Although most employers understand that modern awards do not apply to “high income employees”, there is a common misconception that the mere act of paying an employee an annual salary which exceeds the high income threshold (currently $162,000 p.a.) is enough to classify the employee as a “high income employee” under the Fair Work Act 2009 (Cth).
In the recent decision of APESMA v Peabody Energy1, the Federal Court of Australia confirmed that for an employee to meet the definition of a “high income employee” under the FW Act, the employer must have provided the employee with a “guarantee of annual earnings” that meets the requirements set out in the FW Act.
Importantly, the Federal Court clarified that a clause which provides that the employee will be paid an annual salary which exceeds the high income threshold is not, in and of itself, a “guarantee of annual earnings” for the purposes of the FW Act.
Peabody Energy, the respondent in the proceedings, operated numerous black coal mines in Australia. In 2019 and 2020, Peabody Energy terminated the employment of several employees at its New South Wales and Queensland mines for reasons of redundancy.
The Association of Professional Engineers, Scientists and Managers Australia brought proceedings against Peabody Energy on behalf of the retrenched employees, alleging that it had contravened the Black Coal Mining Industry Award 2010 by failing to provide the employees with certain benefits to which they were entitled under the Award, namely, a payment in respect of their accrued but untaken personal/carer’s leave entitlements.
Peabody Energy contended that, for all but one of the retrenched employees, the Award did not apply and the employees were otherwise award-free, on the basis these employees were paid a salary that was greater than the high income threshold and were therefore “high income employees”.
The Primary Issue
Under section 329 of the FW Act, an employee will be a “high income employee” if the employee has a “guarantee of annual earnings” for a guaranteed period, and the annual rate of the “guarantee of annual earnings” exceeds the high income threshold. Section 330 defines a “guarantee of annual earnings” as a written undertaking from an employer to pay an employee who is covered by a modern award, an amount of earnings in relation to the performance of work during a period of 12 months or more, which the employee accepts.
In the Peabody Energy case, the employment contracts between the parties merely stipulated that the employees would be paid a base annualised salary, the amount of which exceeded the high income threshold. Accordingly, the primary question was whether these provisions in the employment contracts were sufficient to constitute a “guarantee of annual earnings” for the purposes of the FW Act.
Justice Wigney took the view that something more than just an agreement to pay an employee an annualised salary is needed to satisfy the requirements of the FW Act. His Honour observed that an undertaking to pay an employee an amount of earnings could only amount to a “guarantee of annual earnings” if the employee “agree[d] to accept the undertaking and agree[d] with the amount of the earnings”.
His Honour also noted that the employment contracts did not stipulate an end date for which the annualised salary was to be paid – the fact the employees were paid an “annualised” salary did not mean there was a guaranteed period of 12 months as is required under the FW Act.
Ultimately, Justice Wigney held that the employees had not been provided with a “guarantee of annual earnings” for a guaranteed period and therefore, the employees were not “high income employees” for the purposes of the FW Act. Accordingly, it was decided that the Award applied to the employees and they were entitled to be paid out their accrued but untaken personal/carer’s leave entitlements in accordance with the Award.
The Key Takeaways
Employers should promptly review their employment contracts with their employees who may be covered by a modern award and who are paid an annual salary which exceeds the high income threshold, to determine whether these contracts contain an appropriate “guarantee of annual earnings”.
There will likely be a “guarantee of annual earnings” if the contract:
- includes an undertaking that the employee will be paid an annualised rate which exceeds the high income threshold;
- confirms that the period to which the undertaking relates is at least 12 months; and
- advises that acceptance of the undertaking will mean that a modern award will not apply to the employee during the guaranteed period.
If the contracts do not contain appropriate “guarantee of annual earnings” clauses, then consideration should be given to rectifying this by either amending the contracts or entering into separate agreements with the employees.
If you require assistance with reviewing and amending your employment contracts to ensure there is an appropriate “guarantee of annual earnings”, please contact Addisons’ employment team.
1 Association of Professional Engineers, Scientists and Managers Australia v Peabody Energy Australia Coal Pty Ltd  FCA 945.