Australia: A Guide for Employers: Ordinary Hours of Work and Payment for Overtime

Connection
Last Updated: 29 July 2011
Article by Katie Wright

Determining what are 'ordinary hours of work' and when overtime rates of pay must be paid can be one of the most daunting aspects of modern awards. At present, many businesses are reviewing and redrafting their contracts in light of the terms and entitlements of modern awards and are proposing 'catch-all' salary arrangements in the earnest hope that such an arrangement will satisfy all the entitlements an employee has under an award. But strictly applying the terms of the award may not be as troublesome or complicated as one thinks. This article will look at the governing principles behind 'ordinary hours of work' and will provide some guidance on when an employer is obliged to pay overtime.

  1. Ordinary Hours of Work for Award or Agreement- Free Employees

    The Fair Work Act 2009 (Cth) ("Act") is the best starting point for most queries relating to employee entitlements. The Act states that 'ordinary hours of work' for an award or agreement-free employee are the hours agreed by the employee and his or her national system employer as the employee's ordinary hours of work.

    In other words, the ordinary hours of work are the hours that have been agreed to in the employee's employment contract, or which are stated on the employee's roster.

    In the absence of agreement, the Act states that the ordinary hours of work are 38 hours for full time employees and for part-time employees the lesser of 38 hours and the employee's usual weekly hours of work.

    What happens if the employee works more hours than what is stated in the contract?

    If an employee's usual weekly hours of work tend to exceed the hours set out in the employee's contract of employment, the employee's 'ordinary hours of work' are the lesser of 38 hours and the employee's usual weekly hours of work.

    What are Usual Weekly Hours?

    'Usual Weekly Hours' is a statutory term defined in Regulation 1.11 (2) of the Fair Work Regulations 2009 (Cth) ("Regulations"). Usual weekly hours are the average of the hours the employee worked in the last four weeks. The calculation is made by identifying the total number of hours the employee has actually worked over the preceding four weeks and dividing the result by four. If the employee has completed less than four weeks' service the same basis for calculation can be relied on for a preceding period of one, two or three weeks.

    Table 1 - Award/Agreement Free Employee

    Hours Ordinary Hours of Work
    The employee's hours of work are stipulated under a contract or otherwise by written agreement. The hours stipulated under the Contract or otherwise by written agreement.
    The employee's hours of work are not agreed in writing.

    The lesser of:

    • 38 hours per week; and
    • the employee's usual weekly hours.

    The employee's usual weekly hours are greater than the hours stipulated under the employee's contract or under a written agreement.

    The lesser of:

    • 38 hours per week; and
    • the employee‟s usual weekly hours.

  2. Ordinary Hours of Work for Award Covered Employees

    From 1 January 2010, a new system of federal modern awards came into operation. The modern awards cover national system employees (being employees subject to federal industrial relations law) in a particular industry or occupation. The modern awards are quite broad, and senior and managerial employees may be covered, notwithstanding that those employees may earn a high annual salary.

    The Act distinguishes between when a modern award covers‟ a person and when the terms of a modern award 'apply' to a person. The distinction is important in determining the ordinary hours of work of an employee who is covered by a modern award. If the terms of a modern award do not apply to a person, the person is treated as an award/agreement free employee.

    When does a modern award not apply to a person?

    As noted above, senior and managerial employees may be covered by a modern award, notwithstanding that they receive a high annual salary. The Act provides that, where a person is covered by a modern award, the terms of the modern award will not apply to the employee if the employee is provided with a guarantee of annual earnings‟. A guarantee of annual earnings may be provided to any employee who earns above the High Income Threshold (currently $108,300).

    A guarantee of annual earnings ("Guarantee") is a statutory undertaking from an employer to pay an employee an annual salary in excess of the High Income Threshold, in return for which the employee agrees that the terms of the award which would otherwise apply to his or her employment will not apply. The employee continues to be covered by the modern award (and may, for example, have standing to commence proceedings for unfair dismissal on that basis). However, the modern award terms will have no effect in respect of that employee.

