The Fair Work Commission (FWC) has recently handed down a decision which will impact employers paying annualised salaries to employees covered by a Modern Award with an annualised salary clause. The new changes will take effect from 1 March 2020.

The FWC decision finalises the terms of 3 new standard ‘annualised salary arrangement’ clauses, which will replace the existing annualised salary clauses. The new terms will also be inserted into 3 Modern Awards which have not previously had an annualised salary clause. The changes will affect approximately 20 Modern Awards, including the popular Clerks – Private Sector Award.


Current annualised salary arrangements

There are several Modern Awards that include an annualised salary clause. It is common practice for employers to pay an ‘all inclusive’ annualised salary to compensate for Modern Award monetary entitlements in relation to the performance of work (such as overtime rates, penalty rates and loadings).


New obligations for employers under Modern Award annualised wage terms

 The model clauses will introduce new compliance requirements on employers engaging employees on annualised salary arrangements:

  • Employers must advise employees in writing and keep records of:
    • How the annualised salary has been calculated, breaking it down into separate components and factoring in any overtime or penalty assumptions used;
    • The outer limit number of ordinary hours which would attract penalty rates under the Modern Award; and
    • The outer limit of overtime hours which the employee may be required to work in a pay period or roster cycle without receiving any excess payment above the annualised salary.
  • Employers are required to make an additional payment to employees if they work hours in excess of the outer limits specified in their annualised salary arrangements.
  • Employers must keep a record of start and finishing times and unpaid breaks taken by employees. The record must then be signed by employees each pay period or roster cycle.
  • Each 12 months from the commencement of the annualised salary arrangement, the employer must conduct a reconciliation to calculate whether the employee has been better off on the annualised salary compared to the relevant Modern Award. Where there has been a shortfall, this must be paid back to the employee within 14 days.


How should employers prepare?

 Well before 1 March 2020, employers should:

  • ensure that your business is aware of the Modern Awards that apply to employees, and the interaction between the new changes and the relevant Modern Awards;
  • ensure that any annualised salary arrangements are consistent with the new terms of the Modern Awards that apply to the employee;
  • identify and rectify any deficiencies in the annualised salary arrangements in accordance with the terms of the applicable Modern Award.


What about set-off provisions in employment agreements?

 The FWC has made it clear that employers are not obliged to rely only on an award annualised salary arrangement. Employers may still choose to apply the normal common law contract with a set-off clause. However, it is worth noting that there are specific requirements that employers must follow in drafting a set-off provision that complies with employment laws.

We expect that many employers will find the new annualised salary arrangements challenging to implement and impractical to manage. Employers should review their current arrangements and prepare for the introduction of the new changes or seek advice about other options.

If you have any questions or would like to discuss your current employment arrangements, please contact Adren Choon on (03) 9629 9629 or