Recent cases involving allegations of underpayment of wages, highlight the risk for employers of using annualised salaries to pay their award covered employees.  Some employers are still under the misconception that if they pay an employee a “salary”, then the employee is no longer covered by the award.  This is not the case… the employee will remain covered by the award and employers still have to meet their award obligations.

Modern Awards are complex documents.  They impose many and varied obligations on employers; and may not be well suited to your business’s circumstances.  For this reason, many employers choose to use annualised salaries with the aim of paying an all-in rate to cover all the employee’s Modern Award monetary entitlements, including overtime, shift loadings, leave loading and allowances.  There are a number of risks associated with this practice, and I will highlight two such risks below.

Firstly, you cannot set-off the over-award payments unless you have the right to do so. The options most used to acquire that right are:

(a)  common law contracts of employment containing a ‘set-off’ or ‘absorption’ clause; or

(b)  an annualised salary arrangement as provided for in some Modern Awards.

Secondly, your employee must not be worse off by receiving the annualised salary.  The annualised salary must pay the employee an over-award payment that is enough to meet (or set-off) what the employee would have been entitled to under the Modern Award for every pay period or roster cycle.  To minimise this risk, we recommend you assess the employee’s entitlement each pay period or roster cycle, to ensure the minimum has been received. Record keeping is critical to employers as the Fair Work Act  puts the onus on the employer to disprove an allegation of underpayment of a Modern Award entitlement.


You can agree to an arrangement whereby you pay your employee a rate of pay greater than the base rate required by the relevant Modern Award and agree that the over award payment may be used to meet your obligations under the relevant Modern Award.

However, it is critical that such an agreement is in writing and appropriately drafted to achieve the desired outcome.

If you have any questions, please do not hesitate to contact me.

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