It’s that time again – From 1 July 2021, Australia’s superannuation guarantee (SG) will increase from 9.5% to 10%.
Adjustment to the SG rate is something that employers should be well aware of by now. It has occurred periodically since the advent of the SG under the Superannuation Guarantee (Administration) Act (NSW) (the Act) in 1992. At its earliest, the SG was at 3% of an employee’s annual salary. Twenty-nine years later, the 10% SG is certainly sweeter for the employee but can have bitter outcomes for an employer who doesn’t deal with the change in the right way.
Remuneration and Employment Contracts
An employer’s approach to implementing the new SG should first and foremost be guided by the way an employee’s contract is drafted. This will effect whether any change needs to be made to an employee’s remuneration or the wording of their contract.
A contract will usually state that an employee’s salary either includes superannuation or it doesn’t.
A. Salary excludes super
If the contracted salary excludes super and is not drafted as part of a total remuneration package (TRP), it will generally fall to the employer to increase the amount of super paid to 10% of the employee’s annual salary, with no reduction to the employee’s wage. Where a TRP is in place, the employer will need to ensure that the total figure is enough to capture the base salary (without variation) plus the 10% SG and any other applicable benefits. If the TPR does not do this, an employer must consult the variation terms of the relevant contract before varying the wording of the remuneration terms and/or the employee’s base rate.
If an employee’s contracted salary excludes super but not by way of TRP, the implementation of a TRP structure should be duly considered, as it allows employers to structure employee remuneration according to the specifics of an individual’s employment. In implementing a TRP, and, providing the variation terms of the contract permit, the remuneration terms should be reworded to represent the base rate, the 10% SG and any other applicable benefits that will fall within a total remuneration figure.
Where a contract does not provide for unilateral variation of non-substantive terms or is silent on the matter, an employer must consult with their employee to vary the contract by mutual agreement. An employer cannot otherwise unilaterally vary an employment contract or they may be liable for repudiation of contract. An effective way to achieve the variation is to tie the relevant consultation to some other event, such as an increase in remuneration by way of annual performance review. The consultation for each of these events can then be carried out in unison, through a written letter for the employee to sign. To read more about consultation, see below.
B. Salary includes super
If a contracted salary includes super, such as through a TRP, an employer may be tempted to just let the employee’s base rate absorb the 0.5% SG increase. However, this approach should be taken with great caution.
If an employer wishes to absorb the new SG into a base rate of pay, it is essential that they first determine whether, after absorbing the super increase, the employee’s base salary will continue to satisfy the applicable minimum wage for the relevant classification, and all other applicable rates, such as allowances, loadings and penalty rates, as provided under any relevant industrial instrument or governing legislation. If it will not satisfy these things, the base salary must be adjusted so that it does, and consultation and contractual variation carried out to this effect. Failure to do this may otherwise result in underpayment of wages to an employee in contravention of the Fair Work Act 2009 (Cth), a serious contravention of which can attract a penalty up to $66,000.
C. Other contractual considerations
An employer who is looking to adjust the base salary of an employee to encompass the new SG must consider whether there is any risk posed by some existing representation as to remuneration.
For example, if a contract does not contain terms to the effect that ‘representations made outside of this contract are not binding and do not form part of this contract’, and a representation has been made in writing (for example, by email or text), which promises a specific rate of remuneration for an employee, this can be binding on an employer. Therefore, if that employer reduces the employee’s base salary below that which is represented in order to satisfy the new SG, the employee could potentially make a claim of underpayment against that employer, relying on that representation.
It is also relevant that some contracts may contain words to the effect that ‘you will be paid the 9.5% superannuation guarantee in accordance with the Act’. Employers will not be able to keep paying a 9.5% SG from 1 July 2021 on the basis that that’s what the contract says, and they will be in breach of the Act if they do. Rather, from 1 July 2021, the 9.5% SG rate will be out of date and the terms of the contract will need to be varied to reflect the new SG.
To avoid a high-maintenance contract and minimise the risks associated with poorly drafted contracts, employers should ensure their contracts are well-drafted and periodically reviewed by an employment lawyer. In the event of any contractual ambiguity, depending on what that ambiguity is, such ambiguity will likely fall in favour of an employee.
Consultation means asking for and considering employees’ views when making important decisions. Consultation is required for any major workplace change affecting an employee under a modern award. All enterprise agreements must also contain consultation terms for significant workplace changes. These terms must be considered if applicable, such as where an employee’s salary is being increased.
Even if an employment contract permits unilateral variation of non-substantive terms, which can technically be carried out without consultation, we promote individual employee consultation for any variation of contract as best practice. Consultation is a due diligence that ensures employees are informed about changes that affect them and that they have been provided with an opportunity to discuss such changes with their employer.
Consultation should be in writing and indicate:
- what is changing;
- the reason it is changing;
- how it is changing for the specific employee (for example, variation of contract will be required); and
- what the expected impact will be on the employee.
If the change is to be represented by variation of contractual terms, the existing and proposed new terms should be clearly stated in the consultation notice.
Finally, the consultation notice should also invite the employee to provide any feedback or comments on the change. Any such feedback or comments provided must then be given due consideration by the employer before a decision is made.
It might be tempting to apply a ‘one size fits all’ approach when implementing the new SG rate, particularly for medium and large business employers with a significant headcount. However, this approach is fraught with risk.
Employers should take an individual approach to contractual review and consultation where a variation of terms is necessary to implement the new SG. Failure to do so carries significant risk of liability under both the Act and Fair Work Act, including potential penalties up to $66,000.
If your contracts have not been reviewed recently or you would like advice or assistance in updating your contracts of employment, please do not hesitate to contact a member of Coleman Greig’s Employment Law Team, who would be more than happy to assist you today.