Salary vs Wages, get the facts
Although some people use the terms interchangeably, there is a clear difference between being paid a salary or a wage. The correct term must be used when talking about employee compensation.
A wage is the employee remuneration based on the number of hours worked, multiplied by an hourly rate of pay. These hourly rates of pay are usually linked to minimum rates outlined within a Modern Award. ‘Above Award’ hourly rates would also be considered wages.
A salary is the remuneration of an agreed annual amount, paid at agreed intervals (i.e., monthly or fortnightly). This arrangement is essentially outcome and task focused rather than being focused on working a set number of hours. If your salaried employee is covered by a Modern Award, you must be sure that their salary amount is equal to, or higher than, what they would receive as a wage for the same role. This is called the BOOT or Better Off Overall Test.
A real life example
While working with a client, I was talking with one of their employees. This employee was struggling to understand the difference between being paid a salary versus an hourly rate. In the employee’s previous role, they were paid for each hour they worked and anything above their contracted hours was paid at overtime rates. In their new role with their new employer they were paid a salary – their pay didn’t change no matter how many hours they worked.
Being paid an hourly rate seems straight forward, you get paid for the hours or part hours you work. Any hours that are additional to your contracted hours you get paid for – if you’re covered by an Enterprise Agreement or Award you might even get paid overtime rates on the additional hours – bonus!
This means your pay can fluctuate from week to week depending on the hours you work and there is opportunity for you to earn more if you work more than your contracted hours.
Salary on the other hand is an agreed amount of paid over a 12 month period. In most cases, it is generally expected that employees who are paid a salary will work reasonable additional hours without being paid any overtime for the additional hours they work (provided their annual salary is not less than the minimum entitlements they are entitled to under the applicable award, agreement or National Employment Standards (NES).
A simple way of thinking about this concept is that the role is outcome and task focused rather than focused on working a set number hours.
This is the concept the employee was struggling with. They felt that when they had worked their hours for the day or week, they should be paid for the additional hours they were working. Alternatively, they thought they should have the option to go home rather than staying until the task or job they were working on was finished.
It is important to note that this employer very rarely requested their employees to work longer hours, but when they did it was for genuine reasons.
In this instance, the employer had made the decision to pay their employees an ‘above award’ annual salary rather than an hourly rate. The employer took into consideration the skills and experience required to perform the role, what the minimum entitlements under the award would be, as well as other factors such as how frequently the role would be required to work additional hours. All of these things were factored in when determining what the remuneration for the role would be.
We met with the employee and gave them an opportunity to raise their concerns which we were able to successfully resolve.
Clear as mud. Some points to discuss.
- Explain what a salary is and the concept of a salary being outcome and task focused
- Outlined the pros of being paid salary i.e. a salary provides guaranteed income, which makes budgeting and saving easier
- Explain why the business pays a salary over wages – In my case, they had a number of good reasons why!
- Provide employee with a breakdown of what they would have been paid if they were paid at award rates. This should include overtime penalties and leave loading – In my case they were surprised to see they were significantly better off being paid salary!
- Calculate how many additional hours the employee would need to work throughout the year, to be worse off than the award (we also broke this down to a weekly basis.) On this occasion they weren’t working anywhere near these hours and they were a lot better off
If you have an employee struggling with these differences, we encourage you to meet with them. Explain the salary concept and have the conversation. More importantly, give your staff the opportunity to raise their concerns and engage with them over the matter. Sometimes a simple conversation can go a long way.
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