    What are the Ordinary Hours of Work of award covered employees?

    To understand what comprises the ordinary hours of work of an employee who is covered by a modern award, let's use the Clerks - Private Sector Award 2010 ("Clerks Award") as an example.

    As the Clerks Award currently stands, clause 25.1 provides that the ordinary hours of work of day workers covered by the award are:

    1. an average of 38 hours per week, not to exceed 152 hours in 28 days (i.e. the averaging period must not exceed four weeks);
    2. worked between 7.00 AM and 7.00 PM, Monday to Friday;
    3. worked between 7.00 AM and 12.30 PM Saturday; and
    4. not more than ten hours per day exclusive of meal breaks.

    Table 2 - Award Covered Employees

    Day Scope of Ordinary Hours of Work Number of Hours
    Monday 7.00AM to 7.00PM < 10
    Tuesday 7.00AM to 7.00PM < 10
    Wednesday 7.00AM to 7.00PM < 10
    Thursday 7.00AM to 7.00PM < 10
    Friday 7.00AM to 7.00PM < 10
    Saturday 7.00AM to 12.30PM <10
    Sunday
    < 10
    TOTAL
    <38

    Different awards will have different ordinary hours of work. Generally, the ordinary hours of work in an award will reflect the nature of the work carried out in the particular industry covered by that award. It is important to note that the scope of ordinary hours of work is not the same as the hours of work that an employee may be required to work. The hours an employee may be required to work will be fixed within the scope of ordinary hours of work and must be less than 38 hours per week.

  3. Varying the Ordinary Hours of Work for Award Covered Employees

    Ordinary hours of work may be varied by using an Award flexibility agreement or under the terms of the award itself. The terms of a contractual agreement which attempts to vary the scope of hours described as ordinary hours of work under an applicable award will have no effect unless the agreement is one reached under the terms of the award itself.

    Award Flexibility Agreements

    All modern awards contain what is termed an 'Award Flexibility clause'. These clauses allow the employer and an individual employee to agree to vary the application of certain terms of the award to meet their individual needs. The terms that may be varied include terms which concern arrangements for when work is performed, and overtime.

    Award flexibility agreements must be in writing and may be terminated by agreement or by either party giving notice. Nonetheless, while it is in force, an award flexibility agreement provides a useful means to vary the scope of hours an employee performs over a week or a period of weeks, and to provide compensation to the employee other than overtime rates of pay. As an example, an award flexibility agreement may be particularly useful where an employee wishes or is required to regularly start work at 5AM or 6AM. Varying the ordinary hours of work means that the employee may start earlier and will not be entitled to overtime or a penalty rate of pay.

    Award flexibility agreements are subject to a "better off overall" test. That is, the employee cannot be disadvantaged by the agreement. Accordingly, employers will need to consider incentives such as additional leave or company benefits which really compensate the employee for the overtime rates of pay (or other penalty rates) they forgo.

    Majority Agreement Clauses

    Many awards contain terms which allow an employer, by majority agreement, to alter the scope of ordinary hours of work. The Clerks Award contains a clause which provides that 'the spread of hours may be altered by up to one hour at either end of the spread, by agreement between the employer and the majority of employees concerned or in appropriate circumstances, between the employer and an individual employee.'

    These clauses may be useful where, for example, the employer's business regularly operates earlier or later than the scope of hours. What constitutes 'majority agreement' is unclear, but, presumably, a contractual clause contained in all employee contracts to the effect that the employee agrees to alter the scope of hours will suffice.

    It is important to carefully review the award or awards which cover the workplace to see whether 'majority agreement' clauses exist. These clauses really provide wide scope to vary the definition of ordinary hours of work so that overtime is only required to be paid if an employee works more than their usual hours of work. Another example of the latitude of these clauses can be found in the Wine Industry Award 2010. That award goes so far as to state that the employer and a majority of the employees in the workplace, or a section or sections of it, may agree to vary the spread of hours, without limitation.

