The concept of ‘overtime’ can be confusing to navigate as a business. Employees often work varying patterns and hours of work which raises key questions around what exactly constitutes overtime, how it should be paid and what obligations employers have in requesting employees to perform overtime hours.
Below we outline the most common questions that arise when considering overtime and provide guidance on how to ensure you are managing overtime appropriate to meet your obligations.
What is overtime?
‘Overtime’ is where an employee works extra time outside of their ordinary hours as specified within the applicable modern award, enterprise agreement or in their employment contract. This can include work undertaken:
- beyond the ordinary hours of work;
- outside the agreed number of hours per day or week;
- outside the maximum weekly hours of work (e.g., 38 weekly hours for full-time employees); or
- outside the spread of ordinary hours (as stipulated in the applicable award).
Most modern awards will outline what hours are considered ‘ordinary hours’ (i.e., what hours you can roster your employees to perform their usual work), and when overtime rates will apply. For example, clause 13 of the Clerks – Private Sector Award 2020 (Clerks Award) outlines what hours can form part of an employee’s ordinary hours, including the maximum weekly hours and the ordinary spread of hours on any given day. Clause 21 of the Clerks Award confirms when overtime rates will apply, which is generally for any work performed outside of these ordinary hours outlined in clause 13 of the Clerks Award.
Typically, an employer can only request an employee to work overtime where this is reasonable. An employee has the ability to refuse such a request if it is unreasonable.
What do employees get paid when working overtime?
If an employee works overtime, it is common for this work to be paid at a higher penalty rate. However, this will depend on the relevant modern award or enterprise agreement that applies to the employee. Award-free employee will not have a general entitlement to receive a higher rate of pay for overtime work unless this is stipulated in their employment contract.
Penalty rates attached to overtime work in modern awards and enterprise agreements are intended to compensate employees for not only the inconvenience of working additional hours, but in recognition of the various entitlements that generally do not apply when undertaking overtime work such as accrual of certain leave entitlements on these hours and, in some instances, superannuation.
It is imperative for employers to familiarise themselves with the terms of the relevant modern award, enterprise agreement or employment contract which apply to their employees as the terms may vary depending on employment type (e.g., different overtime rules can apply to part-time employees) and the instrument itself.
A common misconception is that where a modern award or enterprise agreement does not stipulate specific overtime rates, or the employee is award-free, that ‘reasonable overtime’ hours are not payable or do not incur additional compensation to their ordinary wage.
An employee must be paid for all hours they work – typically for employees paid an annual salary, this amount will be accounted for in their annualised salary. However, if an employee is paid hourly, they will need to be compensated for all hours worked including overtime work.
What is reasonable overtime?
Whilst employers can request that an employee works overtime, it must be reasonable. Employees have the right to refuse to work overtime if they consider the request to be unreasonable. Whether a request is reasonable is unique to each instance, including consideration of factors such as the employee’s personal circumstances.
The Fair Work Act 2009 (Cth) and some modern awards outline what factors an employer may look at when considering whether such a request is reasonable. This can include:
- The operational needs of the business
- Whether the employee is entitled to receive overtime payments/penalty rates for working additional hours
- Whether they are paid at a higher rate on the understanding that they work some overtime
- Whether the employee was given sufficient notice that they may have to work overtime
- Whether the employee has already stated they can’t ever work overtime
- The usual patterns of work in the industry
- The employee’s role and level of seniority
- The employee’s personal commitments (e.g., family/caring responsibilities)
- Any other relevant factors
It is also necessary to consider the potential work, health and safety risks associated with working additional hours prior to requesting an employee to undertake the overtime.
Can employees take time off in lieu instead of being paid for overtime?
An option for employers to consider when addressing overtime, is whether the applicable modern award or enterprise agreement allows for an employer and employee to agree to taking time off instead of payment for overtime. These arrangements are commonly referred to as ‘TOIL’.
