Most businesses do not think about the difference between an employment contract and an enterprise agreement until a particular moment forces it. Often that moment arrives when you hire past your first handful of staff and someone with a spreadsheet points out that your trading hours, weekend shifts or casual mix do not line up with the modern award covering your workforce. Sometimes it arrives through an underpayment review, a new contract with a large customer, or a plan to open a second site and run the same conditions across both. At that point the question is a practical one: do you keep hiring people on individual contracts that sit within the award, or do you replace the award for your whole workforce with an enterprise agreement?
The two options, stated plainly
A common law employment contract is the written agreement between you and each employee. It is built on ordinary contract principles such as offer, acceptance and consideration, and it sets the individual terms of the relationship: duties, employment type, pay, hours, leave, probation, confidentiality, intellectual property and termination. It does not operate in a vacuum. Every employment relationship in Australia sits on top of the National Employment Standards (NES) in the Fair Work Act 2009 (Cth) (the Act), and if a modern award covers the employee, the award's minimums apply as well.
An enterprise agreement is a different kind of instrument. It is made under Part 2-4 of the Act, it has to be genuinely agreed to by the employees who will be covered by it (in practice, they vote on it), and it only starts operating once the Fair Work Commission approves it. While it applies, it replaces the modern award for the employees it covers. Section 57 of the Act provides that a modern award does not apply to an employee at a time when an enterprise agreement applies to that employment. The NES still applies on top of the agreement, and the agreement's base rate of pay cannot fall below the base rate the modern award would have required: s 206 of the Act.
That framing points to the real question behind this decision. It is not whether "contracts" or "agreements" is the better category. It is whether the modern award that would otherwise apply to your workforce fits how your business actually runs. If it does, individual contracts are usually the simpler path. If it does not, an enterprise agreement lets you design a tailored set of conditions, but only at the price of a bargaining and approval process that takes time and money.
Two assumptions commonly fail here, and both are worth naming up front. First, an enterprise agreement cannot override the NES. Section 55 of the Act says a modern award or enterprise agreement must not exclude the NES, and s 61 describes the NES as minimum standards that cannot be displaced, even by an enterprise agreement. The NES covers maximum weekly hours, annual leave, personal and carer's leave, parental leave, public holidays, notice of termination and redundancy pay, and a range of other standards. Second, a contract cannot undercut the award. A clause that says a salary covers all entitlements does not survive contact with the hours actually worked; if the pay falls below what the award requires, the employer owes the difference regardless of what the contract says. Neither instrument is a way to set lower standards. Each is a way to structure how you pay the standards that apply.
Factors to weigh before you choose
The right choice depends on how your business operates today and where it is heading. These are the factors that usually decide it.
How your roster actually runs
The biggest single driver is the gap between the award's rules and the shifts you actually work. If your staff work standard weekday hours, most modern awards are manageable and a contract-based setup costs you very little to administer:
- Standard hours: The award's penalty rates, overtime and allowances rarely bite. Contracts plus the award are usually the simplest, cheapest answer.
- Extended or irregular hours: Weekend trading, late nights, split shifts, public holidays and on-call work mean every roster has to be priced through the award's penalty framework, and that is where errors creep in.
An enterprise agreement becomes attractive when the second description matches your business, because it lets you design the pay structure rather than administer the award's penalty framework:
- Contract under the award: You pay whatever the award prescribes for each shift, and your payroll system has to apply it correctly every time.
- Enterprise agreement: You can trade off penalties and allowances for a simpler structure, such as a higher flat rate, but only if the agreement passes the Better Off Overall Test (BOOT), which means modelling the trade-offs against the award for the people who will actually work those shifts.
What it costs in time and money to set up
A common law contract can be drafted once, adapted per hire, and put in front of a new employee within days. That is the practical reason most small businesses start there.
An enterprise agreement is a project. You draft the agreement, bargain with employees or their representatives, explain it to the workforce, run a vote, and lodge an application with the Fair Work Commission. The Commission must be satisfied of several things before it approves, including that the agreement has been genuinely agreed to by the employees who voted, that it does not breach the NES rules in s 55, that it passes the BOOT under s 193, and that its nominal expiry date is no more than four years after approval: s 186 of the Act. The agreement must also include a procedure for settling disputes.
