Modern employment awards – are you a risky business?

Picture this:

You’re a small business owner.

After getting through the first five years of trade, you’re starting to see returns on the time, emotion and finances you have invested in your business. Finally, you find yourself in a position you can start paying down business debt and begin to enjoy the financial returns of your hard work.

Then, you receive a document in the mail. It’s a claim for unpaid wages by a former employee. The claim refers to a provision that is nested deep in a Modern Award that you have not seen before. At first, the award provision seems fairly innocuous – it talks about an extra $2.00 per hour payable to employees in certain circumstances. No big deal, you think. And then you realise that the employee making the claim:

Worked for your business for four full years;
Worked for you on average for 38 hours a week; and
The circumstances referred to in the Award applied to the employee’s situation.

Suddenly the seemingly harmless award provision about $2.00 per hour has transformed into an unanticipated liability of over $15,000.

What’s worse: you have 5 other employees in the same situation. Now we’re talking about an unexpected liability of over $75,000, plus the risk that the employment watchdog could issue you with fines for underpayment of wages.

I wish this were a fictional story, but unfortunately, it has been the reality for far too many business owners that have failed to appreciate the practical impacts of the Modern Award system.

Are you a ‘risky business’?

Although the Modern Award system has been in place for over a decade, we still find employers that are:

Completely unaware that Modern Awards exist;
Referring to the incorrect Modern Award in their business documents (including employment agreements and payroll processes); or
Referring to the correct Modern Award, but not properly complying with it.

If you think your business may fall into one of these risk categories, don’t panic (but do act).

In this article, we’ll get back to basics and talk about the tips, traps and tools available to help you navigate the (sometimes) complicated world of Modern Awards.

Risky Business #1: “Modern Awards System? What is that?”

If you are not familiar with the existence of the Modern Awards system and how it relates to your business, you need to take immediate action as there is a risk that:

Your business is not complying with minimum employment standards set by the Fair Work Act 2009 (Cth); and
Your business (and its individual owners) may be liable for contraventions of the Act in the form of underpayment claims by your employees and penalties applied by the Fair Work Ombudsman.

Some employers still assume that due to the nature of their industry/workforce their employees are ‘award-free’. This often stems from a misunderstanding about the scope and coverage of the Modern Awards system. The reality is that even if the majority of your workforce is classified as ‘award free’, there are likely to be at least some employees that are covered by a Modern Award, even if it is the Miscellaneous Award (yes, this award does exist!).

If you have not specifically received professional advice on this issue and its application to your business, we suggest that as a starting point you take these simple steps without delay:

Put together a table of the employees that your business has employed in the past decade with details such as each employee’s:
1. Commencement date;
2. Termination date;
3. Date of birth (if known);
4. Employment type (e.g. casual, part-time, full-time, fixed term);
5. Role in the business; and
6. Pay rates (including any changes to these for the duration of their employment).

Hopefully, this is something you can easily extract from your payroll system.

Identify the written contract terms (if any) that have applied to each employee during the period of their employment, including any position descriptions that have applied to their role. These items will ordinarily be stored in each employee’s file either in electronic or hard copy form. If you are unable to locate any written terms, make note of this on the employee table.
Schedule a time to meet with a lawyer with expertise in employment law. When scheduling the meeting, you should outline that you need specific advice on:
1. Whether (and to what extent) you are at risk of non-compliance claims relating to the Modern Award system; and
2. A strategy for rectifying any immediate issues that are identified.

A note on finding an appropriate adviser: While your professional/trade association or HR consultants may indicate that they can assist you with the above, we recommend getting this advice from a legal professional so that your communications with your chosen adviser are appropriately protected by confidentiality and legal professional privilege (which means that the conversation can’t be used against you in court).

When any immediate issues have been appropriately addressed, we recommend you consult with a professional adviser that is appropriately equipped to:
1. Conduct a ‘health check’ of your entire staff management system from recruitment, onboarding, record keeping right through to performance management and termination practices (as it is likely that if you are unaware of the Modern Award system, there are other legal obligations that may have slipped through the cracks); and
2. Establish a working system to ensure that you stay on top of your legal obligations in this area. This could be as simple as subscribing to the Fair Work Ombudsman’s free email update service. Most Modern Awards are updated periodically, and it is critical that your business adapts to these changes. The pay rates in most awards are reviewed and effective from 1 July each year.

Risky Business #2: Referring to the incorrect Modern Award

Some businesses inadvertently apply the incorrect Award to their employees. This may be because they have:

Selected the Award with the title that ‘sounds about right’, without looking any deeper;
Referred to the Award that seems to refer to the employee’s specific position, without first looking whether an industry-based Award applies; or
Failed to specifically look at the Award’s ‘coverage clause’ which usually appears at clause 4 of each Award.

