Edited version of your written advice

Authorisation Number: 1012930465946

Date of advice: 21 December 2015

Advice

Subject: Superannuation guarantee

Question

What are the ordinary hours of work of those Workers engaged under Individual Employment Contracts which are underpinned by a Modern Award for the purpose of calculating ordinary time earnings (OTE) in respect to the Superannuation Guarantee (Administration) Act 1992 (SGAA)?

Advice

The ordinary hours of work for the purpose of calculating the OTE of the relevant Workers employed under Individual Employment Contracts which are underpinned by the Award in respect of the SGAA are an average of 38 hours per week.

Relevant facts & circumstances

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• The Employer engages the Workers under a Modern Award (the Award) via Individual Employment Contracts (Contracts).

• A clause of the Award provides that the employee's ordinary hours of work are an average of 38 hours per week up to a maximum of 10 hours per day to be worked between the hours of 6.00am and 6.00pm.

• A clause of the Award allows for employees to be paid overtime in respect of all work done in addition to their ordinary hours.

• The Workers engaged under Individual Employment Contracts are provided with a letter of offer which specifies the following:

• Ordinary hours of work are 40 per week

• Annual leave is four weeks per year based on 40 hours per week

• Sick leave is 10 days per year, based on 8 hours per day

• Public holidays are based on 8 hours per day

• Superannuation is 9.5% on ordinary hours up to 40 hours per week

• Pay cycle is fortnightly in arrears

• The terms and conditions of employment will also be subject to various legislative requirements, any applicable industrial instruments and the policies and procedures that are applicable to the work on various projects.

• The Workers are paid a flat rate and do not receive overtime as the higher rate compensates for the loss of overtime.

Relevant legislative provisions

Superannuation Guarantee (Administration) Act 1992 Subsection 6(1)

Reasons for decision

Summary

The ordinary hours of work for the purpose of calculating the OTE of the relevant Workers engaged by the Employer under Individual Employment Contracts which are underpinned by the Award in respect of the SGAA are an average of 38 hours per week.

Detailed reasoning

The SGAA places a requirement on all employers to provide a minimum level of superannuation support for their eligible employees by the quarterly due date, or pay the SG charge percentage.

From 1 July 2008, employers must use OTE as defined in subsection 6(1) of the SGAA as the earnings base to calculate the minimum SG contributions for their employees. This ensures that all employees are treated the same for superannuation purposes.

Some 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.

Ordinary time earnings

OTE, in relation to an employee, is defined in subsection 6(1) of the SGAA and is the lesser of:

(a) the total of the employee's earnings in respect of ordinary hours of work and earnings consisting of over award payments, shift loading or commission, but does not include lump sum payments made on termination of employment in lieu of unused sick leave, unused annual leave and unused long service leave; or

(b) the maximum contribution base for the quarter - the maximum contribution base, which is the maximum limit on the amount of superannuation support that an employer is expected to provide for the benefit of an employee. The maximum contribution base for the 2013/14 year of income is $48,040 per quarter. This amount is indexed annually according to the indexation factor.

The Commissioner's views on OTE generally, including an employee's ordinary hours of work, are included in Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages' (SGR 2009/2)

Ordinary hours of work

The meaning of 'ordinary hours of work' is discussed in paragraphs 13 to18 of SGR 2009/2 and is further clarified in paragraphs 189 to 210 of SGR 2009/2.

Paragraphs 13 to 15 and 18 of SGR 2009/2 address the meaning of 'ordinary hours of work' and state:

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.

Paragraphs 20 to 23 of SGR 2009/2 set out the payments that are specifically included in the definition of 'ordinary time earnings' in subsection 6(1) of the SGAA. Relevantly, paragraphs 20 and 21 state:

20. Earnings consisting of over-award payments, shift-loading or commission are specifically included in the definition of OTE by subparagraph (a)(ii) of that definition in subsection 6(1).

Over-award payments

21. An over-award payment is the component of a payment in excess of an award entitlement. The Commissioner's view is that the specific inclusion of these payments does not apply to over-award payments that are specifically referable to hours worked that are not ordinary time hours. For example, an employer's policy may be to offer a higher rate of overtime pay for some overtime hours worked than the penalty rate required by an award. Even though technically over-award payments, such additional payments would not be OTE under subparagraph (a)(ii) of the definition of OTE in subsection 6(1).

Whilst awards or agreements may have a definition of 'ordinary time earnings' that purports to apply for superannuation purposes, the question posed by the definition of OTE in the SGAA is what amounts are earnings in respect of ordinary hours of work.

Paragraphs 25 and 26 of SGR 2009/2 specify that earnings 'in respect of ordinary hours of work' means all earnings other than overtime. Paragraphs 25 and 26 state:

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.

Appendix 2 of SGR 2009/2 provides an explanation of the legislative context applied to assist taxpayers to understand how the Commissioner's view has been reached.

Paragraphs 225 to 228 specify that earnings 'in respect of ordinary hours of work' means all earnings other than overtime.

Relevantly, paragraphs 225 and 226 state:

225. 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.

226. The Commissioner does not consider that the services or attendance of an employee specifically during certain hours of work is necessary for the earnings to be 'in respect of ordinary hours' and therefore OTE. The Commissioner's view is that the expression 'in respect of ordinary hours of work' was intended to ensure that overtime payments, and cognate amounts, were excluded from the earnings base. It was not intended to exclude amounts paid at a worker's ordinary time rate solely on the ground that they were not earned as a direct result of actually working particular hours in ordinary time.

Application of the law in these circumstances

In this case the Employer engages some Workers under Individual Employment Contracts which are underpinned by a Modern Award.

The relevant Workers are provided with a letter of offer which specifies that:

• They are permanent employees

• Their standard hours of work is 40 hours per week

• That they may work overtime but this will be at the same rate

• That annual leave and sick leave is calculated on the basis of 40 hours per week.

• The terms and conditions of employment will also be subject to various legislative requirements, any applicable industrial instruments and the policies and procedures that are applicable to the work on various projects.

The Award specifies that an employee's ordinary hours of work for a full-time employee are to be an average of 38 hours per week.

The Employer likes to maintain a well-paid and highly motivated work force and as such the rate paid per hour to the relevant Workers is significantly higher than the award rate. The Workers are paid a flat rate for ordinary hours and overtime hours.

Paragraph 14 of SMSFR 2009/2 provides that the relevant award or agreement must draw a genuine distinction between ordinary hours and other hours. Furthermore, it is expected that these other hours, typically described as overtime, are remunerated at a higher rate of pay than the ordinary hours or are otherwise identifiable as a separate component of the total pay in respect of non-ordinary hours.

As provided in paragraph 25 of SGR 2009/2, 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, or are otherwise referrable to overtime or other hours that are not ordinary hours of work.

In applying paragraph 14 of SMSFR 2009/2 to this case, the Award specifies that a full time employee's ordinary hours of work will be an average of 38 hours per week.

In this case, the relevant Workers are paid a flat rate for all hours worked over and above the Award rate of pay. Paragraph 15 of SMSFR 2009/2 states that any hours worked outside the span or in excess of those specified ordinary hours of work do not form part of an employee's 'ordinary hours of work'.

Therefore, it is considered in this case that as the Award specifies the employees ordinary hours of work to be an average of 38 hours per week, these hours are the Workers 'ordinary hours of work'.

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