4.8

Google Reviews

Need Help? Contact An Australian Business Lawyer Today 1300 003 077

Annualised salary and set-off clauses

Reading time: 6 mins

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.

Allison is a Senior Paralegal and former top-tier law firm Paralegal.

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.

workplace lawyer can provide employers with advice, as well as updated employment agreements.

Farrah Motley is an Australian Legal Practitioner and the Director of Prosper Law

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.

Carlynn is a Senior Paralegal at Prosper Law and is finishing a JD in Law in the Philippines

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.

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

Contact an Australian Business Lawyer Today.

Contact us for a free consultation

Contact Us For A Free Legal Consultation
About Prosper Law

We provide legal advice to business and individuals across Australia, no matter which State or Territory you are located. Our easy-to-access, online legal services mean that you can talk to our lawyers wherever you are, at a time that suits you.

4.8

Google Reviews

Get Your Free Guide Now
Need Legal Assistance?

Don’t hesitate – reach out for your free legal assistance today. Your peace of mind is just a click or call away!

Check Out Our Latest Blog Posts

trade promotional terms
Employment

Employer Guide to Forced Resignation

When an employee resigns, it’s usually considered their choice – but not always. If an employee quits because of something the employer did or failed to do, the law may