Published September 2023
Quick Guide to Flat Rates: How to pay them correctly and ensure commercial protection
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, there is a lot people don’t realise about flat rates, 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.
- WHAT IS A FLAT RATE?
A flat rate, sometimes called a ‘loaded’ rate or ‘all-up’ rate, is a rate of pay that includes some or all of the employees 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 $ 24.08 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 $24.08 = $183.00
- Next 3 hours at x150% = $108.36
- Next 0.9 hours at 200% = $43.34
- Total payable for the shift = $334.70
If we take the total payable and divide it by the number of hours worked (11.5), we end up with $29.10per 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 no agreement were made. 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 overall test below or contact the team at Edwards HR for assistance with getting your calculations right.
‘Loaded’ rate is the term 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 documented in an IFA as described in section 4 of this Quick Guide.
- 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. 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.
- 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 overall, than if the Agreement were not made. 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 $24.08 = $183.00
- Next 1.9 hours at x150% = $68.63
- Total payable for the shift = $251.63
If we take the total payable and divide it by the number of hours worked (9.5), we end up with $26.49per hour – This is the flat rate equivalent of the minimum Award entitlements.
If you chose to pay the minimum Award equivalent of $26.49 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 $2.61 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.
- INDIVIDUAL FLEXIBILITY AGREEMENT (IFA)
If you choose to pay a flat rate, this must be documented in an individual flexibility Agreement (IFA) as described in the Award or Agreement applicable to the employee (usually clause 5 in an Award).
An IFA is a written Agreement between one or a select group of employees to change certain terms outlined in their Award or Agreement that suits the needs of the employer and employee. This Agreement should be separate to the employees’ contract of employment because it cannot form part of their terms and conditions of employment.
It is the employer’s responsibility to ensure that the IFA results in the employee being better off overall, and that the employee will not be underpaid or miss out on any entitlements that they would ordinarily receive individually. You cannot introduce an IFA that will reduce the employee’s entitlements.
Every Award and Agreement contains a clause regarding ‘flexibility’ – be sure to check what applies to you before you act and ensure your IFA is drafted professionally to ensure commercial protection for your business.
IMPORTANT NOTE: Most Awards will not allow you to enter into an IFA until the employee has commenced employment with your business. Be sure to check the flexibility clause of your Award or Agreement to find out what applies to your circumstances.
Get in touch with the Edwards HR team to have a comprehensive IFA drafted to suit your needs.
- WHAT CAN YOU CHANGE WITH AN IFA?
An IFA can be used to vary certain clauses in an Award or Registered Agreement. In this Guide, we focus on how to pay a flat rate by utilizing theSe provisions, but they may be used in some other circumstances not noted here.
In an IFA you can vary the following clauses from an Award:
- Arrangements for when work is performed, eg., working hours;
- Overtime rates;
- Penalty rates;
- Leave loading .
You can find out which clauses can be varied in the flexibility clause of the registered Agreement.
For more information about IFA and how to implement them in your workplace, click here to read the Fair Work Ombudsman’s Use of Individual Flexibility Arrangements Best Practice Guide.
- WHO CAN ASK FOR AN IFA?
An employer or employee can request to have an IFA. Both parties need to agree to the arrangement and sign the document which will become legally binding.
Remember, the employee and employer must genuinely make the agreement without duress or coercion.
- CAN YOU END AN IFA?
To end an IFA, it must be agreed between the employer and employee and documented in writing. This can usually be done at any time if both parties agree.
An IFA can also be cancelled by one party as long as the appropriate notice is given. That is:
- If the IFA was made under an award – 13 weeks’ notice required to the other party.
- If the IFA was made under a registered Agreement – refer to the registered Agreement as this will tell you how much notice is required. The notice period under a registered Agreement cannot be anymore than 28 days
- MOVING FORWARD
Flat rates are used by many businesses for many reasons, but to ensure you’re meeting your employer compliance obligations, there are several risks you need to manage and actions you need to take along the way. Underpayments are one of the most significant risks, and when employers are exposed to wage theft litigation and employees are able to make claims for unpaid wages for up to 6 years, there are many reasons to get it right from the beginning.
Clauses between Awards and Registered Agreements can vary, so we recommend that you check what applies to you before entering into any arrangement with your employees.
Every day, Edwards HR supports businesses with wage compliance, auditing and drafting IFA’s 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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