Australia's award system: still modern, or set for more change?

The number of companies reporting miscalculations continues to grow, and may indicate that Australia's award system is too complex.

Many companies looking to do business in Australia ask about the minimum payment obligations they must comply with, and the answer is often far more complicated than the question. But that might be about to change.

What are modern awards?

The award system is unique to Australia. For much of Australia's history, awards were the primary means by which minimum conditions of employment were set.

There are currently over 120 “modern awards” which apply to employees covered by the Fair Work Act 2009. They are referred to as “modern” due to the modernisation process concluded in 2010, which replaced more than 1,500 older awards. Some private sector employees may also be covered by state awards, such as certain employees in Western Australia.

The modern award system provides additional rights and entitlements to employees beyond those provided by the National Employment Standards, including minimum rates of pay. Basic rights and entitlements are set by the National Employment Standards, but the modern award system elaborates and in some cases enhances these.

Awards may apply on an industry basis – such as the Mining Industry Award 2020 – or an occupational basis – for example the Clerks – Private Sector Award 2020. Some catch-all awards, such as the Miscellaneous Award 2020, may cover employees who are not covered by any other award.

Not all employees are award covered. Some modern awards expressly exclude specified classes of employees. For example, the Legal Services Award 2020 excludes admitted lawyers. Senior managers will also usually (but not always) be award free.

Although only one award can cover an employee in relation to a particular job, it is not uncommon for multiple awards to apply to an employer's workforce.

Why do modern awards matter?

Similar to the National Employment Standards, modern awards confer various minimum employment conditions. Most importantly from a compliance perspective, this will include minimum rates of pay, including overtime, penalty rates, loadings and allowances.

However, modern awards also address:

• work-related conditions of employment including hours of work, rostering restrictions, notice periods, rest breaks and travel entitlements;
• flexibility terms and dispute resolution terms;
• consultation obligations in relation to major workplace change; and
• permissible payment arrangements, including annualised salary arrangements.

Award coverage can also be relevant in relation to:

• providing the benchmark for the “better off overall test” when seeking to approve an enterprise agreement;
• determining whether an employee is eligible to make an unfair dismissal application; and
• understanding consultation obligations for workplace restructuring.

Employers occasionally wrongly assume that the National Minimum Wage Order (NMWO) determines the minimum wage that employees must be paid. However, the NMWO only applies to employees not covered by an enterprise agreement or a modern award.

Failing to comply with applicable modern awards can lead to miscalculations in employees' pay, overtime pay and other entitlements. When such miscalculations affect a significant number of employees, and possibly over a duration of several years, the result can be liability for millions of dollars in back-pay, not to mention the potential penalties and reputational risk. A series of household-name employers have featured in the Australian news for these issues.

How is award coverage determined?

The first port of call is always the coverage provision contained in each award (usually clause 4). Many awards will also contain particular job classifications which an employee must fall within to be covered. These classifications may include a list of indicative duties and responsibilities, and refer to specific requisite qualifications or levels of experience. Different classification levels will usually prescribe different minimum rates of pay.

Sometimes, it will be a fairly straightforward process to determine award coverage. Other times, it can be more complex. It is a question of both law and fact, and substance will always be determinative over form. In one Fair Work Commission decision, it was held that an employee was award covered despite being referred to as a ‘regional director’ on the basis that in reality he had no managerial responsibilities and had no direct reports.

Ambiguity may also arise where an employee performs a job which may be covered by multiple awards. This will usually require consideration of which type of work constitutes the employee's “major and substantial employment”, but even then, there is scope for reasonable minds to differ.

The task is further complicated by the fact that, as was observed by the judge, in a frequently cited passage, awards may be “framed without that careful attention to form and draughtsmanship which one expects to find in an Act of Parliament”.

Expressions and terms used in awards may occasionally take their colour from industrial context, and practices in the relevant industry will also aid in construction. None of this can be gleaned from reading the award itself.

Even when the proper award and classification are determined, there are many ways an employer may unwittingly fail to comply. Some awards contain different penalty rates which vary depending on the occupation of the employee and the tasks performed. In a 2015 report into the workplace relations framework, the Productivity Commission noted that these complexities can be a significant source of confusion for both employees and employers.

Further, even if the minimum payment requirements are met, other requirements can be missed. For example, many employers with employees covered by the Building and Construction General On-site Award 2010 are surprised to learn that the award generally requires wages to be paid weekly, and that employees can be eligible for redundancy pay under the award even when they resign.

In short, what this all means is that awards create ample opportunities for employers to get things wrong.

What are the consequences for getting it wrong?

Confirming award coverage and understanding the relevant award obligations is often one of the first but most crucial steps in ensuring compliance with Australian workplace laws.

As recent news headlines have demonstrated, many organisations continue to self-report extensive miscalculations in the payment of wages and other entitlements to their workforces. Last year, the Fair Work Ombudsman reported that it recovered more than A$40 million (£22 million) for 18,000 underpaid employees during the financial year, being the highest total recoveries figure in the regulator’s history.

Many miscalculations appear to directly concern the contravention of one or more modern awards. It seems reasonable to expect that this year’s figures will be even higher.

While the conduct of some employers may be deliberate, it is clear that many employers fail to comply due to their own misapprehension of how the award system operates. The sheer number of implicated employers indicates that the current award system is difficult to navigate.

What does the future hold for modern awards?

There is no getting away from it – despite the modernisation process, Australia's award system is complex. Unsurprisingly, "”award simplification” is the focus of one of the five key working groups convened as part of the federal government's industrial relations reform process.

Various proposals to simplify the system are under discussion, although radical change such as abandoning the award system entirely seems unlikely. In the meantime, more than 2.2 million employees have their pay set by awards, and there is evidence of widespread failure to comply with awards. These are compelling reasons for employers to seek advice on award coverage and award obligations.

Katie Williams and Patrick Williams are employment law experts at Pinsent Masons, the law firm behind Out-Law.com