In Australia, Modern Awards (Awards) set minimum wages and entitlements like overtime, penalty rates, and allowances. While many employers prefer streamlined payroll, they must still comply with the Fair Work Act 2009 (Cth).
One option is an annualised salary approach. However, employers must carefully plan and document these arrangements, especially when using set-off clauses.
This article covers:
What annualised salaries and set-off clauses are
How to implement them legally in employment contracts
Compliance tips under the Fair Work Act
Common employer risks and how to avoid them
Key Takeaways
Modern Awards mandate minimum rates plus entitlements such as penalty rates and overtime.
Annualised salary arrangements can simplify payroll but must not disadvantage employees.
Employers can use either Award-based annualised salaries or a set-off clause in employment contracts.
Maintaining detailed records and audits is crucial to compliance.
Improper use of set-off clauses can lead to underpayment claims, penalties, or legal action.
What is an Annualised Salary?
An annualised salary is a fixed yearly wage that bundles together entitlements like:
Overtime
Penalty rates
Public holiday pay
Loadings and allowances
This is commonly used in professional roles to offer pay consistency and reduce administrative complexity. But employers must ensure:
The salary is equal to or greater than what the employee would earn under the applicable Award or enterprise agreement
Employees are not disadvantaged
All entitlements are clearly disclosed and agreed upon in writing
Employers should make sure that annualised salary agreements are included in the employment contract using a set-off clause.
To stay updated with recent legal developments, read our Employer Guide to Fair Work Changes from 1 July 2025 for a breakdown of new workplace laws affecting wages, leave, and compliance obligations.
Implementing Annualised Salaries: Two Legal Methods
1. Annualised Salary Provisions in Modern Awards
Some Modern Awards allow employers to offer annualised salaries instead of hourly rates plus add-ons. Examples include:
- Clerks – Private Sector Award 2020
- Banking, Finance and Insurance Award
- Mining Industry Award 2010
For help determining which award applies to your employees, see our guide on Interpreting Coverage Clauses in Modern Awards.
Employer obligations under these Awards may include:
Giving written notice of how the annualised salary is calculated
Setting limits on hours covered by the salary
Tracking daily start and finish times and unpaid breaks
Conducting annual reconciliations to identify and fix any underpayments
Administrative burden: These provisions are often complex and require rigorous compliance. Many businesses find this approach impractical without legal support.
2. Set-Off Clauses in Employment Contracts
An alternative to Award-based salary provisions is including a set-off clause in a common law contract. This clause specifies that the annual salary is intended to satisfy the employer’s obligations under a particular Modern Award.
A valid set-off clause must:
Be clear and specific about which entitlements it covers (e.g. overtime, allowances)
Ensure the employee is better off overall test (BOOT)
Provide for regular auditing to avoid underpayments
Case law support: In Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate (2015), the Federal Court upheld the enforceability of properly worded set-off clauses.
A workplace lawyer can provide employers with advice, as well as updated employment agreements.
How to Draft a Legally Sound Set-Off Clause
Your employment contract should clearly:
State the total annual salary
List specific entitlements included in the salary (e.g. overtime, public holidays)
- Avoid generic “catch-all” clauses
Important precedent: In Simone Jade Steward v Next Residential Pty Ltd, the WAIRC ruled that broad, non-specific clauses were invalid, reinforcing the need for precision in employment contracts.
Include these items where applicable:
Ordinary and additional hours
Weekend and public holiday rates
Vehicle and travel allowances
Leave loading and shift penalties
- Equipment allowances
Legal Tip: Should the set-off clause be overly broad, it may not be legally enforceable. Including the entitlements listed in an Award in the employment contract will satisfy the requirement for specificity.
To ensure your employment contracts are compliant and enforceable, learn why employment contracts should be drafted by lawyers-not artificial intelligence.
Record-Keeping and Compliance Requirements for Employers
Under the Fair Work Act and Fair Work Regulations 2009 (Cth), employers must:
1. Keep accurate records
The records must include the following:
- amount of annual salary
- method of calculating annual salary
- overtime
- penalty rates
- starting and ending times, including unpaid breaks taken by employees
The Fair Work Ombudsman says employers must keep written records of an employee’s annualised salary for seven years.
Remember: Each Modern Award has specific requirements that employers must meet. For example, some Modern Awards require that employers and employees enter into a formal, written agreement. This agreement must detail the annualised salary arrangement.
To understand your obligations regarding employee records, read our guide on Obligations to Provide Employment Records to Employees.
2. Issue payslips with detailed breakdowns
Payslips should provide a clear breakdown, showing how the salary covers relevant Award entitlements and identifying any penalty or overtime hours worked.
3. Conduct Regular Audits
Regular audits are essential. Employers should compare the salary actually paid to what the employee would have earned under the applicable Modern Award. Any shortfall must be corrected within 14 days. These audits should occur at least annually or whenever an employee’s employment ends.
4. Review salaries regularly
Employers should review salaries at least once a year. Depending on the Modern Award, employers may need to conduct more regular reviews. The review should occur when there is a change in pay rates under any relevant Awards.
Employers must pay employees their yearly salaries accurately based on an annual wage agreement or set-off clause. Employers will need to ensure that payroll systems (especially automated ones) accurately calculate entitlements.
Penalties for Non-Compliance with Annualised Salaries
Failure to comply with annualised salary obligations can lead to underpayment issues, potentially resulting in:
- Significant fines for non-compliance (up to $66,600 per breach for companies, and up to $133,200 for each serious breach). Individuals, such as directors or HR managers, may also face personal penalties
- Criminal penalties for wage theft in states like Queensland (up to 10 years’ imprisonment)
Frequently Asked Questions
What should be included in a set-off clause?
The clause should list each entitlement being offset (e.g. overtime, penalties), the applicable Award, and confirm that the employee is not worse off.
Other clauses that should always be in employment contracts also exist.
What is the difference between an Award-based salary and a set-off clause?
Award-based annual salaries are governed by specific clauses in Modern Awards. A set-off clause is a contractual method that allows employers to bundle entitlements into a salary outside of those clauses.
Is it enough to pay more than the minimum wage?
No. The salary must also cover all Award entitlements.
Simply paying a higher base wage may not be enough, especially without properly structuring and documenting the arrangement.
Do I need to keep records if I use an annualised salary?
Yes. You must keep detailed records of hours worked, breaks, calculations, and reconciliation audits to demonstrate compliance.
What should I do if I suspect an underpayment?
Immediately conduct an audit. If a shortfall is found, it must be corrected within 14 days. Seek legal advice to mitigate risk and ensure ongoing compliance.
For a comprehensive overview of employer obligations under Australian workplace law, refer to our Fair Work Act: A Guide for Employers.
