The transitional arrangements in modern awards, which take effect from today, raise a number of very complex issues for employers. However, in an important decision on the operation of these arrangements, a Fair Work Australia (FWA) full bench has just addressed two areas of uncertainty relating to overtime and the scope of the absorption provisions.

In this Update, we consider the impact of FWA's decision and also take a brief look at the Government's paid parental leave scheme.

Modern awards and the transitional provisions

Although the new modern awards came into operation on 1 January 2010, the provisions dealing with various monetary entitlements were delayed until 1 July 2010.

As part of award modernisation, the Australian Industrial Relations Commission included transitional provisions in most awards that allow for the phasing in of changes to most monetary entitlements (over the five year period from 1 July 2010 to 30 June 2014). Further details about the transitional provisions can be found in our previous update.

The transitional provisions generally allow for the phasing in arrangements to apply to (among other things) 'Saturday, Sunday, public holiday, evening or other penalties'.

In addition, they provide that 'The monetary obligations imposed on employers by this award may be absorbed into overaward payments. Nothing in this award requires an employer to maintain or increase any overaward payment'

However, there remained a great deal of uncertainty about:

• whether overtime was a 'penalty' (to which the phasing in arrangements apply), and
• how broadly the 'absorption' provision could be applied (eg, did it apply only where employees agreed to accept overaward payments in satisfaction of award entitlements)?

This uncertainty led to two applications to vary the transitional provisions in one of the modern awards (which are common in most other awards).

On the overtime issue, the full bench decided that the transitional provisions were not intended to apply to overtime or hours of work – meaning that the phasing in arrangements also do not apply. This means that employers should have been applying the overtime and hours of work provisions in modern awards since 1 January 2010.

In relation to absorption, the full bench confirmed that the standard absorption clause was intended to permit employers to absorb into existing overaward payments any increases in monetary obligations (e.g. overtime, shift or penalty rates) flowing from the implementation of modern awards. This is the case even if employees haven't previously agreed to a set off arrangement (e.g. under a minimum entitlements or set off clause in their employment contract). This effectively overrules the Fair Work Ombudsman's draft guidance - which suggested that absorption had a more limited effect.

The full bench did, however, note two qualifications. First, absorption will not be available if employees have a contractual entitlement to maintain the overaward payments (which will be rare). Second, the full bench stated that the absorption provision only applies for the transitional period.

Although the full bench's decision seems to be good news for employers, some uncertainties remain – including:

• the decision seems to suggest that the absorption clause may only operate in the context of overaward payments applying immediately prior to the implementation of the modern awards (which leaves the position of new recruits unclear, among other things)
• what is the position in relation to absorption of award entitlements after the transitional period has ended
• can an employer rely on overaward payments from other pay periods – or only those in the relevant pay period (this could be important if significant overtime is worked in a particular month)
• are bonus or commission payments overaward payments, and
• can the absorption provision offset annual leave loading (because of the way in which the National Employment Standards work, possibly not)?

As a result of these uncertainties, employers should utilise contractual set-off or minimum entitlements clauses wherever possible.

Award rates of pay increase

Finally, in relation to modern awards, Fair Work Australia has handed down its first annual wage review decision. As a result, from the first full pay period on or after 1 July 2010:

• the federal minimum wage increases to $569.90 per week
• rates of pay in modern awards and Australian Pay and Classification Scales increase by $26 per week, and
• the casual loading for award/agreement free employees will increase from 20% to 25% over five years.

Government's paid parental leave scheme gets green light

Following some last minute (but important) changes, the Government funded paid parental leave scheme has become law.

The scheme will take effect from 1 January 2011 and will have important implications for employers. The key features of the scheme include:

• eligible workers, who are the primary carer of a child that is born or adopted after 1 January 2011, will be entitled to paid leave for up to 18 weeks (at the federal minimum wage – currently $569.90)
• to be eligible, workers must have earned less than $150,000 (indexed) in the previous financial year; worked 'continuously' for at least 10 of the past 13 months (breaks of up to eight weeks between work days are permitted); worked at least 330 hours in the 10 months; and satisfy an Australian residency requirement
• paid leave to is available to current employees (including some casual and some short term employees) and in some cases, to contractors, the self employed and employees who have resigned
• another carer, other than the child's mother (e.g. the father or even a grandparent), may be able to receive the balance of any unused paid parental leave
• a person wishing to receive paid leave must make an application to the Family Assistance Office – who will then consider and assess the application. Applications can be made from as early as October 2010 
• in most cases, the employer will be responsible for paying parental leave (after it receives funds from the Family Assistance Office). However, in some cases the Family Assistance Office will make payments directly (e.g. to former employees or short term employees)
• carers receiving leave payments cannot return to work until payments have ceased - although they can 'keep in touch' with the workplace for up to 10 days
• the baby bonus is not available to employees who receive paid parental leave 
• payments under the Government scheme appear to be in addition to any other payment an employer is obliged to pay to an employee on parental leave, including under a law or industrial instrument (and probably an employment contract). However, the position probably differs if the employer has a discretionary paid parental leave scheme or policy (in which case some set off arrangements may be possible), and
• a regulatory regime is established to ensure employer compliance with the scheme. As part of this, the Fair Work Ombudsman will be able to investigate complaints, issue infringement notices and may take enforcement action in the Federal Court (which could result in financial penalties being imposed).