Published December 2024
QUICK GUIDE – PAYING EMPLOYEES FLAT RATES THE RIGHT WAY
In many heavy industries, Employers find that flat rates are the best option when paying their employees. In fact, more than half of Edwards HR’s clients pay some form of flat rate to some of their employees.
However, flat rates can be more complex than people realise, so we have put together this Quick Guide to help you understand how flat rates work, your obligations and what you can do to ensure your employees are being paid legally.
1. What is a Flat Rate?
A flat rate, sometimes called an ‘all-up’ rate, is a rate of pay that includes some, or all of the employee’s Award entitlements that would usually be payable separately. Examples of entitlements commonly built into flat rates include overtime, weekend penalty rates, shift loadings, some allowances and annual leave loading.
EXAMPLE: Let’s look at an example of an employee classified under level C12 of the Manufacturing and Associated Industries and Occupations Award, working a 12-hour shift (including a 30-minute unpaid break) from 6am to 6pm on a weekday. The minimum pay rate is $ 24.98 per hour and we are assuming that no allowances are payable.
Under the Award, they would be entitled to the following payments for working this shift:
- First 7.6 hours at ordinary rate of $24.98 = $189.85
- Next 3 hours at x150% = $112.41
- Next 0.9 hours at 200% = $44.96
- Total payable for the shift = $347.22
If we take the total payable and divide it by the number of hours worked (11.5), we end up with $30.19per hour – This is the flat rate equivalent of the minimum Award entitlements.
The rate must be carefully calculated to include compensation for any and all entitlements you do not intend to pay as separate entitlements. It’s also important to check that the applicable Award or Registered Agreement allows those entitlements to be rolled into a flat rate and that the arrangement results in the employee being better off than if the entitlements were paid individually. We discuss each of these points individually later in this guide.
Flat rate calculations are not a simple task and can be further complicated if the employee is not likely to work regular days and hours and applicable allowances or annual leave loading are included. Be sure to read on about the better off requirements below or contact the team at Edwards HR for assistance with getting your calculations right.
Note that a ‘Loaded’ rate is distinct from a flat rate – the term is commonly used where the employee is paid above the award minimum but the rate has entitlements built in. They then receive penalty rates and overtime on top of this higher rate. Note that in this circumstance, this arrangement should still be detailed in the Employment Agreement, with an appropriately worded ‘set-off’ clause as described in section 4 of this Quick Guide.
2. Benefits of Paying a Flat Rate
Flat rates can benefit both the employee and the employer. By their nature, flat rates are higher than the Award rates, so for employees, this can be very appealing. In turn, this can lead to team members being more committed to the role and less likely to leave. This can also provide employers with a larger talent pool when recruiting new employees.
For many employers, flat rates often help to simplify the payroll process because you’re working with less pay types. Generally, it also becomes easier to manage your labour costs when quoting, scheduling and invoicing. This is because it is much simpler to work with a single labour cost that applies to all hours worked, compared with calculating overtime on various days of the week, shift loadings, different allowances and the like.
However, employers need to keep in mind that flat rates do come with on-going maintenance. Here are some things to consider:
- Minimum pay rates in Awards and Agreements change frequently (usually annually) and it is up to the employer to ensure the flat rate is reviewed and adjusted accordingly (if required), each time there is an increase to minimum rates in the relevant Awards or Agreement to ensure the employee/s remain better off.
- Employers need to be aware of all minimum entitlements that apply to their employees and ensure the flat rate compensates for each of these if you do not intend to pay them separately, while also accounting for the days and hours the employee is expected to work.
- Employers must regularly review the hours worked by each employee to ensure that the flat rate paid covers all entitlements to result in the employee being better off. If you are not adequately compensating employees for all the hours worked, including penalty rates, overtime etc., then you may be putting yourself at risk of underpayments and penalties from the Fair Work Ombudsman.
3. Better Off Overall Test (BOOT)
To pay a flat rate to an employee, the employer must ensure that the arrangement results in the employee being better off, than if the relevant entitlements were paid individually.
This simply means that the flat rate needs to cover any entitlements the employee would ordinarily receive under their Award or Agreement, that you do not intend to pay separately.
The more you try to roll into a flat rate, the more complicated it becomes to maintain compliance, particularly if the employee is not working consistent days and hours. We strongly recommend you seek advice about your circumstances to ensure you’re compliant from the beginning – this will also help with compliance into the future.
EXAMPLE: Following on from our first example, let’s look at a scenario where the employee would not be better off:
The employee has been working 12-hour shifts, with a 30-minute unpaid break as per our first example. However, when we first moved the employee to a flat rate, we only thought they would be working 10-hour shifts (with a 30-minute unpaid break). Therefore, our calculation would have looked like this:
- First 7.6 hours at ordinary rate of $24.98 = $189.85
- Next 1.9 hours at x150% = $71.19
- Total payable for the shift = $261.04
If we take the total payable and divide it by the number of hours worked (9.5), we end up with $27.48per hour – This is the flat rate equivalent of the minimum Award entitlements.
If you chose to pay the minimum Award equivalent of $27.48 per hour based on the 10-hour shift calculation BUT the employee is actually working 12-hour shifts, then the employee is actually being underpaid because the calculation did not account for the additional overtime. In this example, they would have been underpaid $2.71 per hour.
Remember that in these examples, we have simply provided the Award equivalent flat rate, we have not made any adjustments to ensure the employee is better off.
You should complete your due diligence calculations often and be sure to correct any discrepancies. The team at Edwards HR can support you with all aspects of this, including preparing a calculator that will assist you with completing this exercise in to the future.
For more guidance about paying employees correct, read our Quick Guide here.
4. Set Off Clause in Employment Agreements
If you choose to pay a flat rate, the Award or Agreement entitlements built in to the rate should be clearly detailed in the employee’s Employment Agreement, with a suitably worded set-off clause . This ensures that in the event of an underpayment, any extra payment that exceeds the minimum entitlements stipulated under the relevant Award or Agreement, may go towards offsetting the Employer’s underpayment payment obligations.
The Employment Agreement should explain to the employee what entitlements are included/built into their flat rate of pay (for example, annual leave loading, overtime and penalty rates may be built in) and if there are others that remain payable separately to the flat rate (for example, a meal allowance or travel allowance might be paid as and when it applies).
You can get in touch with the Edwards HR team if you need;
- a comprehensive Employment Agreement drafted;
- advice on flat rates and what to build in or pay separately;
- would like us to review your existing Employment Agreements, to check if there is a sufficient Set-off clause to suit your needs;
- pay calculations to check rates are sufficient to cover the relevant entitlements.
5. Moving Forward
Flat rates are used by many businesses for many reasons, but with wage theft becoming a criminal offence from January 2025, and employees being able to make claims for unpaid wages for up to 6 years, there are many reasons to make sure you are getting payment of them right and that your Employment Agreements protect you from any such claims.
Every day, Edwards HR supports businesses with wage compliance, auditing and drafting employment agreements that are both cost effective and tailored specifically to your business.
Contact us today to find out how we can support your business.
For more guidance about this update, or to find out how Edwards HR can support your business, contact our team today on 07 3568 0866.
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