Getting legal advice

What is a guarantee of annual earnings?

Sometimes an employer and employee agree to a guarantee of annual earnings. But what does that mean? Learn more here.

Sometimes an employer and employee agree to a guarantee of annual earnings. But what does that mean? Learn more here about written guarantees, earnings, the high income threshold and unfair dismissal.

A guarantee of annual earnings is a written undertaking by an employer to pay an employer more than the high income threshold for 12 months or more.  

Under s47(2) of the Fair Work Act a modern award does not apply to an employee when the employee is a high income employee ($153,600 from July 1, 2020), where there is a guarantee of annual earnings. Section 330 of the Act refers to a guarantee of annual earnings and an annual rate of guarantee.  

An undertaking given by an employer to an employee is a guarantee of annual earnings if: 

  • the employee is covered by a modern award
  • the undertaking is in writing to pay the amount of earnings during a period of 12 months or more
  • the employee agrees to accept the undertaking, and agrees with the amount of the earnings
  • the undertaking is given within 14 days after commencing employment, or a day on which the employer and employee agree to vary the terms and conditions of employment, and
  • an enterprise agreement does not apply to the employee’s employment at the start of the period. 

Section 328(2) of the Fair Work Act requires an employer to ensure that for the period of employment prior to a termination, an employee is paid earnings at the guarantee annual earnings rate. 

What if earnings fall below the threshold?

An employer’s undertaking with respect to the guarantee of annual earnings only applies while an employee is a high income employee, i.e. the employee’s salary exceeds $153,600 p.a. from 1 July 2020. The guarantee is subject to any reductions arising from circumstances in which an employer is required or entitled to reduce an employee’s earnings. 

Examples of circumstances where an employer is entitled to reduce the employee’s earnings are unpaid leave, or absence (e.g. unpaid parental leave), and periods of industrial action. This means, the guarantee is no longer valid if an employee’s salary falls below the new high income threshold amount. It’s advisable to provide an undertaking for the period 1 July to 30 June each year, as the threshold is indexed annually. This ensures the undertaking remains valid. 

What are the advantages of a guarantee? 

The advantage for an employer of excluding the application of a particular award is that it avoids compliance with any of the prescriptive provisions that otherwise might apply.

Unfair dismissal and general protections applications

An employee subject to a guarantee of annual earnings is still eligible to apply for unfair dismissal despite earning above the high income threshold. This is because the employee is still ‘covered’ by a modern award. An employee on a salary above the high income threshold is excluded from unfair dismissal laws only if the employee is award or agreement free. 

The high income threshold is not relevant with respect to general protections applications. 

Example of written guarantee

The [insert modern award title] applies to your employment. We undertake to pay you from 1/7/20 to 30/6/21 total earnings (excluding employer superannuation guarantee contributions and incentive payments) equal to (say) $170,000.

By accepting this undertaking, the [insert modern award title] will not apply while your salary exceeds the high income threshold. 

 

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