Annualised salaries and your award compliance obligations

Paying employees one fixed annual salary sounds like the easiest way to run payroll. One amount, no weekly re-calculation of penalties and overtime, no chasing rate changes. But if an employee is covered by a modern award, an annualised salary is not a way around the award. It is an arrangement the award itself regulates, and using it brings a set of specific obligations with it.

Under the Fair Work Act 2009 (Cth) (the Act), a modern award may include an annualised wage arrangement term, but only if the term includes appropriate safeguards so that no individual employee is disadvantaged (s 139(1)(f)). From the first full pay period on or after 1 March 2020, the Fair Work Commission inserted standard annualised salary clauses into a range of awards, and the Fair Work Ombudsman (FWO) actively enforces them. This guide sets out who the obligations apply to, what you must do, and what happens if you get it wrong.

In short, you must give the employee written notice of what the salary covers, set outer limits on the hours the salary absorbs, keep time records the employee acknowledges, and reconcile the salary against award entitlements at least every 12 months and when employment ends.

Who these obligations apply to

You are in scope if you pay an employee who is covered by a modern award that contains an annualised wage arrangement clause. Standard clauses now sit in awards including the Clerks - Private Sector Award 2020, the Banking, Finance and Insurance Award 2020, the Legal Services Award 2020, the Manufacturing and Associated Industries and Occupations Award 2020 and the Pharmacy Industry Award 2020. Longer-standing clauses also operate in the Hospitality Industry (General) Award and the Restaurant Industry Award. Most of the model clauses apply to full-time employees, and a few awards require the employee's agreement before the arrangement starts, so check the specific award.

Work through which situation you are in:

• Award with an annualised wage clause: You may use the arrangement, but only if you comply with every requirement of the clause.
• Award without a clause: You generally cannot use an annualised arrangement under that award. Your options are an all-inclusive salary with an offset clause or an individual flexibility arrangement (IFA), both discussed below.
• No award applies: You can agree a salary at common law, but it must still cover the National Minimum Wage and the National Employment Standards (NES).
• Enterprise agreement: Annualised wage arrangements can be set under an agreement instead, with rules that come from the agreement and the better off overall test applied when the agreement was approved.

Working out award coverage and the correct classification is the step most employers get wrong, and it determines everything that follows.

The core rule: the salary must not undercut the award

The FWO is direct on this point: an annualised wage generally must not be less than the amount the employee would have received from wages and other entitlements under the award for the work performed during the year. This is the safeguard that s 139(1)(f) of the Fair Work Act 2009 (Cth) requires in every annualised wage term.

Depending on what the award allows, the annualised amount can cover minimum pay rates, penalties, overtime, allowances and annual leave loading. But covering them is not the same as assuming they are covered. The salary only absorbs the entitlements the award's clause says it can, and only to the limits the clause sets.

Give written notice of what the salary covers

Before the arrangement starts, you must give the employee a written record that sets out:

• the annualised salary amount
• which award entitlements the salary covers, such as overtime, penalty rates, allowances and leave loading
• how the salary was calculated, including the assumptions about hours and patterns of work
• the outer limits, being the maximum number of penalty and overtime hours in a pay period or roster cycle that the salary absorbs.

This notice can sit in the employment contract or in a separate written agreement that the employee keeps a copy of. The FWO's worked example for the Clerks Award shows the same items: the amount, the entitlements included, the method of calculation and the maximum penalty and overtime hours. Do not start the arrangement without this record, because the reconciliation at the end of the year depends on it.

Set outer limits and pay beyond them at award rates

The clause caps how many penalty and overtime hours the salary covers in each pay period or roster cycle. Those caps are your outer limits, and they need to reflect the role's realistic roster.

If an employee works hours beyond the outer limits, you must pay for those extra hours separately at the correct award rates, in the pay period in which they were worked. Do not bank them up and hope the annual reconciliation catches them. Paying beyond the limits in real time is one of the specific duties the FWO points to, and it is the one employers most often defer.

Keep time records and get them acknowledged

For each pay period or roster cycle you must record the employee's starting and finishing times and any unpaid breaks, and the employee must confirm the records are correct, either by signing them or electronically.

This applies even though the employee is salaried. The records are what make the annual reconciliation possible, and they are the evidence you will need if the FWO ever asks how the salary was tested against the award. Your general record-keeping and pay slip obligations still apply on top, including showing the salary on each pay slip.