Each modern award or enterprise agreement will have specific rules around the accrual and payment of TOIL, so it is imperative to ensure your business has read, and is complying with these rules prior to undertaking this arrangement. These will typically outline strict parameters such as obligations in record-keeping when coming to a TOIL agreement, the rate of pay or hourly accrual for TOIL, when TOIL hours must be taken by the employee and how these hours are paid if left unused or on termination of employment.
Importantly, these arrangements will require genuine agreement by an employee and are specific to each instance that overtime occurs. As such, it isn’t generally possible to have a standing requirement for all overtime hours to be taken as TOIL instead of being paid, and employees will retain the choice to either enter into this arrangement or receive payment for the overtime hours.
Importantly, if a modern award or enterprise agreement does not have a TOIL option, overtime will need to be paid as it occurs at the relevant rate.
What if I want to vary the rules of when overtime applies for modern award or enterprise agreement covered employees?
Considering the strict rules under modern awards or enterprise agreements regarding hours of work and overtime, it is common that these may not suit the individual needs of each employee or the specific business operations. As such, a recurring question that arises from employers is whether any alternative exists to vary the terms of a modern award or enterprise agreement, and how overtime rates are applied for staff.
In these instances, typically a business may consider whether an Individual Flexibility Arrangement (‘IFA”) may be appropriate. IFAs allow for an employer and employee to vary how certain Award or Agreement conditions are applied to genuinely meet the needs of both parties, typically:
(a) arrangements for when work is performed; or
(b) overtime rates; or
(c) penalty rates; or
(d) allowances; or
(e) annual leave loading.
These arrangements are only possible where a modern award or enterprise agreement allows for these agreements to be made, and where an employer and employee have complied with the strict conditions imposed to enter into such arrangements. An important aspect of an IFA is that it must result in the employee being ‘better off overall’ than if they had been paid in accordance with the rules of the modern award or enterprise agreement. Whether an employee is ‘better off’ will be specific to each individual employee and their circumstances and importantly, an IFA must be made by genuine agreement with the employee. As such, it is not possible for a business to have a standing requirement for every employee to enter into an IFA, and generally the IFA will need to be tailored to each specific employee’s circumstances. There can be considerable risks in undertaking an IFA, particularly when considering whether the arrangement is in fact better off overall. We recommend employers seek advice prior to entering into this arrangement to ensure these are being entered into compliantly.
As an alternative to entering into an IFA, it is not uncommon for an employer to enter into an arrangement whereby an employee is paid a higher rate of pay or annual salary intended to absorb or ‘off-set’ any possible reasonable overtime which may occur. Such an arrangement requires specific terms to be included within the employee’s employment contract, and it is imperative that the offered remuneration is high enough to sufficiently compensate the employee for the award entitlements that it intends to cover during each pay period. It is important that measures are in place for keeping track of employee hours as this method does not absolve an employer from keeping accurate time and attendance records of any overtime hours that are worked. Further, employers should also undertake an annual reconciliation of wages paid to the employees to ensure they are adequately compensated under this arrangement.
Should I have an overtime policy?
To manage overtime effectively in the workplace, we recommend implementing an Overtime Policy which allows the business to set parameters of when overtime hours can be worked and any relevant approval processes in place for undertaking additional hours. By implementing a robust policy, the business’ expectations are clear about overtime, and you will have an ability to reference this where policy breaches have occurred (especially during any potential disciplinary process). Although it will depend on the relevant factors and provisions of the applicable modern award or enterprise agreement, generally these policies will outline that unapproved overtime may not be paid – especially where there are strict rules in place requiring approval for overtime to be sought in order to be eligible for payment.
There are strict rules that govern how employers are expected to roster, pay, and manage overtime in their business and it can be difficult to navigate these areas compliantly. If you have any questions about your overtime obligations, or require assistance in implementing a robust overtime policy, please reach out the HR connect team.
The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact HR Connect for advice.