For most Australian businesses, two instruments decide how much staff get paid, when they work and what they are entitled to: modern awards and enterprise agreements. Awards set the baseline for an industry or occupation. Enterprise agreements replace that baseline with terms tailored to one workplace, provided nobody ends up worse off. Working out which one applies to your staff, and how the two interact, is the difference between a compliant payroll and a backpay problem. This guide explains how each instrument works, who runs the system, and where the traps sit.
Who does what in the system
Four players keep the system moving:
- The Fair Work Commission (FWC): makes and varies modern awards, runs the annual wage review, approves enterprise agreements and their terminations, and can settle disputes when an award or agreement gives it that power.
- The Fair Work Ombudsman (FWO): enforces the rules. It investigates suspected underpayments and record-keeping breaches, issues compliance notices, and can take court proceedings seeking penalties and back pay.
- The employer: must pay at least the minimums that apply, keep records, issue payslips, and bargain in good faith if bargaining for an agreement starts.
- Employees and their representatives: usually a union or another bargaining representative, they negotiate and vote on proposed agreements.
The two regulators have different jobs, which is worth remembering when something goes wrong. The FWC decides whether an instrument is lawful and approves it. The FWO decides whether you have actually complied with it.
The safety net: National Employment Standards and modern awards
The NES is the floor that never moves
The National Employment Standards (NES) are minimum standards set out in s 61 of the Fair Work Act 2009 (Cth) (the Act). They apply to all employees in the national workplace relations system and cannot be displaced, not by an award, an agreement or an employment contract. They cover:
- maximum weekly hours
- requests for flexible working arrangements
- rules for casual employment
- parental leave
- annual leave
- personal/carer's leave, compassionate leave and paid family and domestic violence leave
- community service leave
- long service leave
- public holidays
- notice of termination and redundancy pay
- the Fair Work Information Statement
Everything else in the system builds on this floor. An enterprise agreement can match or improve on the NES, but it can never trade them away.
Modern awards: the industry baseline
A modern award is a legally binding instrument made by the FWC that sets minimum pay and conditions for a particular industry or occupation, such as the General Retail Industry Award 2020 or the Hospitality Industry (General) Award 2020. An award applies to an employee when it covers them and is in operation, and no other provision of the Act stops it applying (s 47 of the Act). Coverage is determined by the industry you operate in and the duties the employee actually performs, not by their job title.
Awards typically set out:
- classification-based minimum pay rates and loadings
- penalty rates and overtime rules
- ordinary hours, span of hours, breaks and rostering rules
- allowances, for example for travel, uniforms or first aid
- consultation and dispute resolution procedures
Awards are living documents. The FWC varies them throughout the year, and every year it runs an annual wage review that adjusts minimum award rates. In the 2025 review, handed down on 3 June 2025, award rates and the national minimum wage rose by 3.5 per cent, taking the national minimum wage to $948 per week (about $24.95 per hour). The new rates applied from the first full pay period starting on or after 1 July 2025, as the Fair Work Ombudsman reminded employers. If you rely on awards, your payroll needs to move with these dates every year.
When the award does not apply
Not every employee is covered by an award. Roles that fall outside every award classification, such as many senior managers, may be award-free, in which case the national minimum wage order sets the floor instead.
A separate mechanism matters for higher-paid staff. Under s 330 of the Act, an employer and employee can agree a written guarantee of annual earnings: a promise to pay the employee a specified amount over 12 months or more, agreed within 14 days of the employee starting (or of the terms being varied). If the guaranteed amount exceeds the high income threshold, the award does not apply to that employee at all (s 47(2) of the Act). The threshold is indexed each year and the Fair Work Ombudsman publishes the amounts: it is $183,100 from 1 July 2025, up from $175,000 in 2024-25. The paperwork matters, because the exclusion only operates while a valid guarantee is in place.
Enterprise agreements: how one is made
An enterprise agreement (often called an EBA) is a single document that sets terms for a specific employer, or group of employers, and the employees it covers. It is negotiated, voted on by staff, and then approved by the FWC. Once approved it stands in the place of the award for the employees it covers.
Bargaining and the employee vote
The process starts with bargaining. The employer notifies employees that it intends to bargain, and employees can appoint bargaining representatives, often a union. The parties must bargain in good faith. Once terms are settled, the employer asks employees to vote, and the agreement is made when a majority of the employees who cast a valid vote approve it.
