SUPERANNUATION GUARANTEE CONTRIBUTIONS -WHAT ARE ORDINARY TIME EARNINGS?
Noel Davis, Barrister
A recent decision of the Full Federal Court has clarified what, in some circumstances, are ordinary time earnings on which employers must base superannuation guarantee charge contributions.
Introduction
The many variable salary and wages arrangements of employers and their employees frequently cause doubt as to what the ordinary time earnings (OTE) are, on which minimum contributions must be based to avoid incurring a superannuation guarantee charge.
The Superannuation Guarantee (Administration) Act 1992 (Cth) (the Act) requires that minimum contributions must be paid on OTE but defines that expression in a vague way.
In s6 of the Act, OTE is defined as meaning earnings in respect of ordinary hours of work other than certain earnings such as over-award payments, shift loadings, commissions or, lump sum payments on termination of employment for unused sick leave, annual leave or long service leave.
A question that often arises in relation to particular employees is, what are their “ordinary hours of work”? That is not an expression the meaning of which can be derived from the legislation. It, therefore, have its ordinary meaning but it is a concept on which opinions can differ, as demonstrated by the Full Federal Court decision and some earlier ones.
The facts in the Federal Court case
The factual position that the first instance court and the Full Federal Court in Bluescope Steel (AIS) Pty Ltd v Australian Workers Union [2019] FCAFC 84 (24 May 2019) wrestled with was, in its simplified form, that the employees were paid annualised salaries to work up to 43.5 hours per week, including standard hours of 38 per week, and the annualised salaries reflected the base salary for the standard hours and additional pay for the additional 5.5 hours per week of non-standard hours and for working on public holidays (if required).
A question that the court at first instance and the Full Court were required to determine was, were the payments for the additional 5.5 hours per week and for working on public holidays that were included in the annualised salaries, OTE for the purposes of the Act?
The first instance decision
The decision of the Federal Court at first instance was that, to avoid a charge under the Act, superannuation contributions were payable for the hours typically or customarily worked and, therefore, included the component of the salaries that reflected working the additional 5.5. hours per week and for working on public holidays, if the employees were required to do so.
That was the decision that was appealed to the Full Federal Court.
Two earlier decisions
Two earlier decisions of the Federal Court and the High Court of Australia are relevant to the issue that was required to be decided in the Bluescope case.
In Quest Personnel Temping Pty Ltd v Cmr of Taxation (2002) 116 FCR 338; 2002 ATC 4116; [2002] FCA 85; BC200200210 it was held that hours actually worked on a habitual basis will be regarded as ordinary hours of work, even if some of the hours are remunerated at overtime rates: at [33]. Therefore, for employees who customarily worked more shifts than were the minimum required under the employment contract, the extra shifts were included in ordinary hours of work but not so for employees who occasionally worked extra shifts.
At [30] of his judgment in this case, Gray J of the Federal Court, having referred to some of the cases on the meaning of “ordinary hours of work”, said:
“On the basis of these authorities, the (Administrative Appeals) Tribunal was correct to conclude that the ordinary hours of work of an employee of the applicant . . . were the normal, regular customary or usual hours worked by the employee. If the normal, regular, customary or usual hours of a particular employee were more than the minimum specified in that employee’s offer of employment, then the actual hours worked were the ordinary hours of work for the purposes of the definition of “ordinary time earnings” in s 6 of the Act.”
In Australian Communication Exchange Ltd v DCT (2003) 201 ALR 271; 53 ATR 834; [2003] HCA 55; BC200305681 the High Court was dealing with a State award definition of “ordinary time earnings” and was required to determine whether SGC contributions were required to be paid for casual employees, under the award, when they were paid for working outside the spread of ordinary working hours referred to in the award.
The employer’s business operated 24 hours a day, 7 days a week. The casual employees, therefore, worked at any time of the day or night and on any day of the week. Casual employees were paid at an ordinary rate per hour when they worked during the prescribed ordinary hours of work but they were paid overtime rates for hours worked outside the prescribed ordinary hours of work.
The employees argued that their ordinary hours of work could be any time 24 hours a day, 7 days a week and, therefore, superannuation contributions, which were payable for ordinary time earnings, should be paid on any amounts earned, regardless of when the casual employees worked.
The High Court did not accept this argument and decided that superannuation contributions were only payable for earnings earned during the prescribed ordinary hours of work and did not apply to earnings that were earned at the overtime rates for working outside of the prescribed ordinary hours of work.
The High Court decision was made by a 4:3 majority.
The Full Federal Court decision in Bluescope
Against the background of the cases mentioned above, the Full Court decided in Bluescope that, in the circumstances under consideration, the earnings for the ordinary hours of work did not include the component of the salaries that related to the 5.5 hours per week that were additional to the standard 38 hours per week and did not include the component of the salaries that related to being required to work on public holidays, if the employees were required to do so.
It, therefore, allowed the appeal.
