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Advice

Subject: Ordinary time earnings - superannuation guarantee

Question

What are the ordinary time earnings (OTE) of individuals employed by the employer under a common law contract of employment and a collective agreement?

Advice

The OTE of individuals employed by the employer under a common law contract of employment and a collective agreement is the earnings in respect of their total rostered hours per 4 week roster cycle.

This advice applies for the following period:

After 1 July 2009.

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. 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 engages the employees under a collective agreement (the Agreement) along with common law contracts (the Contract). The Agreement operates to the exclusion of any award or industrial instrument.

The Agreement provides for terms of engagement, an all inclusive wage rate, hours of work (average 38 hours per week, Mon to Fri between 6am and 6pm), shiftwork, superannuation and project work where conditions may be inconsistent with the Agreement.

The project work clause removes clauses in relation to wage rates, hours of work and shift work from the Agreement. Employees covered under the project work clause of the agreement enter into an employment contract which outlines their employment conditions.

The Contract provides:

Hours of Work

The rostered hours are 12 hours per day for 14 days then 14 days off. The 12 hours are paid at the inclusive rate. The employee acknowledges that the regular hours in excess of 38 hours per week are reasonable. If the employee works additional hours in excess of the daily rostered hours no additional payment will be made, however, where that occurs, employees will be able to work the equivalent less hours on a subsequent day without loss of pay.

Rate of Pay

The rate of pay is an all inclusive rate for all hours worked and takes into account and replaces all allowances, loadings and entitlements, district allowances, site allowances, shift allowances, disability and any other allowance not specifically mentioned. The rate of pay is calculated from a summation of expected ordinary hours plus other overtime and loadings.

Superannuation

The SG contributions are calculated on thirty eight (38) ordinary hours worked in accordance with the SG Legislation and calculated at 9%.

The employees are paid on a weekly basis and do not receive any remuneration for the 14 days that they are rostered off.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 6(1)

Reasons for decision

Summary

The OTE of individuals employed by the Employer under a contract of employment and a collective agreement is the earnings in respect of all hours worked per 4 week roster cycle.

Detailed reasoning

The Superannuation Laws Amendment (2004 Measures No 2) Act 2004 simplified the earnings base of an employee for SGAA purposes. These amendments which apply from 1 July 2008 have the effect that all employers need to calculate their SGAA liability against an employee's OTE, as defined in the SGAA.

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

· 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

· 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 2011/12 year of income is $43,820 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'.

Paragraphs 13 to 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 employees 'ordinary hours of work'.

16. If the ordinary hours of work are not specified in a relevant award or agreement, the 'ordinary hours of work' are the normal, regular, usual or customary hours worked by the employee, as determined in all the circumstances of the case. This is not necessarily the minimum or maximum number of hours worked or required to be worked.

17. In such cases, it may often not be possible or practicable to determine the normal, regular, usual or customary hours of an employee's work. If so, the actual hours worked should be taken to be the 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.

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.

In circumstances where ordinary hours are specified in an award or agreement, the Commissioner's view is that whilst it is common for awards or agreements that set out the terms and conditions of employment to make a provision for the employee's ordinary hours of work, normally hours worked in excess of ordinary hours of work attract penalty rates of pay and are described as 'overtime'. Generally a clear distinction is understood to apply for various purposes between ordinary time earnings and overtime earnings.

The Commissioner's view in relation to the expression of 'ordinary hours of work' which is contained in the definition of OTE in subsection 6(1) of the SGAA is that this expression tends to suggest a fixed or stipulated quantity of hours.

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' mean 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 remunerated for working overtime hours, or are otherwise referrable 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 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.

Application of the law to your circumstances

In this case the employees are engaged under the Agreement along with the Contract as the nature of their employment is consistent with special clauses of the agreement.

SGR 2009/2 addresses the meaning of 'ordinary hours of work' in paragraphs 13 to 18 of the ruling. Under paragraph 13 of SGR 2009/2, 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.

The expression 'ordinary hours of work' provided in subsection 6(1) of the SGAA tends to suggest a fixed or stipulated quantity of hours.

The ordinary hours of work for employees who work under the Contract are defined in the Contract and in the Conditions of Employment attachment to the Contract.

