Anja Pich is a commercial lawyer and the Managing Lawyer at Lawpath. She practises across all areas of commercial law and advises businesses of every size, from first-time founders to established companies, on their legal, regulatory and commercial needs.
- Paying someone more than the award rate doesn’t automatically cancel their right to overtime, penalty rates, allowances, or leave loading.
- First, check whether a modern award or enterprise agreement covers the employee.
- An award-based annual wage arrangement isn’t the same as a salary offset clause in a contract.
- The salary must properly pay for all the entitlements it’s meant to cover.
- Some awards limit the number of overtime or penalty-rate hours that can be included in an annual wage.
- You still need to keep accurate records of working hours for salaried staff.
- Regular reconciliations are crucial if required by the award or arrangement.
Paying an employee an annual salary above award rates doesn’t automatically satisfy the requirements for overtime, penalty rates, allowances, or leave loading. This article explores how annual salaries interact with modern awards, contractual offset clauses, and key compliance obligations under Australian employment law.
Does an annual salary include overtime and penalty rates?
No. An annual salary doesn’t automatically absorb overtime, penalty rates, or other award entitlements simply because it is higher than the award minimum.
A salary arrangement can sometimes cover minimum rates, overtime, penalty rates, allowances, and annual leave loading. However, this depends on the employee’s applicable modern award or enterprise agreement, the employment contract, and the type of arrangement being used.
The distinction usually falls into one of two categories:
- An annualised wage arrangement under an award or enterprise agreement.
- A contractual offsetting arrangement under an employment contract.
This difference matters throughout the entire arrangement. A salary may be intended to cover certain award entitlements, but only if the relevant rules allow it and the employer has structured, documented, and administered the arrangement correctly.
Is an annualised wage arrangement the same as a salary?
No. An annualised wage arrangement isn’t simply another name for a salary.
An employee may receive an annual salary without being on an award-based annualised wage arrangement. Equally, a salary can be structured as part of an annualised wage arrangement, but only where the applicable award or enterprise agreement permits it.
| Arrangement | Where it comes from | What controls it |
|---|---|---|
| Annualised wage arrangement | Modern award or enterprise agreement | Rules in the applicable instrument |
| Contractual offsetting arrangement | Employment contract or separate agreement | Contract wording plus award or agreement obligations |
| Guarantee of annual earnings | Fair Work Act arrangement for eligible high-income employees | Separate statutory rules |
Annualised wage arrangement
An annualised wage arrangement is created under specific rules in a modern award or enterprise agreement. These determine:
- Which employees can use the arrangement.
- Which entitlements can be included in the annualised wage.
- What information the employer must record.
- Whether overtime or penalty-rate outer limits apply.
- How and when reconciliation must occur.
Where permitted, an annualised wage may cover entitlements such as minimum rates, overtime, penalties, allowances, and annual leave loading.
Contractual offsetting arrangement
A contractual offsetting arrangement is generally created through an employment contract or separate agreement. Under this approach, an employer pays an above-award salary and intends that amount to satisfy specified award entitlements.
This differs from an award-based annualised wage arrangement, as it depends heavily on the wording of the contract, the applicable award or agreement, the employee’s actual work patterns, and whether the salary is sufficient to cover the employee’s minimum entitlements over time.
Guarantee of annual earnings
A guarantee of annual earnings is a separate Fair Work Act arrangement that may apply to eligible high-income employees. It shouldn’t be treated as interchangeable with an annualised wage arrangement or an ordinary salary offset clause.
Which entitlements can an annual salary cover?
Depending on the applicable award, enterprise agreement, or contract arrangement, an annual salary may be able to cover:
- Minimum award rates
- Overtime
- Penalty rates
- Allowances
- Annual leave loading
However, the salary only covers the entitlements that the arrangement is actually permitted and intended to cover. It doesn’t automatically absorb every possible award entitlement.
Additionally, the employee must receive at least what they would otherwise have received under the award or agreement for the work they actually perform.
Can a salary cover overtime?
Yes, potentially. A salary can cover overtime if the applicable arrangement properly accounts for it. The arrangement should address:
- The employee’s ordinary hours
- The overtime hours that may be worked
- Whether assumed overtime is built into the salary
- Any outer limit on overtime hours
- How additional overtime is paid once an applicable limit is exceeded
For some awards, salaried employee overtime in Australia may require employers to identify the overtime hours assumed in the annualised wage. They may also require separate payment if the employee works overtime above the applicable outer limit.
For example, an annualised wage arrangement may assume that an employee will work up to 8 hours of overtime per pay period. If the employee works 12 overtime hours and the applicable award requires payment above that limit, the additional four hours may need to be paid separately.
Can a salary cover penalty rates?
Yes, if the arrangement validly includes them. Salaried employee penalty rates can apply for work performed at particular times, including:
- Weekends
- Public holidays
- Evenings
- Early mornings
- Shiftwork
Note that the overall remuneration must still properly compensate the employee for their applicable award or enterprise agreement entitlements. If the award includes outer limits, penalty-rate hours beyond those limits may need to be paid separately.
