The Federal Court provides guidance on guarantees of annual earnings

Key takeaways

Guarantees of annual earnings are a means of avoiding the provisions of a modern award that covers high income employees.
It is critical to ensure that guarantees of annual earnings strictly follow the requirements of the Fair Work Act 2009 (Cth).
The Federal Court of Australia has recently found that the annualised salary provisions of a contract of employment for a high-income employee was ‘not sufficient’ to constitute a guarantee of annual earnings.

Guarantees of annual earnings are a common way that employers and employees in traditionally highly paid but award-covered industries (e.g. banking, finance, insurance and mining) can agree that a modern award does not ‘apply’ to an employee, despite the award continuing to ‘cover’ the employee. This means that the parties to the guarantee can effectively displace the terms of the modern award on a day-to-day basis; but the ability to do so hinges on strict compliance with the requirements for entering into such an arrangement under the Fair Work Act 2009 (Cth).

What is a ‘guarantee of annual earnings’?

A guarantee of annual earnings is a particular undertaking given by an employer to a high-income employee (i.e. an employee who earns above the high-income threshold; currently $162,000 a year). To enter into such an undertaking, the following conditions must be satisfied:

the employee is covered by a modern award that is in operation;
the undertaking is an undertaking in writing to pay the employee an amount of earnings in relation to the performance of work during a period of 12 months or more,² unless the employee is employed or performing particular duties for period of less than 12 months;³
the employee agrees to accept the undertaking, and agrees with the amount of the earnings;⁴
the undertaking and the employee's agreement are given before the start of the period, and within 14 days after the day the employee is employed, or a day on which the employer and employee agree to vary the terms and conditions of the employee's employment;⁵ and
an enterprise agreement does not apply to the employee's employment at the start of the period.⁶

The Federal Court has recently considered whether the annualised salary provisions of a contract of employment could be sufficient to constitute a guarantee of annual earnings. The answer should be a warning to employers who rely on these arrangements.

The Federal Court’s view: APESMA v Peabody Energy Australia Coal Pty Ltd

In APESMA v Peabody Energy Australia Coal Pty Ltd [2022] FCA 945, the Court found that arrangements entered into between Peabody Energy Australia Coal Pty Ltd (Peabody) and certain employees did not constitute a guarantee of annual earnings within the meaning of the Fair Work Act 2009 (Cth). As a result, the Black Coal Mining Industry Award 2020 applied to those employees and the employees were entitled to various payments under the award. Peabody sought to rely on the annualised salary provisions of the employment contracts with the relevant employees, arguing that that the contractual provisions were sufficient to constitute a guarantee of annual earnings. The Court expressed the position in the following way:
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‍“The critical question for determination is whether the agreement between Peabody and each of the employees that Peabody would pay them a particular salary was sufficient to constitute a guarantee of annual earnings, or if something more was required. The short answer to that question is that something more was required.”

The Court found that the terms of the employment were not sufficient to constitute guarantees of annual earnings within the meaning of s.330 of the Fair Work Act 2009 (Cth)FW Act. The following matters were relevant to this determination:

the employer’s guarantee must identifiable, enforceable and voluntarily accepted by an employee with knowledge that, by accepting the undertaking, the relevant modern award will no longer apply to them;
something more than a mere contractual promise to pay an employee a specified salary is required;
the provisions of the Fair Work Act 2009 (Cth) dealing with guarantees of annual earnings are civil remedy provisions, and so it is difficult to accept that an employer could breach those provisions by breaching a term that requires the employer to pay a specified salary which happens to exceed the high income threshold;
a guarantee of annual earnings must be for a fixed or determinate and readily identifiable period, and in that case the contracts did not specify the end of the period in which the employee would be paid the relevant earnings; and
the employees could not have been said to have agreed to accept any undertaking as to the payment of an amount of earnings and agreed with the amount of the earnings. Rather, by signing the relevant contracts, the employees merely agreed to accept the terms of those contracts.

What does the case mean for employers?

This case indicates that the courts apply a high level of scrutiny to purported guarantees of annual earnings and the requirements of the Fair Work Act 2009 (Cth) in relation to such arrangements must be strictly followed. It is therefore critical to correctly use the language of the Fair Work Act 2009 (Cth)when drafting guarantees of annual earnings and maintain strict adherence to the requirements of the legislation.

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About the Authors

Stephen Schoninger leads the employment and workplace law practice at Avant Law, based in Sydney. Stephen has over 18 years’ experience practising exclusively in employment, industrial relations and discrimination laws. Stephen is called on for his ability to plainly advise on and pragmatically apply legal principles to manage and resolve complex issues arising in the workplace. Stephen advises employers and employees in the private and public sectors on all areas of workplace law and is an experienced litigator of work-related claims. Stephen also conducts workplace investigations and delivers workplace compliance training. He regularly presents seminars on topical employment and workplace law issues.

(1) Fair Work Act 2009 (Cth) s330 (1)(a)
(2)Fair Work Act 2009 (Cth) s330 (1)(b)
(3)Fair Work Act 2009 (Cth) s330 (1)(2).
(4) Fair Work Act 2009 (Cth) s330 (1)(c).
(5) Fair Work Act 2009 (Cth) s330(1)(d).
(6)Fair Work Act 2009 (Cth) s 330(1)(e).

Disclaimer: The information in this article does not constitute legal advice or other professional advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of its content. The information in this article is current to 26 August 2022.