The ability to attract and retain talented staff greatly benefits an organisation’s ability to sustain a competitive advantage. The loss of a key employee can have a significantnegative impact the business. Remuneration plays an important factor in the attraction, engagement, motivation and retention of employees. Employers need to be well aware of their obligations surrounding this sensitive subject as well as considering what, in addition to salary, their organisation may offer an employee to improve engagement and motivation within their business.
An employer’s obligation to pay wages upon receipt of services by the employee arises as a consequence of the existence of an employment relationship. However, while this obligation is a necessary requirement of the employment contract, the minimum quantum of wages that the employer must pay is governed by statute and other statutory instruments.
Modern awards and enterprise agreements set minimum wages for those employees covered by a modern award or an enterprise agreement. Award wages, and the national minimum wage, are determined by annual reviews conducted by the Fair Work Commission. Employers can pay wages in excess of the minimum, but cannot contract to pay less than the award or Fair Work Act 2009 (Cth) (“FWA”) provides. The FWA provides that employers must pay their employees minimum wage entitlement in money (cash, cheque or electronic funds transfer). An employer who pays their employees by some other means (e.g. store vouchers or goods) will find that employees can still recover their full wage entitlement in money, without any set-off for the value of the goods.
The FWA also prohibits employers from deducting money from employees except in very specific circumstances such as for salary sacrificing arrangements, overpayment of wages and the like. All other set off amounts must be for the benefit of the employee and with their express consent. This means that amounts paid to employees in error, or as loans, or where an employer has provided a benefit which it wishes to have reimbursed, can only be set off with the employee’s express consent.
Loadings, Penalty rates and Allowances
Awards and enterprise agreements often require some form of loading or premium to be paid for particular work. Casual employees are generally entitled to a loading on top of their hourly or weekly rate. It has also been the norm for modern awards to set penalty rates to provide compensation for overtime work and/or work during ‘anti-social’ times (such as night, weekends and public holidays). We note there has been a more recent decision to reduce penalty rates in the hospitality, retail and fast-food industries.
Furthermore, many awards and enterprise agreements provide allowances to be paid in certain circumstances, such as for dirty work, provision for tools, travel away from normal place of work or high duties. These amounts must be paid in addition to the minimum wages set in the award. The workplace Ombudsman is vigorously prosecuting employers who fail to make the appropriate payments even if they are paying the correct minimum wages. Many employers however believe that merely by paying their employees more than the minimum required by a relevant award or enterprise agreement, they no longer need to pay the loadings, penalties or allowances. This is entirely incorrect and can lead to significant under-payment claims. If employers do wish to pay “all up” rates, they need to ensure they have complied with all award requirements. These requirements may include providing notice to employees that the remuneration is an all up rate. For example the Clerks Private Sector Award required an employer who wishes to pay an annual salary or all up rate to specify in writing to the employee the award entitlements that are “set-off” by the all up rate. It is very important that the written contract of employment address this issue so as to ensure the organisation can rely on a set-off argument. If this is not properly dealt with the organisation may find that despite paying its employees inflated salaries, they are still liable for penalties and allowances.
Bonuses and Incentives
Many organiations use bonuses and incentive payments as a way to motivate and incentivise employees. However, badly constructed or implemented bonus/incentive schemes may actually result in significantly demotivating employees and lead to possible protracted disputes and litigation. Bonus or incentive schemes are common for executives or professional level employees, who are typically eligible to receive cash payments and/or share allocations or options. Some incentive schemes reward individual merit, whereas others may be based on performance of a division or the organisation as a whole. The structure of an incentive scheme and how it operates in practice should be carefully considered. It would be most unfortunate for example, if an incentive scheme incentivised employees to take unnecessary health risks which put their safety in jeopardy. Such schemes were not uncommon in the manufacturing industry, where performance bonuses were provided on the basis of productivity, which then encouraged employees to by-pass safety mechanisms on machinery in order to speed up production.
Bonus or incentive schemes are often at the employer’s discretion as to the assessment of an employee’s performance, or the quantum of any bonus or share offering. In circumstances where an employee feels the discretion has been exercised arbitrarily or vindictively, it is far more likely to have a negative impact than positive, regardless of the quantum of the bonus paid. While discretionary bonus and incentive payments are the norm and may mean that the employee has no right as such to be rewarded, where such entitlement to participate in a bonus or incentive scheme is incorporated in the contract of employment, even if it is entirely discretionary, there may be an implied obligation not to exercise the discretion capriciously or arbitrarily, and thus create a contractual right to a payment.