Reconcile every 12 months and on termination

At least every 12 months, and whenever the employee's employment ends before that, you must compare what you actually paid against what the employee would have earned under the award for the hours they actually worked, including overtime and penalties. Some awards also require a reconciliation when the arrangement itself ends.

If the comparison shows a shortfall, you must pay the employee the difference. The timeframe is set by the award; for the model clauses introduced in 2020 the shortfall is typically payable within 14 days of the reconciliation. The FWO's guidance is that the difference must be paid, without exception for how the year went.

You should also re-run the numbers outside the 12-month cycle when award rates change after the annual wage review, when an employee changes classification, or when the role's pattern of hours shifts materially. A salary that was adequate in March can be an underpayment by July.

What happens if you get it wrong

An underpayment is a contravention of the award. Section 45 of the Fair Work Act 2009 (Cth) provides that a person must not contravene a term of a modern award, and it is a civil remedy provision.

The maximum penalties are significant. A penalty unit is currently $364, and the table in s 539 of the Act sets the maximum at 60 penalty units per contravention, which is $21,840 for an individual. Section 546 provides that a body corporate faces five times that amount, or $109,200 per contravention. For a serious contravention, where the employer knowingly or recklessly underpaid, the maximum is 600 penalty units, or $218,400 for an individual and $1,092,000 for a company. For non-small-business employers, a contravention involving an underpayment amount can attract the greater of the unit-based penalty or three times the underpayment amount.

Courts can also order back pay, interest and compensation, and repeated failures across pay periods can attract multiple penalties, subject to the course of conduct rules in the Act. On the enforcement side, the FWO can investigate, issue compliance notices, accept enforceable undertakings and take employers to court. And since January 2025, deliberately underpaying an employee is a criminal offence under the wage theft provisions, which carry imprisonment for individuals.

Alternatives when your award has no annualised clause

If your award lacks the clause, two other structures are available, each with different safeguards:

• All-inclusive salary with an offset clause: The contract states that the salary compensates for identified award entitlements such as overtime, penalties and allowances. The FWO treats this as a contractual offsetting arrangement. It does not remove your obligation to ensure the salary actually covers those entitlements, so you still need to model the award rates, keep time records and check periodically that the salary has kept pace.
• Individual flexibility arrangement: Every modern award must include a flexibility term under s 144 of the Fair Work Act 2009 (Cth). An IFA lets you and one employee vary the effect of certain award terms to meet genuine needs. It must leave the employee better off overall than if no arrangement was made, must be genuinely agreed, must be in writing and signed, and a copy must be given to the employee.

Whichever structure you use, the NES still apply. Maximum weekly hours under s 62 of the Act remain 38 hours plus reasonable additional hours, and a salary cannot be used to contract around that or any other NES entitlement.

Compliance checklist

Work through each item before the arrangement starts, and again at every reconciliation:

• Confirm coverage: Check that the award applies to the role and that it actually contains an annualised wage clause.
• Model the maths: Calculate what the employee would earn under the award on a realistic roster before you fix the figure.
• Give written notice: Set out the amount, the inclusions, the calculation method and the outer limits, and keep a copy.
• Track time: Record start and finish times and unpaid breaks, and get the employee to acknowledge each period.
• Pay beyond the limits in real time: Any hours over the outer limits are paid at award rates in the pay period worked.
• Diarise the reconciliation: Schedule the 12-month check for every salaried award employee, and run one on termination.
• Top up shortfalls: Pay any difference within the award's timeframe and keep the reconciliation records.
• Revisit assumptions: Re-run the numbers whenever award rates, rosters or the role itself change.

When to get a lawyer involved

Award coverage and classification questions are the natural starting point for advice, because an error there flows through the whole arrangement. A lawyer can also draft the written notice and any contract or IFA terms, stress-test your salary modelling, run or review the annual reconciliation, and handle the situation if the FWO comes knocking or a wage audit is underway. The cost of advice on the front end is trivial next to a remediation exercise across years of pay cycles.

Start with the reconciliation date

Of all the duties in the clause, the one that most often goes missing is the reconciliation itself, together with the related rule that hours beyond the outer limits must be paid in the pay period they are worked. A salary can sit unchallenged for years until an employee leaves, a complaint lands or an audit arrives, and then the top-up and penalty exposure spans the whole period.

The first action this week is simple: pull the award for each salaried employee, confirm it contains an annualised wage clause, and diarise the 12-month reconciliation date for each arrangement. If the start and finish time records are not being kept and acknowledged, start that system now, because every month without records is a month you cannot defend. An annualised salary is a compliance arrangement, not a shortcut, and the reconciliation is where that distinction gets tested.