Penalty rates, part 7 – avoiding paying penalty rates

  • Penalty rates

It’s possible to avoid paying penalty rates.  There’s four ways:

  • Award flexibility
  • Make over award payments
  • Make a guarantee of annual earnings with a high income employee. That’s income of over $129,300 per year, but will increase on 1 July 2014. Then you can contract out of the whole modern award.
  • Convince the Fair Work Commission that penalty rates should be removed from modern awards. There’s an overview of the process in part 1 of Whites Legal’s look into penalty rates.

This Small Plate looks at over award payments and award flexibility.

The usual caveat: this is a basic analysis which doesn’t take into account the nuances of your hospitality business. Get advice tailored to your business.

Over award payments

The business can decide to pay the employee a higher base wage with a view to compensating the employee for any penalty rates which would otherwise be payable.

Remember that that penalty rates are a minimum hourly rate for working particular hours. Penalty rate loading is not calculated off the employee’s base wage (unless the employee’s receiving minimum wage under the modern award).

It’s probably not worth getting particularly excited about over award payments if you’re trying to reduce costs. The bottom line of the business is unlikely to improve as a direct result of making over award payments to replace penalty rates.

If you choose to make over award payments, it’s critical for a business to keep good records of the each employee’s time and pay. This is required anyway. It’s also evidence to show that the employee’s been compensated properly for working without being paid penalty rates.

Award flexibility

All modern awards include an award flexibility term. Check around clause 7.

Using award flexibility

  1. Know which modern award applies (if any) and read the clause on award flexibility.
  2. Work out what the employee gets in place of penalty rates. The employee must be better off overall.
  3. Come to an genuine agreement with the employee.
  4. Write the award flexibility agreement. Make sure it only deals with the matters which can be varied under the award flexibility term
  5. Employer and employee signs the award flexibility agreement and each keep their copy safe.
  6. Keep records into the future which you can use to show that the employee is still better off overall.

Know which modern award applies

Here’s some of the usual modern awards for hospitality businesses:

Check the clause titled “coverage” and in the schedule titled “Classification definitions”

If you’re not sure if one of these fit your business:

“The Employee must be better off overall”

Ah. There’s the catch.

The business needs to change the employee’s conditions of employment so he or she is better off over all. Given it’s a change to the employee’s pay, the employee will likely need to paid a higher base wage.

Just like over award payments, it’s unlikely the business will see an improvement in its bottom line by making use of award flexibility.

A few parting notes

  • As always, keep detailed employee records.
  • It’s unlawful to treat someone differently if they don’t agree to award flexibility.
  • Unless there’s a way to avoid it, you’re up for penalty rates, or you’re in some trouble.

If you have questions, contact Whites Legal for any questions about penalty rates or employment law


Leave A Comment