Relevantly, the decision of Silverbrook Research Pty Ltd v Lindley  NSWCA 357 considered the issue of whether an employer had any contractual obligation to pay a discretionary bonus scheme. In this case, Robyn Lindley was employed by Silverbrook Research Pty Ltd (“Silverbrook”) on an annual salary of $210,000. Her contract provided that her salary was to be reviewed annually, although Silverbrook was not obliged to increase the salary. The agreement also provided that Ms Lindley was eligible for an annual performance bonus subject to her meeting performance objectives set by Silverbrook each quarter. Ms Lindley ceased working for Silverbrook and at no stage during her employment was her salary increased or reviewed. Furthermore, no objectives were ever established by which the bonus could be measured. Accordingly, Ms Lindley was never paid a bonus.
Ms Lindley commenced proceedings in the District Court of NSW. The Court held that Silverbrook had breached the agreement by failing to review Ms Lindley’s salary annually. The Court also determined that Ms Lindley had lost the opportunity to meet the objectives that would have paid her a bonus. Consequently, Ms Lindley was successful and damages of $74,000 were awarded by the Court. However, Silverbrook appealed the finding to the NSW Supreme Court.
Silverbrook argued that salary increases or bonuses were entirely a discretion, no matter how well (or badly) the employee had performed. The company merely exercised the discretion it had, not to pay any more than the starting salary. Accordingly, they maintained that Ms Lindley had not proved damage because the decision to pay the bonus was entirely at Silverbrook’s discretion.
The Court of Appeal held that the decision as to whether Ms Lindley should receive the bonus was entirely within the discretion of Silverbrook, however it should not be construed as to permit Silverbrook from withholding the bonus capriciously or arbitrarily or unreasonably. The Court accepted, that while Silverbrook had not made a promise to pay the bonus, it had promised toformulate KPIs and undertake a process of reviewing Ms Lindley’s performance with a view to her obtaining a bonus in the event the result of the process was favourable. The Court further stated that a discretionary clause should receive a reasonable construction and not permit the employer to choose arbitrarily or capriciously or unreasonably that it need not pay the money once the set objectives have been satisfied.
This decision highlights the importance of ensuring employers do not act unreasonably when choosing to exercise their discretion. It is common for employer’s to not want to pay a bonus to a departing employee. However, in light of this decision, if an employer chooses to exercise their discretion there should be a reasonable basis to do so and ensure that basis is recorded. In addition, the contract of employment should specifically set out that incentive payments are not payable if the employee is no longer employed or serving out a period of notice.
Remuneration Packages and Benefits
It is common for employers to provide additional benefits as part of the remuneration package. Such benefits are usually provided to high-salary employees not covered directly by awards or enterprise agreements and may include additional superannuation, low interest loans, provisions for a motor vehicle or vehicle allowance, telephone allowances, accommodation or additional benefits such as paid meals. The value of these additional benefits can be substantial and significantly assist in attracting and retaining talented employees in a competitive market. If additional benefits are provided to employees, it is important that the employer carefully consider whether the benefit forms part of the individual’s remuneration (or not). If the benefit does form part of the remuneration it may be included in the calculation of severance or termination payments. There may also be unintended consequences where for example an employer provides an employee with accommodation and treats the value of the housing as part of the remuneration. In such circumstances, the employee may then have rights as a tenant under relevant State tenancy legislation, meaning that the employer may then be obliged to provide the employee far longer notice to vacate the premises at the termination of employment than is otherwise provided by the notice provision in the contract of employment.
In light of the above, it is abundantly clear that employee remuneration should be carefully considered to ensure it meets the relevant objectives of the employer and is set to comply with all legislative requirements. Employers should also be weary to ensure that realistic performance based incentives are created for employees that are achievable and do not encourage self-interested behaviour or unsafe work practices. Most importantly, remuneration should be considered holistically and not just as a number.
If you wish to discuss the different remuneration models that can be used to incentivise staff and increase workforce engagement, or the best practice contractual terms regarding this area, please do not hesitate to contact us.
If you wish to discuss any aspect of this article or require specialist advice or assistance inrelation to your employment relations framework, please do not hesitate to contact us.
This alert is not intended to constitute, and should not be treated as, legal advice.