Australia moves to protect penalty and overtime rates, making system more complicated

While well intentioned, the legislation may also have far-reaching and unintended effects that could prove ultimately detrimental to both employers and employees.

The legislation will insert a new section 135(A) in the Fair Work Act requiring the Fair Work Commission (FWC) to ensure that, when making, varying or revoking modern awards:

• penalty and overtime rates in modern awards cannot be reduced; and
• modern awards do not include terms that substitute penalty or overtime rate entitlements if the terms would have the effect of reducing the additional income that employees would otherwise receive.

In Australia, employees are paid higher pay rates known as penalty rates for working particular hours or days, such as working on weekends, public holidays or overtime (outside their ordinary hours of work). The proposed changes are designed to prevent applications such as those currently before the FWC by employers in the retail, clerical and banking sectors that are seeking authority for minimum pay rates including overtime and other penalty rates to be “rolled up” into one rate of pay. 

In her second reading speech when introducing the amendment in parliament, Amanda Rishworth, minister for employment and workplace relations, said: “This legislation will mean that proposals like these cannot be included in modern awards, which act as our safety net, and ensures penalty and overtime rates of low-paid workers are protected.”

Under the amendment, the FWC would be prevented from approving a 20% increase in the minimum weekly rate for employees while reducing or removing other penalty rates, provided it determines that the employees would have otherwise received more remuneration from their previous minimum weekly rate plus other relevant additional entitlements, such as overtime or weekend penalty rates.

Currently, modern awards, together with the National Employment Standards, provide employees with a safety net of entitlements, such as additional remuneration for employees working overtime, or on weekends or public holidays. The additional remuneration is usually set as a percentage of an employee’s minimum hourly wage, with workers typically being paid 250% of their usual rate to work on public holidays.

According to the government, the proposed new bill reinforces the primacy of the award safety net, and will protect workers from award proposals that reduce actual take-home pay.

The proposed legislation is currently before the Senate Education and Employment Legislation Committee, which is seeking submissions and is expected to hold a hearing on this next week.

Implications

In its current form, the bill has a number of significant implications:

• It may – despite the government’s statement it is not intended to have retrospective effect – force the FWC to remove longstanding existing terms of some modern awards providing for alternatives to penalty payments;

   

• It will limit award flexibility for employers considering alternative pay arrangements given it is likely to prevent the FWC from endorsing any innovation in pay structuring that absorbs penalty or overtime rates, even in circumstances where such arrangements may be commercially rational, as well as beneficial for employees who wish to trade up penalty rates for higher, more secure salaries;
• It fails to provide a clear definition of what is a “reduction” in penalty or overtime rates, which may prompt unnecessary disputes and create interpretative challenges for the FWC, courts, employers and unions;
• It continues the recent trend of more prescriptive legislative changes and underscores Australia’s continued reliance on a highly regulated labour system, including a centralised award framework. This, in turn reignites concerns whether such a system can encourage innovation and investment, accommodate evolving workforce expectations around flexible working and meet business needs without sacrificing a commitment to fairness;
• It may make it more difficult for enterprise agreements containing “rolled up” rates of pay to gain approval in the future, given that overtime and other penalty rates will form part of the “better off overall” test, rather than rolled-up rates;
• It risks making enterprise bargaining less attractive for employers who will likely be forced to retain existing award penalty rates as a minimum in any new agreement, even if one employee would not be better off under the proposed new arrangement.

Assuming the bill is passed in its current form, employers will need to reassess their current remuneration models – particularly those involving annualised salaries or flexible rostering – to ensure compliance with the new statutory framework. If employers are considering applying for any variation to an award, they will also need to seriously consider whether their proposed variation is compliant with the amendment’s requirements. 

Co-written by Neil Napper of Pinsent Masons