A clause of the Contract relates to the employees hours of work. This clause provides that the applicable roster cycle and hours of work are contained in an attachment to the Contract, being more than 8 hours per day during the on-work cycle which is paid at the employee's all inclusive rate of pay.

By accepting the offer of full time employment, the employees acknowledge that the regular hours in excess of an average of 38 hours are reasonable. No additional payments are made where an employee is required to work in excess of their rostered hours and the employees will be able to work the equivalent less hours on a subsequent day without loss of pay.

The attachment provides that the employees will work a roster of 2 weeks on / 2 weeks off, with the working hour's being12 hours per day, except where otherwise provided.

Whilst the Contract and Attachment provide that the 'Ordinary Hours' are 38 hours per week, the rostered hours detailed in the attachment to the Contract contradict that the employees 'ordinary hours' are 38 hours. These clauses provide that the fixed or stipulated hours of work for the employees are 12 hours per day for 2 weeks (14 days), after which the employees will have 2 weeks (14 days) off. This equates to 168 hours over a 4 week (28 day) roster cycle.

Under paragraph 14 of SGR 2009/2, the award or agreement does not need to use the exact expression 'ordinary hours of work', but the award or agreement needs to draw a genuine distinction between ordinary hours and other hours. It would be expected that other hours are remunerated at a higher rate than ordinary hours, or otherwise identifiable as a separate component of the total pay in respect of non-ordinary hours.

The contract provides that the employee's rate of pay is an all inclusive rate for all hours worked and takes into account and replaces all allowances, loading and entitlements, district allowance, site allowances, shift allowances, disability and any other allowance not specifically mentioned. The rate of pay is calculated from a summation of expected ordinary hours plus other overtime hours and loadings.

You have stated in your letter that you understand that the payment for work performed outside the ordinary hours of work are not considered OTE as outlined in paragraph 41 of SGR 2009/2.

Paragraphs 41 to 43 of SGR2009/2 relate to certain kinds of payments that are not 'ordinary time earnings'. Paragraphs 41 to 43 state:

Overtime payments

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

42. This is so whether the payments are calculated at an hourly rate of the employee gets a specific loading, or an annualised or lump sum component of a total salary package, that is expressly referrable to overtime hours as remunerated for overtime hours worked.

43. However, some employees, particularly some managers and professionals, receive a single undissected annual salary within a remuneration package that recognises in a non-specific way that the employee may often be expected to work more than ordinary hours of work prescribed. The whole amount of salary payable under such a package is OTE, unless overtime amounts are distinctly identifiable as mentioned in paragraph 42 of this Ruling.

The rate of pay clause of the contract does not draw a genuine distinction between ordinary hours and other hours, rather it refers to an all-inclusive rate of pay which is calculated from a summation of expected ordinary hours plus other overtime hours and loadings. The clause does not detail the amounts of the components that make up the all-inclusive rate.

Other hours are not expressly referrable to overtime hours; rather they are referred to in the hours of work clause as "the regular hours in excess of an average of thirty eight (38) hours per week." These regular hours in excess of an average of 38 hours are not remunerated at a higher rate than the ordinary hours and are not identifiable as a separate component of the total pay in respect of non-ordinary hours. As all hours worked are paid at the all-inclusive rate of pay, this provides that the hours in excess of 38 hours per week are not overtime hours.

As determined above, the payments for these hours in excess of 38 hours per week are not overtime payments which are expressly referrable to overtime hours and the employees are not remunerated for overtime hours worked, rather these hours in excess of 38 ordinary hours per week are their fixed or stipulated hours and are remunerated at their all-inclusive rate of pay. Therefore, paragraph 41 of SGR 2009/2 does not apply to your circumstances.

When determining the 'earnings in respect of ordinary hours of work', we must consider paragraphs 25 and 26 of SGR 2009/2 which provide that earnings 'in respect of ordinary hours of work' mean all earnings other than overtime.

Under 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 remunerated for working overtime hours, or are otherwise referrable only to overtime or other hours that are not ordinary hours of work.

As stated above, the employees are paid at an all-inclusive rate of pay in relation to the hours rostered in Attachment 3 to the contract. The hours in excess of 38 hours per week are not described in clause 4 of the contract as overtime; rather they are described as "the regular hours in excess of an average of thirty eight (38) ordinary hours per week……"

Paragraph 26 of SGR 2009/2 identifies the central question which is posed by the definition of OTE in the SGAA.