Allsop CJ, with whom Rangiah J agreed, said at [121] that the superannuation guarantee charge (SGC) legislation was not intended to provide mandatory contributions based on total salaries paid. Rather, he said, it is a system to encourage national retirement savings based on standard hours of work at ordinary rates of pay.
At [111] he said, in relation to the employment arrangements in this case, that each employee was being paid a salary calculated on a base rate using standard hours (38 per week) at ordinary rates plus an additional sum for the right of the employer to call on the employee to work an additional 4.5 hours per week.
At [110] he said that “ordinary hours of work” means standard hours calculated and paid at ordinary rates which, in this case, is the standard 38 hours at ordinary rates of pay referred to in the employment agreements between the employer and the employees.
At [106] he added that “ordinary hours of work”, for the purposes of the Act, does not include earnings in respect of penalty rates for working on public holidays.
In response to the respondent’s submission that, to base the SGC contributions on a base salary for working 38 hours per week, would require dissection of each fortnightly salary to calculate what amount represented base salary and what represented payment for additional hours, the chief justice disagreed and said that there was an agreed salary at ordinary rates for the ordinary hours of work and there was an additional salary for the additional hours that the employee may or may not be required to work.
Collier J, who wrote a separate judgement, said at [157] that the relevant award and enterprise agreements for these employees defined an employee’s “ordinary hours of work” to be an average of 38 hours per week and the annualised salary included a component for additional hours of 5.5 hours per week which may or may not be worked. In light of that, Collier J concluded at [314] that “ordinary time earnings’’ in ss6(1) and 23(2) of the Act , in the circumstances of the present case where “ordinary hours of work” are defined by the enterprise agreements, means earnings in respect of those ordinary hours.
In relation to the meaning to be attributed to “ordinary hours”, Collier J said at [298] that if the legislature had intended that “earnings in respect of ordinary hours worked” meant “earnings in respect of actual hours worked” it could have so legislated.
Conclusion
The Full Court’s decision clarifies what are to be regarded as the ordinary hours of work where the ordinary hours are specified in industrial awards or agreements and enterprise agreements, even if the employees are required to sometimes or habitually work longer hours than the specified ordinary hours. SGC contributions are payable only for the component of the salary that relates to the ordinary hours.
There are, however, circumstances that are outside of these facts where the position is less clear. If the ordinary hours to be worked are not specified in an award or an agreement, the salary for the hours actually worked may be the salary on which the contributions have to based if they are the normal , regular, customary hours worked by the employee.
Because of the interpretation that is being applied by the courts to the meaning of ordinary hours of work, there is an obvious opportunity for employers to minimise their SGC contributions by artificially minimising the ordinary hours of work specified in their employment agreements and basing their SGC contributions on that part of their employees’ salaries attributable to the reduced ordinary hours.
The many variable salary and wages arrangements of employers and their employees frequently cause doubt as to what the ordinary time earnings (OTE) are, on which minimum contributions must be based to avoid incurring a superannuation guarantee charge.
The Superannuation Guarantee (Administration) Act 1992 (Cth) (the Act) requires that minimum contributions must be paid on OTE but defines that expression in a vague way.
In s6 of the Act, OTE is defined as meaning earnings in respect of ordinary hours of work other than certain earnings such as over-award payments, shift loadings, commissions or, lump sum payments on termination of employment for unused sick leave, annual leave or long service leave.
A question that often arises in relation to particular employees is, what are their “ordinary hours of work”? That is not an expression the meaning of which can be derived from the legislation. It, therefore, have its ordinary meaning but it is a concept on which opinions can differ, as demonstrated by the Full Federal Court decision and some earlier ones.
The facts in the Federal Court case
The factual position that the first instance court and the Full Federal Court in Bluescope Steel (AIS) Pty Ltd v Australian Workers Union [2019] FCAFC 84 (24 May 2019) wrestled with was, in its simplified form, that the employees were paid annualised salaries to work up to 43.5 hours per week, including standard hours of 38 per week, and the annualised salaries reflected the base salary for the standard hours and additional pay for the additional 5.5 hours per week of non-standard hours and for working on public holidays (if required).
A question that the court at first instance and the Full Court were required to determine was, were the payments for the additional 5.5 hours per week and for working on public holidays that were included in the annualised salaries, OTE for the purposes of the Act?
The first instance decision
The decision of the Federal Court at first instance was that, to avoid a charge under the Act, superannuation contributions were payable for the hours typically or customarily worked and, therefore, included the component of the salaries that reflected working the additional 5.5. hours per week and for working on public holidays, if the employees were required to do so.
That was the decision that was appealed to the Full Federal Court.
Two earlier decisions
Two earlier decisions of the Federal Court and the High Court of Australia are relevant to the issue that was required to be decided in the Bluescope case.
In Quest Personnel Temping Pty Ltd v Cmr of Taxation (2002) 116 FCR 338; 2002 ATC 4116; [2002] FCA 85; BC200200210 it was held that hours actually worked on a habitual basis will be regarded as ordinary hours of work, even if some of the hours are remunerated at overtime rates: at [33]. Therefore, for employees who customarily worked more shifts than were the minimum required under the employment contract, the extra shifts were included in ordinary hours of work but not so for employees who occasionally worked extra shifts.