  4. When is Overtime Paid

    Overtime is an award based entitlement. Accordingly, an employee who is award/agreement free does not have any entitlement to overtime. However, an amount equivalent to overtime may be paid to an award/agreement free employee as a discretionary benefit in consideration for the employee working reasonable additional hours in excess of the maximum 38 hours.

    Determining an employee's ordinary hours of work is vastly more important for employers who are engaging employees covered by modern awards.

    As overtime is an award based entitlement, what constitutes an employee's ordinary hours of work must first be determined with reference to the applicable award. For discussion about determining the ordinary hours of work of award covered employee, please refer to paragraph 2, above.

    Once the ordinary hours of work are determined, an employer should then refer to the section of the award which details when overtime is required to be paid. Again, let's use the Clerks Award as an example.

    Clause 27.1 of the Clerks Award provides that employees:

    1. working outside the scope of ordinary hours fixed in the award; or
    2. within the scope of ordinary hours fixed by the award, but in excess of the hours fixed for an ordinary week's work,

    are entitled to be paid at the overtime rate of pay of time and a half for the first two hours and double time thereafter, calculated on a daily basis.

    The 'hours fixed for an ordinary weeks work' are described as 'the hours fixed in an establishment in accordance with clause 25 of the award'. This is not a very helpful description, but presumably means the hours that the business actually operates, or the hours that an employee is contracted to work. Accordingly, notwithstanding the scope of ordinary hours, if an employee works beyond their usual working hours, the hours worked must be paid at overtime rates of pay.

    Case Example

    Consider a model employee, Sally, who is covered by the Clerks Award and who is contracted to work between 9 AM and 5.00PM, Monday to Friday (with an hour lunch break).

    If we ask Sally to perform:

    1. one additional hour's work on Tuesday;
    2. two additional hour's work on Friday; and
    3. one hour's work on Saturday,

    Sally is entitled to be paid overtime rates of pay in accordance with Table 3.

    Table 2 - Employee Overtime Record

    Day Ordinary Hours of Work Usual Working Hours Hours Worked Cumulative Total Overtime
    Monday

    7AM to 7PM

    Not more than ten hours.

    9AM to 5PM

    One hour lunch break.

    Usual Working Hours 7 N/A
    Tuesday As above. As above. 9AM to 6PM 15 One hour at time and a half.
    Wednesday As above. As above. Usual Working Hours 22 N/A
    Thursday As above. As above. Usual Working Hours 29 N/A
    Friday As above. As above. 9AM to 7PM 38 Two hours at time and a half.
    Saturday 7AM to 12.30PM N/A 9AM to 10AM 39 Two hours at time and a half and one hour at double time.*
    Sunday N/A N/A N/A 39 N/A

    *Clause 27.1 (d) of the award provides that an employee who works 38 hours per week Monday to Friday must be paid for a minimum of three hours at the overtime rates for work performed on a Saturday.

    If Sally was ordinarily rostered to work on a Saturday, she would not be paid the overtime rate. As Saturday is within the spread of ordinary hours of work under the award, Sally would instead receive a penalty rate of pay of time and a quarter which is payable for Saturday work under the terms of the award.

    In every instance, to determine when overtime is required to be paid an employer should:

    1. identify the ordinary hours of work of the employee as fixed by the award;
    2. identify the hours fixed for an ordinary week's work for the employee;
    3. identify whether the employee is working hours of work outside either:
    4. the ordinary hours of work; and
    5. the hours fixed for an ordinary week's work; and
    6. determine whether the award requires overtime (or a penalty rate of pay) to be paid for those hours.
  5. Paying for Overtime

    All modern awards provide that if an employee receives a salary which is higher than the rates of pay prescribed by the award which covers them, the higher salary may be in satisfaction the employee's award based entitlements. This includes the entitlement to be paid for overtime, weekend work, shift work and other award based entitlements.

    Employers tend to automatically think that paying an employee an annual salary in satisfaction of all their entitlements will be more financially beneficial to them. However, this is not always the case. Paying an annual salary is in some cases only beneficial for the administrative ease it affords when employing a number of people on different days of the week, in different capacities, and for different hours.