Can a salary include annual leave loading?
Yes, in some circumstances. You may not need to pay annual leave loading separately if it’s properly included in the arrangement.
However, not every above-award salary absorbs it. Be sure to check whether:
- The applicable award provides annual leave loading
- The annualised wage arrangement or contract permits leave loading to be included
- The contract clearly identifies annual leave loading as an entitlement intended to be satisfied by the salary
- The salary remains sufficient overall
A salary clause that says “all entitlements are included” may create uncertainty if annual leave loading is not expressly addressed, particularly if the employee is award-covered.
Can a salary cover allowances?
Potentially. An annualised wage or contractual salary arrangement may cover certain allowances if the relevant arrangement permits it and the salary properly compensates the employee.
However, allowances aren’t one broad category. Different awards provide different types of allowances, including:
- Tool, uniform, or laundry
- First-aid
- Meals
- Travel
- Vehicle costs
- Leading-hand or responsibility
You may be able to absorb some of these into an annualised wage or salary arrangement. Others may be reimbursements or expense-related amounts that require separate treatment.
What are the outer limits in an annualised wage arrangement?
Outer limits are the maximum amount of overtime or penalty-rate hours that an annualised wage can absorb before additional payment becomes due.
They are designed to stop an employer from paying a fixed annual amount while requiring unlimited overtime, weekend work, or penalty-rate work.
The Clerks Award is a clear example of this. Its annualised wage provisions require employers to record matters including:
- The annualised wage
- The award provisions covered by the arrangement
- The method used to calculate the annualised wage
- Overtime and penalty-rate assumptions
- The applicable outer-limit hours
Not every award has identical outer-limit rules. Employers should check the annualised wage provisions in the specific modern award or enterprise agreement that applies to the employee.
Does paying well above the award make the problem disappear?
No. A high salary can help satisfy award entitlements, but the amount alone isn’t enough.
“Above award” is a calculation, not an exemption from the award.
Employers still need to identify:
- Which modern award or enterprise agreement applies
- The employee’s correct classification
- Which entitlements the salary is intended to offset
- Whether the employment contract uses sufficiently clear wording
- How much overtime and penalty-rate work the employee actually performs
- Whether the employee receives at least their full award entitlements in each pay period
An employee may receive a salary well above the ordinary weekly award rate but still be underpaid if they work extensive overtime, frequent weekend work, public holidays, or high-penalty shifts.
Review contractual offset provisions and payroll systems, especially if you haven’t reviewed salary arrangements for several years.
What should an employment contract say if salary is meant to cover award entitlements?
An employment contract should clearly document the salary arrangement if the salary is intended to satisfy award or enterprise agreement entitlements.
Depending on the role and arrangement, the contract should identify:
- The applicable modern award or enterprise agreement
- The employee’s classification
- The annual salary
- The specific award entitlements the salary should satisfy
- Overtime assumptions
- Penalty-rate assumptions
- Included allowances
- Annual leave loading treatment
- Review or reconciliation processes
- How hours beyond any applicable limit will be handled
A generic statement such as “your salary includes all entitlements” may not give you sufficient certainty. The more entitlements a salary is intended to absorb, the more important it becomes to identify them clearly.
Employment Contract Review or advice from an employment lawyer can be useful for more complex scenarios.
Do employers still need to track hours for salaried employees?
Yes, if record-keeping obligations apply.
Paying employees a salary doesn’t mean that you can simply abandon timesheets and working-hour records. You still need to record:
- Loadings
- Penalty rates
- Allowances
- Hours worked (including overtime). Note that payslips for salaried employees must show the annual rate of pay.
Some modern awards impose additional annualised wage record-keeping obligations, including:
- Start and finish times
- Unpaid breaks
- Employee acknowledgement of hours worked
- Records of the annualised wage amount
- Award provisions covered by the arrangement
- Assumed overtime and penalty-rate hours
- Outer-limit tracking
The appropriate record-keeping process depends on the applicable award, enterprise agreement, and salary arrangement.
Do annual salaries need to be reconciled?
Often, yes. Annualised wage arrangements under an award may require reconciliation (e.g. every 12 months and on termination); for contractual offsets, check compliance every pay period and pay any shortfall in that pay period.
Even if this isn’t expressly required, regular checks are sensible. They can identify shortfalls before they become substantial underpayment issues.
A reconciliation may be triggered or become particularly important after:
- Award rate increases
- A classification change
- Increased overtime
- More weekend or public holiday work
- Salary reviews
- Changes to roster patterns
- A move from ordinary hours to shiftwork
- A change in duties or responsibilities
A reconciliation should compare the employee’s actual remuneration against the award or agreement amount that would have applied to the work actually performed.
What happens if the salary does not cover award entitlements?
