Shift penalties and overtime, your obligations as an employer

If your business relies on staff working evenings, weekends, public holidays or early starts, penalty and overtime payments are probably a regular part of your payroll. Getting them wrong is one of the most common ways Australian small businesses underpay their employees, often without realising it until the Fair Work Ombudsman (FWO) becomes involved.

Your obligations come from three places: the modern award or enterprise agreement that covers each employee, the employment contract, and the National Employment Standards (NES) in the Fair Work Act 2009 (Cth) (the Act). This article sets out the duties you need to meet, covering when overtime and penalty rates are payable, minimum payments and breaks on overtime shifts, and how to keep requests for extra hours lawful.

Does this apply to your business?

Most private sector employers in Australia are national system employers covered by the Act. If you are, the NES apply to every employee, and a modern award will also apply unless an enterprise agreement covers the employee instead.

An enterprise agreement approved by the Fair Work Commission can replace award terms, but it cannot undercut the NES, and the award remains the default if no agreement applies. If an employee is award and agreement free, the NES still set the baseline, including the 38 hour cap on weekly hours for full time employees, but penalty and overtime rates will only apply if the contract provides them.

To work out where your business sits, ask three questions:

• Which award or agreement applies: Every employee needs to be mapped to the modern award that covers their work, or to an enterprise agreement that replaces it.
• What the ordinary hours are: The award or agreement sets the ordinary hours for each classification, including any daily cap and the spread of hours across the day.
• How each employee is engaged: Whether an employee is full time, part time or casual changes how penalties, overtime and loadings are calculated.

Getting the first question wrong is usually where the trouble starts, because the rest of your payroll obligations hang off it.

Pay overtime when work falls outside ordinary hours

Overtime is work performed outside the ordinary hours set out in the award, enterprise agreement or contract that applies to the employee. As the FWO explains, it can include work beyond the maximum daily or weekly ordinary hours, work outside a part time employee's agreed number of hours, and work outside the spread of ordinary hours, which is the range of times during the day when ordinary hours can be worked. Overtime is usually paid at a higher rate, and the rate and the trigger for it are set by the award or agreement.

The ordinary hours clause is the pivot. Consider the Clerks Private Sector Award 2020, which covers many office-based employees. A full time employee under that award is engaged to work 38 ordinary hours per week. A part time employee is engaged for fewer than 38 hours on a reasonably predictable basis, and at engagement the employer and employee must agree in writing on the hours worked each day, the days of the week, and the starting and finishing times. Any time a part time employee works beyond those agreed hours is overtime and must be paid at the overtime rate. Similarly, hours worked on a rostered day off that is not substituted or banked are overtime.

The practical point is that the trigger for overtime is not always "more than 38 hours". For part time and casual employees it can be a much lower number, because the agreed hours in their written arrangement are the reference point.

Pay penalty rates for unsocial hours

Penalty rates are higher pay rates that apply when an employee works particular hours or days. The FWO lists the common triggers as weekends, public holidays, overtime, late night shifts and early morning shifts.

The rates are expressed in the award as a percentage loading on the employee's minimum hourly rate. The percentage varies from award to award and can also vary between full time, part time and casual employees, because a casual's penalty is calculated on top of their casual loading. Your award's penalty table sets out the exact figures, and the FWO's Pay and Conditions Tool can calculate them for a given roster.

Be careful with arrangements that look like they replace penalties. Annualised salary clauses, individual flexibility arrangements and guarantees of annual earnings are all legitimate, but the overall amount paid under them must be at least what the employee would have received under the award or agreement. A salary that silently absorbs weekend and evening penalties without a mechanism to check it against the award floor is a common source of underpayment claims.

Meet minimum payments and provide breaks on overtime shifts

Two further obligations sit alongside the rates themselves.

First, many awards guarantee a minimum payment for an overtime call out, for example a minimum number of hours paid at the overtime rate when an employee is asked to work on a Saturday, Sunday or public holiday. The figure sits in the award's overtime clause, and it matters for payroll because a short shift can still attract the full minimum.

Second, break entitlements continue to apply during overtime. Under the Clerks Private Sector Award, an employee who works more than four hours of overtime on a Saturday is entitled to a paid rest break, and an employee who works more than five hours at a time is entitled to an unpaid meal break of 30 to 60 minutes taken within the first five hours. Similar rules appear in most awards, and the detail depends on the award's break table. On top of the award, workplace health and safety laws require you to manage fatigue, which is one reason a long overtime roster needs thought rather than habit.