The approval checklist
The employer then applies to the FWC for approval. Under s 186 of the Act, the FWC must be satisfied that:
- the agreement was genuinely agreed to by the employees it covers
- its terms do not contravene the NES
- it passes the Better Off Overall Test (BOOT)
- the group of employees covered was fairly chosen
- it contains no unlawful terms
- it specifies a nominal expiry date no more than 4 years after approval
- it includes a dispute resolution term that allows the FWC or an independent person to settle disputes, with employee representation
The better off overall test
The BOOT is the heart of the system. Under s 193 of the Act, an agreement passes the test if the FWC is 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. The comparison is of the whole package, not clause by clause: a lower penalty rate can be offset by a higher base rate elsewhere, as long as the overall outcome is better. If the agreement fails the BOOT, the FWC can still approve it where exceptional circumstances make approval consistent with the public interest (s 189 of the Act), or approve it subject to undertakings.
There is also a hard floor under the rates themselves: the base rate of pay under an agreement cannot be less than the base rate the employee would get under the award, or the national minimum wage (s 206 of the Act).
What happens at the nominal expiry date
An agreement's nominal expiry date can be no more than 4 years after approval. Crucially, the agreement does not lapse on that date. It keeps operating, with the same terms, until it is replaced or terminated. What changes after nominal expiry is the parties' options: employees can take protected industrial action in support of a new agreement, and the agreement becomes terminable.
Termination itself needs the FWC. The employer and employees can jointly agree to terminate an agreement, but the termination has no effect unless the FWC approves it (s 219 of the Act). After nominal expiry, the employer, an employee or a union can also apply on its own for termination (s 225 of the Act). Until one of those paths is completed, the agreement binds everyone, even years after its nominal expiry date.
How awards and agreements interact
The key mechanic is substitution. While an enterprise agreement applies to an employee, the modern award does not apply to that employment at all (s 57 of the Act). The agreement takes the award's place, and the NES continues to apply on top of both.
To work out what applies to any given employee, run through the sequence:
- Is there an enterprise agreement in operation that covers this employee? If yes, the agreement applies and the award is switched off.
- If there is no agreement, is there a modern award that covers the employee, based on the industry and the duties they actually perform? If yes, the award sets the minimums.
- If there is no agreement and no award, the national minimum wage order applies instead.
The award never fully disappears, even where an agreement is in place. It is the benchmark for the BOOT at approval, the floor for base rates under s 206 of the Act, and the instrument that snaps back into force the day the agreement is terminated. It is also the reference point for employees the agreement does not cover: if you hire someone whose role sits outside the agreement's coverage, they are back under the award from day one.
Where the system tends to bite
The mechanics are straightforward on paper. The failures come from the edges:
- The flat rate trap: Paying one all-inclusive hourly rate that is supposed to absorb penalties, overtime and allowances, without checking it actually covers them, is the most common source of underpayment. The award minimums are a floor, not a suggestion.
- A generous contract does not switch the award off: Paying above award rates is fine, but the award still underpins minimums unless a registered agreement applies, the role is genuinely award-free, or a valid high income guarantee is in place.
- Classification drift: Employees' duties evolve over time, and a role can quietly move into a higher classification. Reviews should follow the duties, not the job title.
- Guarantee paperwork: A high income guarantee must be in writing, cover 12 months or more, and be agreed within 14 days of employment starting. Miss the window and the award still applies, whatever the salary.
- Expiry neglect: Because agreements continue past their nominal expiry date, businesses often forget they are still bound. If you want out, termination requires an FWC application; the agreement binds until that is done.
- Records and payslips: Employers must make and keep employee records for 7 years (s 535 of the Act) and give a payslip within one working day of each payment (s 536 of the Act). If the records are not there, the law reverses the burden: the employer must disprove the underpayment allegation rather than the employee proving it.
- The reasonably foreseeable employee: The BOOT is assessed against future hires as well as current staff, so an agreement designed around today's workforce can fail if its terms would disadvantage a role you are likely to add.
Where a workplace lawyer earns their keep
The most valuable advice lands before the paperwork exists. Before bargaining starts, a lawyer can model the BOOT against the current award, test whether proposed trade-offs leave employees better off overall, and design the coverage and classification structure so the agreement does what you need. That up-front work is what prevents approval delays, undertakings and disputes later.
A lawyer is also the person to call at the edges: when a role's classification is disputed, when an agreement approaches its nominal expiry date and you need a replacement or termination strategy, when the FWO comes knocking, or when you are considering high income guarantees for senior staff. These are the moments where a small drafting error turns into a backpay liability or a penalty.
The expiry date is where the risk lives
If one detail deserves your attention, it is the nominal expiry date and what happens around it. An agreement is assessed against the award as it stands at approval, but award rates move every July, roles change, and the workforce evolves. An agreement that looked fine when it was approved can drift badly out of step, and because it keeps operating past its nominal expiry date, there is no automatic reset. The award is always waiting in the wings: it is the benchmark for the BOOT, the floor under base rates, and the instrument that snaps back the moment the agreement ends. Track the expiry date from day one, model the BOOT properly before you bargain, and get advice before you commit to terms, because the cost of getting it wrong is measured in back pay, penalties and investigations, while the cost of getting it right is a single well-drafted document.