The BOOT is usually the stage where the time goes. The Commission must be satisfied that each award-covered employee, and each reasonably foreseeable employee, would be better off overall under the agreement than under the relevant modern award: s 193 of the Act. That means modelling different employee patterns, including nights, weekends, overtime and higher duties, and showing the trade-offs still leave employees ahead. If the Commission has concerns, it can accept written undertakings to fix them (s 190), or in rare exceptional circumstances approve an agreement that does not pass the BOOT where that would not be contrary to the public interest (s 189). Approval can take months, and it can be refused.
How easily you can change things later
A contract is comparatively easy to adjust. You can change your template for new hires, and for existing employees you can vary terms if the employee agrees to the change, as long as the result still complies with the NES and any applicable award.
An enterprise agreement is locked in by design. Its nominal expiry date cannot be more than four years after approval, but passing that date does not end it: the agreement keeps operating until it is replaced or terminated, and terminating it after its nominal expiry date requires an application to the Fair Work Commission under s 225 of the Act. Changing the terms while it operates means bargaining again and going through a variation process. If you expect your business model, hours or staffing mix to shift quickly, that rigidity is a real cost, and early-stage businesses in particular tend to underestimate it.
Where the compliance risk actually sits
Neither option removes risk. Each moves the risk to a different place, and the risk is driven by how well the document matches your real payroll and rostering:
- With contracts: Risk concentrates in award coverage mistakes, wrong employment types (casual against part-time against full-time), salary set-offs that never get reconciled against actual hours, and time records that do not match the rosters.
- With enterprise agreements: Risk concentrates in BOOT modelling that does not reflect real rosters, classifications that are unclear, payroll systems that do not apply the agreement's structure, and consultation and dispute procedures that sit unused until a problem arrives.
Whatever you choose, the document and the payroll system have to tell the same story. A well-drafted contract does not help if the payroll pays the wrong award rate, and an approved agreement does not help if the roster software cannot price its structure.
Who the instrument covers
Check who would actually be inside each option. Not every employee is covered by a modern award, and coverage determines how much work each instrument does. The high income threshold matters here too: it was $175,000 for the 2024-25 year and rose to $183,100 from 1 July 2025, and it affects unfair dismissal eligibility and the arrangements available to high income employees. An employee outside award coverage, or above the threshold, may need a different approach altogether, and a lawyer should confirm where each person sits before you commit to a structure.
How an Artificer Legal employment lawyer helps you choose
This is a decision where professional input pays for itself early, because the cost of getting it wrong is an underpayment claim or a lock-in you cannot easily unwind.
An Artificer Legal practitioner starts by stress-testing the assumptions behind each option: mapping your workforce, confirming who is covered by which award, and checking whether the people you are about to hire change the picture. They then model the downside. For a contract-based setup, that means checking that salaries, set-offs and annualised arrangements reconcile against actual hours under the award. For an enterprise agreement, it means building the BOOT modelling across your real rosters, not a hypothetical one, so approval is not delayed by undertakings or refused.
Once the direction is clear, they draft what the chosen path needs: contracts that comply with the NES and the relevant award, or the enterprise agreement itself, the explanatory materials for the employee vote, the Fair Work Commission application, and any response to concerns the Commission raises. They also help with the surrounding systems, such as policies and payroll processes, so the documents and the way the business actually runs stay aligned. If you later need to vary a contract or terminate an agreement after its nominal expiry date, that is the same advice channel, already familiar with your setup.
The question that actually matters
The choice of instrument is not the hard part. The hard part is the question underneath it: does the document match how the business actually runs, and can the payroll pay what the document promises? A contract that ignores the award and an agreement whose BOOT modelling does not reflect real shifts end in the same place, with wages owing and a compliance problem to unwind. Businesses that spend the effort early, on coverage, modelling and payroll alignment, are the ones for whom either instrument quietly does its job.
In short, the NES applies to every employee and cannot be displaced. A common law contract sets individual terms but must sit within the NES and any applicable modern award, and it cannot undercut either. An enterprise agreement can replace the award for covered employees while it applies, but it must be genuinely agreed, must pass the Better Off Overall Test, cannot breach the NES, and carries real setup cost and lock-in. For most small businesses, contracts are the sensible starting point, and an enterprise agreement earns its place when the award is genuinely out of step with complex rosters or a larger, multi-site workforce. A lawyer's role is to confirm which description fits you, and to draft and implement the documents so the choice actually holds up in practice.