Paragraph 26 of SGR 2009/2 states:

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 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

Paragraph 15 of the contract relates to superannuation and states:

The employer superannuation contributions shall be calculated on thirty eight (38) ordinary hours worked as prescribed in Clause 16 of the Agreement in accordance with the Superannuation Guarantee Legislation and calculated at 9%.

The ordinary time earnings base shall be the employee's rate of pay for time worked as ordinary hours (up to 38 hours per week), and shall not include any additional rates of pay, productivity payments, bonuses, or allowances.

Whilst the Contract provides a definition of 'ordinary time earnings' that purports to apply for superannuation purposes, we must address the central question which is posed by the definition of OTE in the SGAA;

What amount are 'earnings in respect of ordinary hours of work'?

We have identified by applying paragraph 13 of SGR 2009/2 to your situation that the employment contract states that the 'Ordinary Hours' for the employees are 38 hours per week, yet the roster provides the fixed or stipulated hours that the employees will work as 12 hour shifts for 2 weeks then receive 2 weeks off. This equates to 168 hours over a 4 week roster cycle. Furthermore, the hours of work clause of the Contract describes the hours in excess of 38 hours per week to be the employee's regular hours in excess of an average of 38 ordinary hours per week.

The fact that these hours in excess of 38 hours per week are described as the employees regular hour's leads to the conclusion that these hours form part of their ordinary hours of work as these are their fixed or stipulated hours.

In applying paragraph 14 we have identified that there is no distinction between ordinary hours and other hours. Other hours are not described as being overtime hours; rather they are described as being regular hours in excess of thirty eight (38) ordinary hours per week.

Paragraph 26 of SGR 2009/2 provides that the employees earnings in respect of ordinary hours of work could in some cases be a different amount from any purported amount of 'OTE' in the award or agreement.

Appendix 1- Examples of SGR 2009/2 provides information to help to understand how the Commissioner's view has been reached.

Example 3 - Agreement supplanting award removes distinction between ordinary hours and other hours contained within paragraphs 93 to 98 state:

93. Cliff was employed under an award which stipulates that ordinary hours shall not exceed a maximum of 38 hours per week. The award also states that all time worked in excess of the ordinary hours shall be deemed to be overtime and paid at a rate of time-and-a-half for the first three hours worked and double time thereafter.

94. However, Cliff and his employer agree under a workplace agreement that he will work 50 hours each week which will be paid at the same hourly rate for all of the 50 hours worked. That rate is inclusive of all allowances and penalties. No lesser amount of hours is identified as 'ordinary', nor is separate provision made for any overtime hours.

95. Cliff duly works his 50 hours per week and is paid at the appropriate single rate under the agreement.

97. Under the terms of the agreement (which overrides the terms of the award to the extent of any inconsistence), no distinction is made between any of the hours Cliff works, nor is any component of his pay separately identifiable as overtime. Therefore Cliff's ordinary hours of work for superannuation guarantee purposes are 50 hours per week.

98. Therefore each whole payment to Cliff for 50 hours of work is 'earnings in respect of ordinary hours of work' and is OTE.

Whilst the Agreement and Contract are not supplanted by an award that stipulates the ordinary hours, it is considered that this example is similar to your situation in that you have negotiated with your employees regular hours of work which exceed the standard of 38 hours per week and have negotiated an all-inclusive rate of pay where there is no component that is expressly referrable to overtime hours.

This provides that the ordinary hours of hours work of the employees covered under the Contract is 168 hours in a 4 week roster cycle.

Conclusion

Under subsection 6(1) of the SGAA 'ordinary time earnings' in relation to an employee means earnings in respect of ordinary hours of work (other than certain lump sum payments made to the employee on termination of employment) and earnings consisting of over-award payments, shift-loading or commission.

Whilst the employment contract purports that the employees ordinary hours of work and ordinary time earnings base is 38 hours per week, the roster arrangement clearly indicates that the fixed or stipulated hours of the employees is 168 hours in a 4 week roster cycle.

Therefore, the OTE of individuals employed by the employer under a contract of employment on and collective agreement is the earnings in respect of 168 hours per 4 week roster cycle.