2.5% Federal Minimum Wage Increase – Can I Absorb the Increase?

It’s that time of the year again and businesses are not only dealing with end of financial year accounting issues, but also considering the impact of the Minimum Wage increase announced by the Fair Work Commission.

The FWC has decided to increase the Minimum Wage by 2.5% from the first pay period to commence on or after 1 July. FWC President, Justice Iain Ross stated in the decision “A number of considerations have led us to award a lower increase than that determined in last year’s review decision”. Among these considerations was the reduction in inflation and aggregate wages growth, which Justice Ross referred to as “the most significant change” to occur during the past year.

Of course, any increase will apply to the current Award wage rates. However, for various reasons employers often pay staff rates of pay that are in excess of the Award rate. The question that is often posed to me is, “If I’m paying an over-Award rate of pay to my staff, can I absorb the increase?” The answer depends upon the way that the over-Award payment is expressed in the contract of employment/ letter of appointment.

Employers are not legally bound to pay any more than the appropriate Award rate of pay, however if the over-Award is expressed in such a way in an employment contract/letter of appointment which prescribes a precise over-Award payment, then that prescribed over-Award must be maintained. In other words, if the employment contract states that the employee shall be paid $20.00 over the Award, then that employee shall maintain the $20 parity between the Award rate and the actual rate of pay – the over-Award payment therefore is not able to be absorbed.

However, if the over-Award is not prescribed and defined in the contract of employment, then the over-Award component may be absorbed by future increases. For example, if the Award rate is $400.00 per week and the contract of employment simply states that the employee shall be paid $450.00 per week, then there is no contractual obligation to maintain the $50.00 parity and increases may be absorbed into the over-Award rate.

It is important to note here that staff should be advised in writing as to what over-Award payments are to be made and what the additional payment is intended to cover, either by way of a letter of appointment or employment contract.

If you require further information and clarification into this very important aspect of employment contracts, please do not hesitate to contact us at Effective Workplace Solutions. You should always seek expert advice prior to entering into or drafting employment contracts or appointment letters.