If the salary doesn’t cover the employee’s minimum award or enterprise agreement entitlements, the shortfall may amount to an underpayment.
The employer may need to:
- Calculate what the employee should have been paid.
- Identify the affected pay periods.
- Pay the shortfall.
- Correct superannuation where relevant.
- Fix payroll settings.
- Update contracts or salary arrangements.
- Improve record-keeping processes.
If you identify a potential underpayment, get employment or payroll advice before assuming a one-off payment will resolve every issue.
What changed after the Woolworths and Coles salary cases?
Fair Work updated its guidance following the Federal Court’s decisions on 5 September 2025 involving Woolworths and Coles.
Employers relying on a salary to cover award entitlements must make sure it covers them in each pay period. Overpaying in one pay period doesn’t make up for underpaying in another. Note the proceedings are ongoing.
The decisions are relevant to:
- Contractual offsetting arrangements
- When and how salary payments can satisfy award entitlements
- Record-keeping obligations for salaried employees
The key practical implication for employers is straightforward: review old salary clauses rather than assuming arrangements drafted years ago still provide enough protection.
An employment contract may still use broad language about a salary covering “all entitlements”, but you should test that wording against the employee’s current award, classification, working hours, penalty exposure, and record-keeping arrangements.
Annual salary compliance checklist
Use this checklist to ensure annual salary compliance:
- Identify the correct modern award or enterprise agreement.
- Confirm the employee’s classification.
- Check whether the award permits an annualised wage arrangement.
- Identify each entitlement that the salary is intended to cover.
- Calculate expected overtime, penalties, allowances, and leave loading.
- Check any outer limits.
- Document the arrangement clearly.
- Keep the required hours and pay records.
- Monitor actual hours against assumptions.
- Reconcile where required.
- Pay any shortfall promptly.
- Recheck the arrangement after award increases, role changes, or roster changes.
When should you get an employment contract or salary arrangement reviewed?
Consider an employment contract review, employment legal advice, or payroll advice if:
- The employee is award-covered.
- The salary is intended to absorb several different entitlements.
- Significant overtime is expected.
- Weekend or public holiday work is common.
- The existing contract uses a broad or generic offset clause.
- No reconciliation has been completed.
- Hours are not currently being tracked.
- The arrangement predates the 2025 Woolworths and Coles decisions.
- There is uncertainty about award coverage or classification.
- A potential underpayment has been identified.
An employment agreement is a useful starting point for documenting a salary arrangement. However, it may not be enough if the award, classification, offsetting position or overtime assumptions are unclear.
Unsure if you’re on the right side of the law when it comes to salary arrangements? Get help from an employment lawyer to review your salary arrangements.
FAQs
Does a salary include overtime in Australia?
A salary may include overtime if the applicable award, enterprise agreement, or employment contract properly permits it, but inclusion isn’t automatic.
Do salaried employees get penalty rates?
Salaried employees may still be entitled to penalty rates under an award or enterprise agreement. A salary may cover those penalties only if the arrangement validly includes them and the employee receives at least their minimum entitlement overall.
Does annual salary include leave loading?
Not automatically. Annual leave loading may be included in an annualised wage arrangement or a contractual offsetting arrangement if permitted and clearly documented.
Can an above-award salary cover overtime?
Yes, an above-award salary can cover overtime if it properly compensates the employee for the overtime worked.
What is an annualised wage arrangement?
An annualised wage arrangement is a mechanism under a modern award or enterprise agreement that allows a fixed annual wage to cover specified entitlements, subject to the rules of that instrument.
What is a contractual offsetting arrangement?
A contractual offsetting arrangement is a salary arrangement in an employment contract or a separate agreement in which an above-award salary is intended to satisfy specific entitlements under an award or enterprise agreement.
Do salaried employees need timesheets?
They may. Employers can still have record-keeping obligations for salaried employees, particularly if overtime, penalty rates, loadings or allowances apply. Some awards also require records of start times, finish times, and unpaid breaks.
What are the outer limits for annualised salaries in Australia?
Outer limits are maximum overtime or penalty-rate hours that can be absorbed into an annualised wage before separate payment becomes due.
Do annual salaries need to be reconciled?
Often, yes. Some awards require annual reconciliation. For contractual salary offsets, check every pay period that the salary covers the employee’s award entitlements for that period; a later reconciliation can’t fix an earlier shortfall.
What happens if a salary is less than the employee’s award entitlements?
The difference may be an underpayment. The employer may need to calculate the shortfall, back-pay the employee, correct superannuation contributions where relevant, and update payroll, record-keeping, and contract processes.
Can a salary include allowances?
Potentially. This depends on the specific allowance, the applicable award or agreement, and the wording of the annualised wage or contractual arrangement. Expense reimbursements may need separate treatment.
Does paying above the award mean the award no longer applies?
No. Paying above the award doesn’t remove the award’s application. The employer must still identify the correct award, classification, and minimum entitlements, and ensure the salary leaves the employee no worse off.
Sources:
