AMMA Workplace Policy Advisor Tegan Morris (pictured) examines a Federal Full Court decision providing clarity to employers on their obligations to make superannuation contributions on behalf of workers who are remunerated on annualised salary arrangements.
The bench, comprising of Chief Justice Allsop, Justices Collier and Rangiah, found employers are only required to pay superannuation on the standard hours at ordinary rates of pay where employees are on annualised salaries. The bench set aside Justice Flick’s decision from March 2018 that Bluescope Steel (Bluescope) should have made superannuation contributions for additional hours and public holidays worked by employees on annualised and aggregate salaries.
The Australian Workers’ Union (AWU) alleged that Bluescope failed to make appropriate superannuation contributions to two Port Kembla employees who are paid under aggregate or annualised salary arrangements. The AWU argued that Bluescope breached the enterprise agreements by failing to pay superannuation to the employees on the hours they are required to work under the respective agreements.
Bluescope pays some of its employees who are rostered to work weekends and public holidays annualised or aggregate salaries. Both the annualised and aggregate salaries include payment for public holidays. In addition, the annualised salaries include payment for an additional 5.5 hour per week (given the requirement for employees on annualised salaries to work up to 43.5 hours per week to meet business needs).
Under the relevant industrial instruments, including enterprise agreements and awards, the annualised salaries are comprised of a base rate component for 38 ordinary hours per week and a component which includes additional payments such as penalty rates, allowances, shipping shift premiums, public holiday loadings and payouts and payments for additional hours worked outside the normal rostered hours. The relevant clause of the enterprise agreement expressly calculates the annualised salary with the base salary being 38 ordinary hours per week and overtime of 5.5 additional hours per week.
The aggregate salaries under the relevant enterprise agreements are made up of three components comprised of a base rate of pay, a component which includes additional payments for allowances and public holidays and a component for shift work. Employees on aggregate salaries work seven day continuous shift rosters with the ordinary hours worked including weekend shifts.
In the first instance decision, Justice Flick considered whether the additional hours component of the annualised salaries, and the public holiday components paid to employees on annualised or aggregate salaries, were ordinary time earnings. The determinative factor for Justice Flick’s decision was the employees’ usual and normal work hours as required by the terms of the relevant industrial instruments.
Justice Flick found there was no distinction between the standard and ordinary hours separate from the total number of hours worked, including the additional hours and public holidays required to be worked. That lack of distinction arose from the wording of the enterprise agreements that expressly required employees to work additional hours and public holidays as standard, and the normal manner in which work was performed.
He held that Bluescope had failed to make the appropriate superannuation contributions to the employees for the additional hours incorporated in the annualised and aggregate salaries.
The appeal decision
Bluescope appealed the decision on eight grounds. Central to the appeal was the question of the proper construction of the provisions of the superannuation legislation, specifically the definition of ‘ordinary time earnings’ and the meaning of ‘ordinary hours’ as used within that definition.
Chief Justice Allsop found the use of the expression “earnings in respect of ordinary hours work” in the definition of ‘ordinary time earnings’ in the superannuation legislation does not necessarily lead to a definition meaning ‘hours usually or ordinarily worked’. He said the earnings are the focus of the definition and consequently, it is not just the hours worked that is important, but the rate at which the hours are being paid. He found that by directing his focus solely to the word “ordinary” and finding that it meant the usual and normal hours worked, Justice Flick erred in his findings in relation to the statutory definition of “ordinary time earnings”. That was the key error in Justice Flick’s decision.
The Chief Justice found the enterprise agreements utilise the concept of ordinary time earnings, consistent with the superannuation legislation, for the purpose of calculating the annualised and aggregate salaries. He said the annualised and aggregate salaries contain a clear component of ordinary or standard hours at an ordinary rate and the enterprise agreements clearly distinguish the rate of pay for the base salary and the additional hours required to work to meet business needs.
The express distinction between payment for ordinary hours of work and payment for additional hours in the industrial instruments was crucial in determining which earnings were referable to ‘ordinary time’ in the context of the definition of ordinary time earnings. Without that distinction, superannuation might be required to be paid on all hours worked. The Chief Justice explained this as follows:
‘It can be accepted that if the relevant distinction is not made, in the award or industrial instrument or contract of employment, between, on the one hand, standard or ordinary hours and ordinary rates of pay, and on the other, additional hours at higher rates of pay, then the ordinary hours will be the hours agreed to be worked, or the usual or normal hours worked, if they be different.’
‘In such a case there is no ground to distinguish between different hours, and the only way a notion of “ordinary hours” could be understood was by what usually or ordinarily happened.’
The Chief Justice stated the proper construction of the operation of the legislation gives a less favourable financial outcome to some employees than calculating contributions on the whole annualised salary. He also said employees can bargain for greater contributions to superannuation under their relevant enterprise agreements or industrial instruments. The system is to encourage national savings for retirement based on standard hours at ordinary rates.
Having made these findings about the proper construction of the definition of ‘ordinary time earnings’ under the superannuation legislation, he allowed the appeal, held all eight grounds were resolved in Bluescope’s favour, set aside Justice Flick’s orders and dismissed the AWU’s original application.
Justice Collier upheld the appeal on three of the eight grounds. Importantly, she agreed with the findings of the Chief Justice as to the central question of the appeal, that is, the proper construction of the statutory definition of ‘ordinary time earnings’ under the superannuation legislation and the fact that the industrial instruments in question made a distinction between payment for ordinary hours, and payment for other hours.
Justice Rangiah stated that Chief Justice Allsop and Justice Collier were in general concurrence on the significant issues in the appeal and agreed with the reasons of the Chief Justice.
The appeal was allowed and parties were given 14 days to file submissions as to the form of any orders.
Implications for employers
Bluescope was successful in this appeal because of the express distinction in the relevant industrial instruments relating to the different components of salary. That is, the distinction between earnings for ordinary time and earnings for an additional or greater number of hours beyond ordinary or standard hours. Because Bluescope made this express distinction, it was only liable to pay superannuation in respect of earnings referable to ordinary hours of work, as opposed to earnings for all hours normally worked, or required to be worked under the terms of the relevant industrial instruments.
The lesson for employers is to ensure that enterprise agreements, and contracts of employment, break down the annualised salary so that it is clearly referable what earnings relate to payment for ‘ordinary hours’ of work, and what earnings relate to payment for other hours, or other matters.
The use of annualised or aggregate salaries provides efficiency and overall fairness in remunerating employees. Employers may elect to pay workers under annualised or aggregate salary arrangements where it is more onerous than calculating wages weekly, fortnightly or monthly under the award provisions.
Employers utilising these salary arrangements must advise employees in writing and keep records of how the annualised salaries are calculated, breaking it down into components and factoring in any overtime or penalty assumptions used. As per the findings of this appeal decision, this exercise should avoid shortfalls in both payment of the superannuation guarantee charge and the salary payable to employees under relevant modern awards.
As part of the first four yearly modern award review process, the Fair Work Commission will be introducing model annualised salary clauses in 19 modern awards. The model clauses will introduce a number of compliance requirements for employers who engage employees on annualised salary arrangements. Meeting these requirements will assist employers in restricting superannuation payments to only the earnings referable to ordinary time hours.
For more information on annualised or aggregate salaries read the AMMA factsheet (link) on the impacts and implications of the new model clauses being introduced or contact the team [email protected].