Business Law Lawyers NSW

This article should be read in conjunction with my previous article “Transitional Provisions in Modern Awards” written on 1 July 2010.

This article focuses on how to phase in (and possibly phase out) penalty/loading rates under the transitional provisions that are included in most modern awards.

The model transitional provisions that are included in most modern awards provide for the phasing in of penalty rates/loadings where the pre-modern award entitlement differs from that contained in the modern award.

This means that where an “equivalent” loading/penalty rate in a pre-modern award differs from the modern award, the difference between the two amounts can be phased in similar to differences in pay rates as discussed in the previous article mentioned above.

The Fair Work Ombudsman considers a penalty/loading rate to be “equivalent” when it applies:

a) For the same purpose;
b) For the same time periods; and
c) In the same way.

A penalty/loading rate applies in the same way if the entitlements are both:

a) Paid at the same frequency, such as per hour or per shift; and
b) Paid as a percentage of the same amount (e.g. both penalties are paid as a percentage of the employee’s classification rate, rather than as a percentage of a different amount or a flat dollar rate).

There are 3 main scenarios where phasing of penalty/loading rates may be required:

  1. Phasing of penalty/loadings which are “equivalent”;
  2. Phasing of penalty/loadings which are not “equivalent”; and
  3. Phasing of penalty/loadings which are a “new entitlement”

We will now deal with each of these scenarios in turn.

1. Phasing of penalty/loadings which are “equivalent”:

If an “equivalent” pre-modern award and modern award penalty/loading rate differs, then the difference between the two penalty/loading rates is calculated and preserved as a “transitional percentage”.

Note: The transitional percentage may be expressed in dollar terms where the penalty/loading is expressed as a dollar amount rather than a percentage.

Like the transitional provisions for pay rates, the transitional percentage is calculated each year as follows:

First full pay on or afterProportion of transitional percentage
1 July 201080%
1 July 201160%
1 July 201240%
1 July 201320%
1 July 20140%

Note:

  • Where the modern award penalty/loading rate is higher, the penalty/loading rate is obtained by subtracting the proportion of the transitional percentage.
  • Where the modern award penalty/loading rate is lower, the penalty/loading rate is obtained by adding the proportion of the transitional percentage.

Example – “Equivalent” Penalty – Difference in percentage

Bob’s pre-modern award entitled him to receive a 50% penalty for ordinary hours worked on a Saturday. The modern award that now applies to Bob entitles him to receive only a 25% penalty for ordinary hours worked on a Saturday.

In this example, Bob’s penalty entitlements in both awards is considered to be “equivalent” because they are paid for the same purpose, per hour and as a percentage of Bob’s hourly rate.

Therefore the “transitional percentage” is the difference between the pre-modern award and the modern award entitlement which is 25%.

2010 penalty rate:

On 1 July 2010, 80% of the transitional percentage should be added to the modern award penalty rate to obtain Bob’s penalty entitlement for this year.

80% of the 25% transitional percentage = 20% (proportion of transitional percentage)

25% (modern award penalty) + 20% (proportion of transitional percentage for 2010) = 45%

Therefore, from the first pay period on or after 1 July 2010, Bob’s Saturday penalty entitlement is 45%.

The same process applies (using the appropriate proportion of “transitional percentage” from the above table) for 2011, 2012 and 2013.

2. Phasing of penalty/loadings which are not “equivalent”:

Where a penalty/loading is not “equivalent”, the pre-modern award entitlement is “phased out” and the modern award entitlement is “phased in”. An example of a non-equivalent penalty/loading could be where an employee is entitled to receive an additional flat dollar amount per hour as a loading for all hours worked on a Saturday under the pre-modern award. And, under the modern award, the employee is entitled to receive an additional hourly penalty calculated as a percentage of their base hourly rate for all hours worked on a Saturday. In this scenario the penalty/loading rate entitlements are not equivalent because one is a flat dollar amount per hour and the other is a percentage of the employee’s hourly rate.

If the pre-modern award and modern award penalty rates are not “equivalent” the following approach applies:

a) Penalty/Loading rates from a modern award are “phased in” from zero in 5 instalments of 20% as follows:

First full pay on or afterProportion of modern award penalty/loading
1 July 20100%
1 July 201120%
1 July 201240%
1 July 201360%
1 July 201480%

b) Pre-modern award penalty/loading rates are “phased out” to zero in 5 instalments of 20% as follows:

First full pay on or afterProportion of modern award penalty/loading
1 July 201080%
1 July 201160%
1 July 201240%
1 July 201320%
1 July 20140%

This may result in a pre-modern award entitlement being phased out at the same time that a modern award entitlement is being phased in.

Example – “Non-Equivalent” Penalty/Loading

Jill’s hourly rate is $18.00 per hour. Her pre-modern award entitled her to receive a Saturday loading consisting of a flat dollar amount of $3.60 per hour for all ordinary hours worked on a Saturday. The modern award that now applies to Jill entitles her to receive a 25% penalty for all ordinary hours worked on a Saturday.

In this example, Jill’s penalty entitlements in both awards are not considered to be “equivalent” because they do not apply in the same way. Therefore the modern award penalty is “phased in” and the pre-modern loading is “phased out”.

2010 penalty rate:

From the first pay period on or after 1 July 2010, Jill is entitled to 20% of the modern award penalty and 80% of the pre-modern award loading.

$2.88 per hour (80% of $3.60) + 5% penalty on the base rate of $18.00 per hour (20% of 25%)

The same process applies (using the appropriate proportion of “transitional percentage” from the above table) for 2011, 2012 and 2013.

3. Phasing of penalty/loadings which are a “new entitlement”:

Where an employee did not have a particular penalty/loading rate entitlement prior to 1 January 2010 (e.g. because they were award-free), any new entitlement under a modern award may be “phased in” from the first pay period on or after 1 July 2010 in 20% increments each year until 2014.

Example – “New Entitlement” Penalty/Loading

John is now entitled to receive a 50% penalty for all ordinary hours worked on a Saturday. He was not entitled to this penalty prior to 1 January 2010 as he was award-free.

From the first pay period on or after 1 July 2010 John is entitled to receive a 10% loading for all hours worked on a Saturday (i.e. 20% of 50%).

From 1 July 2011 John would be entitled to receive a 20% penalty for all ordinary hours worked on a Saturday (i.e. 40% of 50%).

Note:

Employers may choose to pay the modern award penalty/loading rates in full at any time and therefore avoid having to potentially administer two different rates at the same time.


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