If you think this may apply to your business or any of your employees, we recommend that you take these simple steps:

Use the Fair Work Ombudsman’s free ‘Awards Finder’ tool to identify all of the possible Awards that may apply to your workplace (there may be more than one!).
Put together a table of the employees that you think may be affected by this issue, including details such as the employee’s:
- Commencement date;
- Termination date;
- Date of birth (if known);
- Employment type (e.g. casual, part-time, full-time, fixed term);
- Role in the business; and
- The name of the Award that you have applied in the past to determine their employment terms.
Double check that you are referring to the correct Award for each employee by reading the ‘Coverage’ clause (usually found at clause 4 in the Award) in the context of each employee’s role in the business.
On the employee table, make note of any identified discrepancies between the Award that has been applied in the past vs. what you have discovered from using the ‘Awards Finder’ tool and reading the coverage clause.
If you think there is any chance that you have been applying the incorrect Award to any individual employee’s position, you should attempt to work out the extent of any shortfall in entitlements that you have provided to that employee and either:
- Take steps to immediately rectify the issue; or
- Seek professional advice from an employment lawyer that can help you to confirm the extent of the issue and assist you to implement a strategy to address it.
If you are satisfied that you are referring to the correct Award, you then need to ensure that the employee has been appropriately classified under that Award (see recommended steps for Risky Business #3 below).

If you are unclear about any of these steps, consult with a professional adviser that is appropriately equipped to help you identify the relevant Awards and their application to your workforce.

Risky Business #3: Referring to the correct Modern Award, but not appropriately complying with it

The most common issues that we come across in relation to Modern Awards is where an employer:

Is fully aware of the Modern Award system;
Has selected the correct Modern Awards that apply to their employees; but
Has not complied with all of the terms of the applicable Award.

This can happen when the employer:

Has purported to pay the employee an ‘above award’ flat rate, without appropriately following the mandatory process for implementing an Individual Flexibility Arrangement (usually specifically set out at clause 7 of the Award);
Has not properly appreciated, understood or applied all of the allowances and penalty rates that apply to a particular employee;
Has failed to appropriately classify the employee’s role by reference to Schedule B of the Award (either from the beginning or as the employee’s role has evolved over time); or
Has failed to implement a system to stay on top of changes to the Award (e.g. annual pay rate increases).

If you think this may apply to your business or any of your employees, we recommend that you take these steps:

Read the applicable Award, beginning to end. Sorry, but there is no shortcut to this one.
Highlight any areas where you are not 100% confident that your business is compliant (either now or in the past).
Put together a table of the employees that you think may be affected by the issues you have highlighted, including employee details such as:
- Commencement date;
- Termination date (if applicable);
- Date of birth (if known);
- Employment type (e.g. casual, part-time, full-time, fixed term);
- The employee’s role in the business (including all of the specific tasks that the employee currently performs);
- The applicable Award; and
- The Award classification that you have applied to their employment (by reference to Schedule B);
Identify the written contract terms (if any) that have applied to each employee during the period of their employment, including any position descriptions that have applied to their role. If you are unable to locate any written terms, make note of this on the employee table.
On the employee table, make note of any identified discrepancies that may apply to each individual employee by reference to the employee’s actual role/pay rates and the Award provisions.
If you think there is any chance that you have not complied with the minimum provisions set out in the Award for any of your employees, you should attempt to work out the extent of any shortfall in entitlements that you have provided to that employee and either:
- Take steps to immediately rectify the issue; or
- Seek professional advice from an employment lawyer that can help you to confirm the extent of the issue and assist you to implement a strategy to address it.

A Note about Exceptions

While Modern Awards apply to many businesses and their employees, it’s worth just mentioning some of the blanket exceptions to Award coverage. These include:

If an employer has a registered agreement in place. Registered enterprise agreements are complex and can apply to a business or group of businesses. They are negotiated between the employer and the employees, generally represented by a union, and cannot provide entitlements that are less than those provided by the applicable award.
If your employee is a high-income employee. To be classified as a high-income employee an employee must have accepted a written guarantee of annual earnings and be guaranteed to earn an annual amount that is more than the high-income threshold. The high-income threshold is set at the beginning of each financial year. From 1 July 2022, the high-income threshold is $162,000. On this basis, many senior managers and professionals are not covered by awards. This excludes superannuation (i.e. that is on top) and any discretionary pay, i.e. bonuses.
There are a few jobs and industries that are not covered by awards at all. If there is also not a registered agreement in place, then an employee is said to be award and agreement free.

Navigating the (sometimes) complicated world of Modern Awards may seem like a daunting task, but it’s important to break your compliance strategy down to manageable steps and deal with each step systematically and comprehensively.

There are many useful free tools and resources on the Fair Work Ombudsman’s website, including detailed Pay Guides. If you lose your way, it’s important to seek professional help and take action early. Your business is counting on it!

The information contained in this post is current at the date of editing – 28 March 2023

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