    A smaller workforce, or a workforce where the days and hours of work are relatively similar for all employees, may benefit from applying the terms of the award strictly. The use of rosters to fix start and finish time of work (which may be year in ahead, fortnightly or weekly, depending on the work) and timesheets to record hours of work actually worked (including work outside of the employee's usual hours of work and on weekends or public holidays) may become more commonplace in organisations to ensure award entitlements can be accurately calculated.

    As an indicative example of the cost benefits associated with adhering to an award, let's go back to Sally. If Sally is paid a gross annual salary (in satisfaction of her award entitlements) of, say, $55,000 per annum exclusive of superannuation, her weekly wage is approximately $1,057.69 (before tax).

    If, under the Clerks Award, Sally is classified as a Level 2 employee, she would be entitled to a minimum weekly rate of pay of $650 (before tax), which is equivalent to an hourly rate of $17.11 and an annual rate of $33,800.

    The additional payment to which Sally is entitled for overtime worked in accordance with Table 3 is set out in the following table.

    Table 4 - Employee Overtime Pay Record

    If we assume that Sally is regularly asked to work the same overtime for thirty five weeks out of the year, her additional entitlement is $5,735.45. Thus, Sally's annual salary under the award (presuming no other penalties, loadings or allowances apply) would be a total of $39,489.08. That's a significant saving compared to what would be paid in an annual salary arrangement.
    Day Ordinary Hours of Work Usual Working Hours Hours Worked Cumulative Total Overtime Payment for Overtime
    Mon

    7AM to 7PM

    Not more than ten hours.

    9AM to 5PM

    One hour lunch break.

    Usual Working Hours 7 N/A
    Tue As above. As above. 9AM to 6PM 15 One hour at time and a half. $25.67
    Wed As above. As above. Usual Working Hours 22 N/A
    Thu As above. As above. Usual Working Hours 29 N/A
    Fri As above. As above. 9AM to 7PM 38 Two hours at time and a half. $51.33
    Sat 7AM to 12.30PM N/A 9AM to 10AM 39 Two hours at time and a half and one hour at double time. $86.87
    Sun N/A N/A 39 N/A





    TOTAL $163.87


  6. Conclusion

    Economically, it may be worth taking the time to get familiar with the terms of modern awards which cover a particular workplace. A casual approach to awards and the use of annual salary arrangements may not necessarily be to the benefit of an organisation, even though it may seem administratively easier.

    Applying award terms strictly does not necessarily mean that an organisation will find itself out of pocket – it is to an employer's benefit to view how the scope of ordinary hours of work may be adjusted for their workplace, and to consider work arrangements where overtime is less likely to be incurred. This includes arrangements where:

    1. two employees share a dayshift over the scope of ordinary hours;
    2. an employee works a longer day over a shorter working week;
    3. part time employees are engaged to perform work within the scope of ordinary hours on the basis of a well organised weekly or fortnightly roster; or
    4. a full time employee agrees to work longer hours of work and is compensated for work in excess of 38 hours per week by incentives such as:

      1. additional leave;
      2. company benefits; and
      3. bonuses.

    Ultimately, a personal approach needs to be taken to the needs of the business and of the individual employee. We suggest that a helpful step by step approach to take when engaging a new employee is as follows.

    1. identify the modern award which covers the employee;
    2. identify the scope of ordinary hours of work under the award;
    3. agree with the employee on the employee's usual working hours (which may be by roster and vary from week to week); and
    4. if necessary, keep a weekly, fortnightly or monthly log of the hours the employee actually works.

    Reading and becoming familiar with the terms of the award is the critical first step in determining the ordinary hours of work of different award covered employees. Modern awards have been greatly simplified from their state predecessors and are, in themselves, a practical and economic source of employee entitlements. Where a number of awards may apply, consolidating the terms of awards in policies or manuals may also be a useful reference tool for employers. Businesses should take the time to review award terms carefully to see how they can be applied to the employer and employee's mutual benefit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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