Edited version of administratively binding advice

Authorisation Number: 1012555474183

Advice

Subject: Ordinary time earnings

Question 1

Will superannuation payments calculated by the Employer for their employees under the terms of an enterprise agreement formed under the Fair Work Act 2009 (FWA) satisfy the requirement that the minimum level of superannuation support be based on 'ordinary time earnings' as defined under subsection 6(1) of the SGAA?.

Advice

No, please refer to 'Reasons for decision'.

The arrangement commenced on:

After 1 October 2012

Relevant facts and circumstances

If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

The Employer commissioned a third party to negotiate an enterprise agreement on their behalf.

The agreement is a single-enterprise agreement approved under the FWA.

The Agreement contains a clause which seeks to use a lower rate per hour for superannuation calculations that that paid to the workers.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 subsection 6(1).

Reasons for decision

Question 1

Summary

Superannuation payments calculated by the Employer for their employees under the terms of an enterprise agreement formed under the FWA, will not satisfy the requirement that the minimum level of superannuation support is to be based on 'ordinary time earnings' as defined under subsection 6(1) of the SGAA.

Detailed reasoning

Relevant law and ruling

From 1 July 2008, all employers must use OTE as the earnings base to calculate the minimum super guarantee contributions required for their employees.

From 1 July 2008, employers may still be required to use notional earnings bases specified in legislation or industrial agreements as the basis of their superannuation support in cases where these are above an employee's OTE, but SGAA obligations will only be assessed against OTE.

The phrase 'ordinary time earnings' is defined in subsection 6(1) of the SGAA as follows:

ordinary time earnings, in relation to an employee, means:

(a) the total of:

(i) earnings in respect of ordinary hours of work other than earnings consisting of a lump sum payment of any of the following kinds made to the employee on the termination of his or her employment:

(A) a payment in lieu of unused sick leave;

(B) an unused annual leave payment, or unused long service leave payment, within the meaning of the Income Tax Assessment Act 1997; and …

(ii) earnings consisting of over-award payments, shift-loading or commission; or

(b) if the total ascertained in accordance with paragraph (a) would be greater than the maximum contribution base for the quarter - the maximum contribution base.

(emphasis added)

In broad terms (and subject to some exceptions), OTE of an employee means earnings in respect of ordinary hours of work. Payments for work performed outside the ordinary hours of work, such as overtime payments, are not OTE.

OTE includes commissions, shift-loadings and some allowances, but does not include overtime payments. Superannuation Guarantee Ruling SGR 2009/2-Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2) provides further guidance on what constitutes OTE.

The expression 'earnings in respect of ordinary hours of work' or any of the terms in that expression are not defined in the SGAA. The Commissioner's view on the meaning of these phrases and the relationship between OTE and salary or wages is expressed in the following paragraphs of SGR 2009/2 as follows:

Relationship between OTE and salary or wages

7. An amount can only be part of an employee's OTE if it is 'salary or wages' of the employee. But an employee's salary or wages may include amounts that are not OTE.

…

Meaning of 'earnings'

12. An employee's 'earnings', for the purpose of the definition of OTE, is the remuneration paid to the employee as a reward for the employee's services. The practical effect for superannuation guarantee purposes is that the expression 'earnings' means 'salary or wages'.

Meaning of 'ordinary hours of work'

13. An employee's 'ordinary hours of work' are the hours specified as his or her ordinary hours of work under the relevant award or agreement, or under the combination of such documents, that governs the employee's conditions of employment.

14. The document need not use the exact expression 'ordinary hours of work', but it needs to draw a genuine distinction, for the purposes of the award or agreement, between ordinary hours and other hours. In particular, it would be expected that the other hours are remunerated at a higher rate (typically described as overtime) than the ordinary hours, or otherwise identifiable as a separate component of the total pay in respect of non-ordinary hours

15. Any hours worked in excess of, or outside the span (if any) of, those specified ordinary hours of work are not part of the employee's 'ordinary hours of work'.

…

18. 'Ordinary hours of work' are not necessarily limited to hours to be worked between 9am and 5pm, Monday to Friday. They may (depending on the provision in the relevant award or agreement, if any) include hours to be worked at other times, including at night, on weekends or on public holidays.

Earnings 'in respect of ordinary hours of work' means all earnings other than overtime

25. All amounts of earnings in respect of employment are in respect of the employee's ordinary hours of work unless they are remuneration for working overtime hours, or are otherwise referable only to overtime or to other hours that are not ordinary hours of work. There is no such thing as earnings that are merely in respect of employment generally and are not OTE because they are not in respect of any particular hours of work.

