Do I have to pay compulsory superannuation on overtime amounts?03 July 2019 Topics: Superannuation, Tax and revenue, Tax disputes, Workplace relations and safety
Employers need to be careful of a couple of traps where their employees are working overtime. There will be no superannuation guarantee charge where the employer contributes the appropriate percentage (currently 9.5%) of an employee’s ‘ordinary time earnings’ into their superannuation fund.
The starting position is that ‘ordinary time earnings’ means ‘earnings in respect of ordinary hours of work’. But what are ordinary hours? Are they the hours specified in the award or agreement as ordinary hours? Or are they the hours that the employee regularly works?
This issue was examined by the Full Federal Court in its recent decision in Bluescope Steel (AIS) Pty Ltd v Australian Workers’ Union.
What happened in Bluescope Steel?
The Australian Workers’ Union (AWU) started proceedings on behalf of its members against Bluescope Steel. The AWU claimed that Bluescope Steel had not contributed enough superannuation on behalf of its employees.
This was because Bluescope Steel had excluded two components in calculating the ‘ordinary time earnings’ of its employees:
- an ‘additional hours component’, and
- a ‘public holidays component’.
One of the employees, Mr Storey, was paid an annualised salary. This was expressly calculated as the sum of:
- base salary – being the ordinary stevedoring hourly rate x 38 hours x 52 weeks, and
- overtime – being 5.5 hours overtime per week x 2.1761 x the ordinary stevedoring hourly rate.
The effect was that Mr Storey regularly worked more than his ‘ordinary hours’ of 38 hours, but was remunerated for the additional 5.5 hours at overtime rates.
At first instance, the Federal Court concluded that ‘ordinary hours’ were the hours that were ‘regular, normal, customary or usual’ – which meant 43.5 hours per week. The ‘ordinary time earnings’ therefore included the ‘additional hours component’.
On appeal, the Full Federal Court concluded that ‘ordinary hours’ were the ordinary hours as set out in the relevant award or agreement. This meant that the ‘overtime’ component of Mr Storey’s annualised salary was not ‘in respect of ordinary hours of work’ and therefore not included in calculating the minimum superannuation contribution.
The effect of the decision in Bluescope Steel
The general principle established by the Full Federal Court is that ‘ordinary hours’ means the ordinary hours that are set out in the relevant award or agreement. This is consistent with the ATO’s view.
However, applying this principle will depend on the specific facts of the case. Bluescope Steel had the advantage of expressly setting out that its annualised salaries were calculated on ‘base salary’ and ‘overtime’ components.
Risk #1 – annualised salaries that do not expressly set out how the salary is calculated
The Full Federal Court may have come to a different conclusion in Bluescope Steel if the relevant agreements had not been so explicit in distinguishing between the base salary and overtime components.
Employers who use annualised salaries, and are not contributing superannuation in respect of an overtime component, should check their agreements are as explicit as those in Bluescope Steel.
Risk #2 – no ordinary hours specified in the award or agreement
The Court in Bluescope Steel focused on the industrial relations concept of ‘ordinary hours’, and concluded that this concept was intended to establish the amount of superannuation that must be contributed to avoid the superannuation guarantee charge.
If there are no ordinary hours specified in the award or agreement, the employer will need to consider the hours that were worked on a ‘customary, regular, normal or usual’ basis.
There is a distinction between cases where employees:
- work overtime on an ad hoc basis – for example, isolated overtime performed on one Saturday to complete a particular project will not be ‘ordinary hours’, and
- have a pattern of regularly working overtime – for example, employees regularly working 50 hours a week at the same rate of pay may be working 50 ‘ordinary hours’.
However, there are grey areas in between. Whether an employee’s hours are so ‘customary, regular, normal or usual’ to be ‘ordinary hours’ will depend on the particular facts of the employee and employer and the tasks that are performed.
Risk #3 – ‘minimum hours’ are set out in the agreement or award
The legislation uses the phrase ‘ordinary hours of work’. This is not the same as ‘minimum hours of work’.
If the relevant award or agreement refers to ‘minimum hours of work’, and there are no stated ‘ordinary hours’ or ‘overtime’, then the employer will need to determine what hours, in practice, are ‘customary, regular, normal or usual’.
What do I need to do?
In our experience, the main risk for employers making decisions about how much compulsory superannuation must be contributed is that those decisions are then often applied across their workforce.
If there are any errors in those decisions, this can result in significant amounts of superannuation guarantee charge, nominal interest at 10% per annum, the administration component and penalties. Directors of companies may also be personally liable.
Employers should review their arrangements to identify any risks.
Please contact a member of our team if you would like any assistance.