Edited version of private advice

Authorisation Number: 1051727882278

Date of advice: 31 July 2020

Ruling

Subject: Ordinary time earnings and time off in lieu hours

Question

Is time off instead of payment of overtime for an employee, considered ordinary time earnings (OTE) for the purposes of subsection 6(1) of the Superannuation Guarantee Administration Act 1992 (SGAA)?

Answer

Yes.

Relevant facts and circumstances

Employees of the Employer are covered by an Award.

The Award states that an Employee may agree in writing with the Employer to take time off work instead of payment for overtime.

Time off instead of overtime must be taken within 6 months of it being worked at times agreed by both parties. If the overtime is not taken within 6 months the Employer must pay the Employee the overtime, in the next pay period, at the overtime rate.

If an Employee has banked time off for overtime hours paid out on termination, the Employer must pay the Employee at the overtime rate.

The Award states that the ordinary hours of work for all full-time employees will not exceed 152 hours over a four week period.

The Award allows an Employee and Employer to enter into individual flexibility arrangements to vary the application of the terms of the award relating to arrangements for when work is performed and overtime rates.

As per the Award the Employer has made individual flexibility arrangements (IFA) available to its employees.

The IFA recognises the seasonal nature of the workplace. The Employee understands that work will not be available during the off-season, but the Employee will be able to access the banked hours when the paid entitlements are exhausted so that there will be minimal disruption to their income.

The weekly hours of work will average 53 weekly hours over 4 consecutive weeks which is made up of 152 hours of ordinary time as defined in the Award and 15 hours of overtime per week.

All overtime will be taken as time off instead of payment.

Banked hours will accrue on an hour for hour basis in accordance with the Time Off instead of payment for overtime provisions as per the Award.

Contentions

When taken as paid time off work pursuant to the Award provisions dealing with "time off instead of payment for overtime" the hours taken are paid at the ordinary rate of pay but it is submitted that these hours of work remain in essence overtime hours albeit they are being paid and taken at another time. It is submitted that the same applies if these overtime hours are paid out pursuant to clause 25.1(f).

Reasons for decision

Detailed reasoning

OTE, in relation to an employee, is defined in subsection 6(1) of the SGAA and includes the total of the employee's earnings in respect of ordinary hours of workand earnings consisting of over award payments, shift loading or commission. However it 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.

OTE is described in SGR 2009/2 as the payment for the 'ordinary hours of work'. The term 'ordinary hours of work' is defined as:

·         the hours specified as the employee's ordinary hours under an award or agreement; or

·         if the ordinary hours are not specified, the hours regularly worked by the employee; or

·         if the ordinary hours are not specified and the regular hours are impossible or impractical to determine, the actual hours worked.

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.

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 similar 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.[1]

Banked hours accrual

As set out in the IFA, the banked overtime hours that are accrued by the full-time Employee are normally expended during the off-season.

An overtime hour is equal to one ordinary hour when banked and later taken - it is paid at the ordinary time hourly rate. The only time that an overtime hour is remunerated at the overtime rate is when it is paid out after not being used within 6 months or is paid out on termination of employment.

Payments made to an employee on termination of their employment in lieu of unused sick leave, annual leave or long service leave are expressly excluded from the definition of OTE under subsection 6(1) of the SGAA. However, if a payment for these types of unused leave occurs while the employee remains employed, this amount is paid in connection with the employee's ordinary hours in the same way as any other leave payment.

Whether a lump sum payment of accrued time for banked hours is considered OTE under the SGAA depends on whether it is 'earnings in respect of ordinary hours of work'. This position applies equally to payments 'cashed out' to an employee during the course of their employment, or on their termination.

When banked hours are paid it is because the Employee has worked extra hours that add up over a set period of time and this is taken as accrued leave, much like a rostered day off (RDO) or time off in lieu (TOIL).

Paragraph 32 and 33 of SGR 2009/2 clarify that RDO payments are normally OTE:

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.

33. Similarly, salary or wages received at the ordinary time rate in respect of public holidays, rostered days off and the like is OTE.

For example, an award may prescribe the ordinary hours as 38 per week over a work cycle of four weeks (152 hours). This represents 19 x 8 hour work days and one x 8 hour RDO accrued. All RDO hours are accrued on hours worked in excess of the 152 ordinary hours as described in the agreement. The ordinary hours of work have been completed in 19 days, which allows the employee to take an RDO on the last day of the 20 day work cycle.

In accordance with the IFA, the Employee will work 15 hours overtime a week. They have elected to take TOIL for this overtime (instead of receiving payment).

Superannuation guarantee is not paid on overtime hours and will not be payable on any accrued TOIL that is paid to an employee on termination or cashed out while still in employment. This is because the TOIL related directly to the overtime hours and would represent an amount paid for work performed in excess of, or in addition to, an employee's normal working hours for a settlement period, and therefore would not be 'in respect of ordinary hours of work'.

However, where there is an agreement for the employee to take their accrued TOIL as payment for their ordinary hours of work at a later date, then superannuation guarantee would be payable. Effectively the employee is substituting their accrued TOIL for hours within their normal ordinary hours of work.

Under the terms of the IFA and Award, the Employee has agreed to bank overtime hours for the purpose of substituting them for their normal ordinary hours of work during periods of unseasonal downtime. Subsequently, such a payment to an Employee will be OTE as defined in subsection 6(1) of the SGAA. This conclusion is supported by the fact that the banked hours accrue on an hour for hour basis and are not paid at the overtime rate when substituted for ordinary hours.

Relevant legislative provisions

Superannuation Guarantee Administration Act 1992 subsection 6(1)

We followed these ATO view documents

Superannuation Guarantee Ruling SGR 2009/2 Superannuation guarantee: meaning of the terms 'ordinary time earnings' and 'salary or wages'

[1] paragraphs 225 and 226 of the SGR 2009/2.