At [30] of his judgment in this case, Gray J of the Federal Court, having referred to some of the cases on the meaning of “ordinary hours of work”, said:
“On the basis of these authorities, the (Administrative Appeals) Tribunal was correct to conclude that the ordinary hours of work of an employee of the applicant . . . were the normal, regular customary or usual hours worked by the employee. If the normal, regular, customary or usual hours of a particular employee were more than the minimum specified in that employee’s offer of employment, then the actual hours worked were the ordinary hours of work for the purposes of the definition of “ordinary time earnings” in s 6 of the Act.”
In Australian Communication Exchange Ltd v DCT (2003) 201 ALR 271; 53 ATR 834; [2003] HCA 55; BC200305681 the High Court was dealing with a State award definition of “ordinary time earnings” and was required to determine whether SGC contributions were required to be paid for casual employees, under the award, when they were paid for working outside the spread of ordinary working hours referred to in the award.
The employer’s business operated 24 hours a day, 7 days a week. The casual employees, therefore, worked at any time of the day or night and on any day of the week. Casual employees were paid at an ordinary rate per hour when they worked during the prescribed ordinary hours of work but they were paid overtime rates for hours worked outside the prescribed ordinary hours of work.
The employees argued that their ordinary hours of work could be any time 24 hours a day, 7 days a week and, therefore, superannuation contributions, which were payable for ordinary time earnings, should be paid on any amounts earned, regardless of when the casual employees worked.
The High Court did not accept this argument and decided that superannuation contributions were only payable for earnings earned during the prescribed ordinary hours of work and did not apply to earnings that were earned at the overtime rates for working outside of the prescribed ordinary hours of work.
The High Court decision was made by a 4:3 majority.
The Full Federal Court decision in Bluescope
Against the background of the cases mentioned above, the Full Court decided in Bluescope that, in the circumstances under consideration, the earnings for the ordinary hours of work did not include the component of the salaries that related to the 5.5 hours per week that were additional to the standard 38 hours per week and did not include the component of the salaries that related to being required to work on public holidays, if the employees were required to do so.
It, therefore, allowed the appeal.
Allsop CJ, with whom Rangiah J agreed, said at [121] that the superannuation guarantee charge (SGC) legislation was not intended to provide mandatory contributions based on total salaries paid. Rather, he said, it is a system to encourage national retirement savings based on standard hours of work at ordinary rates of pay.
At [111] he said, in relation to the employment arrangements in this case, that each employee was being paid a salary calculated on a base rate using standard hours (38 per week) at ordinary rates plus an additional sum for the right of the employer to call on the employee to work an additional 4.5 hours per week.
At [110] he said that “ordinary hours of work” means standard hours calculated and paid at ordinary rates which, in this case, is the standard 38 hours at ordinary rates of pay referred to in the employment agreements between the employer and the employees.
At [106] he added that “ordinary hours of work”, for the purposes of the Act, does not include earnings in respect of penalty rates for working on public holidays.
In response to the respondent’s submission that, to base the SGC contributions on a base salary for working 38 hours per week, would require dissection of each fortnightly salary to calculate what amount represented base salary and what represented payment for additional hours, the chief justice disagreed and said that there was an agreed salary at ordinary rates for the ordinary hours of work and there was an additional salary for the additional hours that the employee may or may not be required to work.
Collier J, who wrote a separate judgement, said at [157] that the relevant award and enterprise agreements for these employees defined an employee’s “ordinary hours of work” to be an average of 38 hours per week and the annualised salary included a component for additional hours of 5.5 hours per week which may or may not be worked. In light of that, Collier J concluded at [314] that “ordinary time earnings’’ in ss6(1) and 23(2) of the Act , in the circumstances of the present case where “ordinary hours of work” are defined by the enterprise agreements, means earnings in respect of those ordinary hours.
In relation to the meaning to be attributed to “ordinary hours”, Collier J said at [298] that if the legislature had intended that “earnings in respect of ordinary hours worked” meant “earnings in respect of actual hours worked” it could have so legislated.
Conclusion
The Full Court’s decision clarifies what are to be regarded as the ordinary hours of work where the ordinary hours are specified in industrial awards or agreements and enterprise agreements, even if the employees are required to sometimes or habitually work longer hours than the specified ordinary hours. SGC contributions are payable only for the component of the salary that relates to the ordinary hours.
There are, however, circumstances that are outside of these facts where the position is less clear. If the ordinary hours to be worked are not specified in an award or an agreement, the salary for the hours actually worked may be the salary on which the contributions have to based if they are the normal , regular, customary hours worked by the employee.
Because of the interpretation that is being applied by the courts to the meaning of ordinary hours of work, there is an obvious opportunity for employers to minimise their SGC contributions by artificially minimising the ordinary hours of work specified in their employment agreements and basing their SGC contributions on that part of their employees’ salaries attributable to the reduced ordinary hours.