To be, or not to be… on a high income guarantee?

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Association of Professional Engineers, Scientists and Managers Australia v Peabody Energy Australia Coal Pty Ltd [2022] FCA 945

On 17 August 2022, the Federal Court of Australia handed down a significant decision examining how "high income guarantees" work under the Fair Work Act.

What is a high income guarantee?

A high income guarantee is, in essence, a promise made by an employer to an award-covered employee that they will be paid above the "high income threshold" during a 12-month period. The employee must also accept this promise.

If a high income guarantee is in effect, then the employee will be considered to be a "high income worker" and the relevant award will not apply to the employee.

The high income threshold is an amount set and indexed under the Fair Work Act. It is currently $162,000.

Background facts

The claim was brought against Peabody, a coal mining company, by 20 former employees who had been retrenched from two of its mines in Queensland and New South Wales. All of the impacted employees had been paid an annual remuneration that exceeded $153,600, which was the relevant high income threshold at the time of their retrenchment.

The issue in this case related to the payout of accrued personal leave under the Black Coal Mining Industry Award (the Award). The union, on behalf of the retrenched employees, argued that clause 13.4(b) of the Award applied to the employees, and as such Peabody should have paid out all accrued personal leave entitlements to the employees with 70 hours or more of accrued personal or carers leave at the time of their redundancy.

Peabody argued that the Award did not cover 19 of the 20 employees, as they were high income employees at the time of redundancy.

All of the employees had employment contracts that detailed their annual salaries, and Peabody argued that these employment contracts constituted "guarantees of annual earnings".

Question before the Court

The Court was asked to determine whether the fact that Peabody and the employees had simply agreed that the employees would be paid a specified annual salary on the terms of their contracts, would be sufficient to constitute a "guarantee of annual earnings".

The Court's decision

The Court ultimately held that to constitute a guarantee of annual earnings, something more was required than the contractual arrangements in place between Peabody and the employees.

Peabody’s agreement to pay the employees an annualised salary could, at least in a general sense, be said to have constituted an undertaking of sorts to pay the employees the specified amount of earnings in relation to the performance of work. However, the Court could not accept that any such undertakings by Peabody were capable of constituting guarantees of annual earnings. It also could not be concluded that the employees accepted any such undertakings, as opposed to simply agreeing to the amount of the earnings Peabody had agreed to pay.

An undertaking to pay an employee an amount of earnings was found to only constitute a guarantee of annual earnings if the employee in question "agrees to accept the undertaking, and agrees with the amount of the earnings". In addition, there needs to be specified in the employment contract a "guaranteed period" for when an employee is paid. This period needs to begin at the start of the undertaking and end at a particular point, being the earlier of:

  • the end of the undertaking; or
  • an enterprise agreement starting to apply; or
  • an employer revoking the guarantee, with the employee’s agreement

Why is this significant?

If an employer has employees who are award covered, it is not sufficient to simply pay them salaries above the high income threshold in order to prevent the award applying to them.

Even if employees have agreed written employment contracts that specify their annual salary and time periods for payment (e.g. monthly), this will not be enough to constitute a guarantee of annual earnings.

Next steps for employers

All employers should now:

  • review all employment contracts with high income employees who are award covered; and
  • consider entering into guarantees with those employees about their remuneration

It is worth noting that an employer found to contravene a guarantee of annual earnings is liable to pay a potentially substantial penalty (up to a maximum of $660,000 for a serious contravention).

Importantly, in the event an employee does not have an appropriate guarantee in place and they are award covered, that employee may be able to make claims under the award for entitlements such as overtime, penalties and allowances. This may expose an employer to claims for breaching the award, as well as penalties.

If you have any concerns about your employment contracts, or any questions about how this decision will affect you, please reach out to us.

Photo by Javier Sierra on Unsplash.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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Caitlyn Hoffmann

Caitlyn Hoffmann