26. An award or agreement may itself have a definition of 'ordinary time earnings' that purports to apply for superannuation purposes. However, the central question posed by the definition of OTE in the SGAA is what amounts are 'earnings in respect of ordinary hours of work'. This could in some cases be a different amount from any purported amount of 'OTE' in the award or agreement. As mentioned in paragraph 13 of this Ruling, the Commissioner accepts that 'ordinary hours of work' are as determined by the relevant award or agreement, but that does not imply that OTE itself is necessarily as determined by the award or agreement.

Allowances and loadings

27. Many employees receive various additional payments that are described as allowances or loadings and that are paid to employees to recognise or compensate for certain conditions relating to their employment. Examples:

· a 'site allowance' paid fortnightly at a flat rate in acknowledgement of the displacement an employee undergoes when a job requires him or her to work in a remote location;

· a 'casual loading' of 20% of the basic ordinary time rate of pay paid to a casual worker in lieu of any fixed, regular minimum hours of work and of paid leave entitlements;

· a 'dirt allowance' paid as a flat rate in acknowledgement of the conditions in which the work is undertaken; and

· a 'freezer allowance' paid at the rate of an extra $2.50 per hour to employees, such as some supermarket employees, who perform most of their duties in cold storage facilities.

These kinds of payment are OTE except to the extent that they:

· are not 'salary or wages', for example if they are payments of a predetermined gfamount to offset or reimburse particular expenses (see paragraph 72 of this Ruling); or

· relate solely to hours of work other than ordinary hours of work (see paragraphs 41 to 43 of this Ruling).

Bonuses

28. Additional earnings received as a reward for good performance, and other like 'bonus' payments, are OTE in most cases. Exceptionally, a discrete and clearly identifiable bonus payment may relate solely to work performed entirely outside ordinary hours. For example, an employer may pay a bonus specifically to recognise a special project that an employee contributed to entirely in non-ordinary hours.

Paid leave and holiday pay

32. Subject to the exclusions mentioned at paragraph 34 of this Ruling, salary or wages that an employee receives, at or below his or her normal rate of pay for ordinary hours of work, in respect of periods of paid leave is simply a continuation of his or her ordinary time pay. It is OTE. It does not matter whether the entitlement to take the paid leave accrued gradually over time, arose in a specified circumstance or following a specified event, or was simply granted to the employee in the exercise of the employer's discretion.

41. Payments for work performed during hours outside an employee's ordinary hours of work are not OTE.

Example 2 - Ordinary hours of work and overtime hours determined by agreement prevailing over award

87. Ennio is employed under a collective agreement which incorporates by reference terms from an award. To the extent of any inconsistency between the agreement and the award, the agreement prevails.

88. The award provides that the ordinary hours are an average of 38 hours per week and gives an employer the right to require an employee to work reasonable overtime.

89. However, the agreement provides for a shift roster which requires that employees work an average of 44 hours per week and identifies on the roster the ordinary hours of work as 40 hours (all paid at a particular hourly rate) and the overtime hours as 4 hours (to attract a penalty rate of pay in addition to the ordinary hourly rate).

Salary or wages

90. The payment for Ennio's 44 hours of work is a reward for services provided as an employee of the company and is therefore 'salary or wages'.

OTE

91. As the agreement requires Ennio to work an average of 40 'ordinary' hours per week, these are his 'ordinary hours of work'. Therefore, the payment to Ennio for 40 hours of work is 'earnings in respect of ordinary hours of work' and is OTE.

92. The payment for the additional 4 hours of rostered overtime is not 'earnings in respect of ordinary hours of work' and is therefore not included in OTE.

Application of the law and ruling

Subsection 6(1) of the SGAA defines OTE as 'earnings in respect of ordinary hours of work'.

As the expression 'earnings in respect of ordinary hours of work' or any of the terms in that expression are not defined in the SGAA, we turn to the Commissioner's view in SGR 2009/2.

In relation to paragraphs 7 and 12 of SGR 2009/2 it is clear that the payments being made by the employer are wages and as such they can form part of the employee's OTE.

Being remuneration paid to the employee as a reward for the employee's services, they also satisfy the 'earnings' element of OTE.

The second element for satisfaction is that the earnings are to be 'in respect of ordinary hours of work'.

The Agreement states that the ordinary working hours will be 8 hours per day from Monday to Friday and the rates of pay for superannuation purposes will be less than the normal hourly rate.

The payments made under the Agreement will not satisfy the requirement under the SGAA that the minimum level of superannuation support be based on defined OTE. OTE will be 'the earnings in respect of ordinary hours of work'.

The Employer is required to meet its liabilities under both the Agreement and the SGAA.

In meeting its obligations under this Agreement, the Employer will fall short of satisfying the requirement under the SGAA that the minimum level of superannuation support be based on defined OTE.

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