Keep requests for extra hours reasonable

The Act caps how much work you can demand. Under s 62, you must not request or require an employee to work more than 38 hours in a week, or for a part time employee more than the lesser of 38 hours and their ordinary weekly hours, unless the additional hours are reasonable. An employee may refuse additional hours that are unreasonable.

Whether hours are reasonable is assessed against a list of factors in s 62(3) of the Act. The ones that come up most often for a small business are:

• Health and safety: The risk to the employee from working the additional hours, including fatigue.
• Personal circumstances: The employee's family responsibilities and other personal situation.
• Workplace needs: The needs of your business or enterprise.
• Compensation: Whether the employee is paid overtime, penalty rates or other compensation for the extra hours.
• Notice: How much notice you gave of the request or requirement.
• Industry patterns and role: The usual patterns of work in the industry and the nature of the employee's role.

The list is not exhaustive, and any other relevant matter can be taken into account. The practical implications are to give proper notice before rostering extra hours, to check the employee's recent hours and fatigue risk rather than assuming availability, and to remember that a refusal of unreasonable hours is a lawful choice, not a disciplinary problem. Punishing an employee for refusing can expose you to a general protections claim, which is a separate and expensive risk.

What happens if you get it wrong

Underpaying penalty or overtime rates is a contravention of the Act. The FWO can investigate on its own initiative or after a complaint, issue a compliance notice, and take court action. A court can order you to back pay the amounts owed and can also impose penalties for the contravention.

This is also an area where the law has recently moved in the employees' favour. The Fair Work Amendment (Protecting Penalty and Overtime Rates) Act 2025 (Cth) commenced on 30 August 2025. As the FWO explains, the Fair Work Commission must now apply a principle that award penalty rates and overtime rates are not reduced, and that awards do not substitute an employee's entitlement to penalty or overtime rates with a term that pays them less, including for shifts, weekends, public holidays and unsocial or irregular hours. The changes apply to proceedings already underway and to new matters from 30 August 2025. They do not affect individual flexibility arrangements, the making of enterprise agreements, or the Commission's ability to correct errors in awards, but they signal that penalty and overtime entitlements are a policy priority and a scrutiny target.

A practical compliance checklist

Work through these items on a regular basis:

• Map your workforce to awards: Confirm which modern award or enterprise agreement covers each employee and each classification.
• Record ordinary hours: Keep the agreed daily hours, days and start and finish times for every part time employee in writing.
• Audit your rates: Check that penalty, overtime and casual loadings are calculated on the correct base rate, including for casual employees whose penalties stack on the casual loading.
• Check minimum payment and break clauses: Confirm what your award guarantees for overtime call outs and what breaks are required during overtime shifts.
• Review annualised salaries: Test every salary arrangement against the award or agreement floor at least once a year, and after award changes.
• Document overtime requests: Give notice in writing, check fatigue and recent hours, and keep a record of the request.
• Keep time and wage records: Accurate records and pay slips are your first line of defence if the FWO ever asks questions.

When you should get legal advice

Some situations are worth a lawyer's time before they become a problem. These include working out which award covers a mixed workforce, drafting an enterprise agreement that needs to pass the better off overall test, setting up an annualised salary arrangement that can survive scrutiny, and responding to an FWO audit, a compliance notice or an underpayment claim. Employment lawyers can also advise on the risk of adverse action if an employee has refused overtime, and can review employment contracts so that penalty and overtime terms line up with the underlying award.

Start with the ordinary hours clause

The obligation employers most often miss is not the penalty table, it is the ordinary hours clause that sits behind it. Everything else depends on that clause: whether overtime is triggered, what rate applies, what minimum payment is owed, and when breaks are due. If your payroll is built on a contract or a salary figure without checking the award's ordinary hours, you have no reliable way to know whether you are paying enough.

This week, pick the award that covers most of your staff and pull out two clauses: the ordinary hours clause and the penalty table. Test them against one typical roster, including any evening, weekend or public holiday shifts. If the numbers do not reconcile, that is the signal to fix your rates before a complaint or an audit does it for you. Artificer Legal's employment lawyers can help you map your awards, review your pay arrangements and respond to regulator action.