contractual fix for some years and the courts have waxed and waned about the formalities which are required to achieve a lawful and enforceable agreement.
In Simone Jade Stewart v Next Residential Pty Ltd [2016] WAIRC 00756 the Industrial Magistrate in Western Australia has cast doubt about the effectiveness of set-off clauses, at least in cases where a modern award provides for annualised salaries.
Ms Stewart’s contract contained a clause providing that ‘(y)our salary is inclusive of any award provisions/entitlements that may be payable under an award’.
The Clerks Modern Award contains a provision allowing an employer to pay an employee an annual salary in satisfaction of minimum weekly wages, allowances, overtime and penalty rates, and annual leave loading.
However, the relevant clause in the Clerks Modern Award also provides that ‘where an annual salary is paid the employer must advise the employee in writing of the annual salary that is payable and which of the provisions of this award will be satisfied by payment of the annual salary’.
The Industrial Magistrate concluded in this case and on a preliminary point that the Award expressly required that the award entitlements to be consumed into the annual rate needed to be identified with specificity and that in the absence of compliance with this formality, the employer could not rely upon the annualised salary by itself as a defence.