An over‑award payment is any payment made above the minimum rates or entitlements prescribed by a modern award. This often occurs where employers pay higher base rates to attract or retain employees.

Paying an employee above award rates does not automatically replace or absorb specific award entitlements such as penalties, allowances or annual leave loading. These entitlements continue to apply unless they can lawfully be included in a salary arrangement under the relevant award and are clearly documented.

 

What is annual leave loading?

Annual leave loading, commonly 17.5%, is a feature of many modern awards and is typically payable when an employee takes annual leave, in addition to their ordinary rate of pay.

Annual leave loading is an award entitlement and not a discretionary benefit. Employers cannot assume it is included in an employee’s salary unless there is a valid mechanism under the applicable award that allows this to occur.

 

Annualised salary arrangements

Many modern awards include clauses that allow employees to be paid an annualised salary instead of separate payments for:

  • minimum wages

  • allowances

  • overtime and penalty rates

  • annual leave loading (where expressly permitted).

An annualised salary arrangement involves paying a fixed annual amount intended to compensate an employee for the projected value of certain award entitlements over a year.

Since changes introduced in 2020, modern award annualised salary clauses typically require employers to:

  • identify in writing which award entitlements are included in the salary

  • ensure the employee is better off overall

  • keep records of hours worked

  • conduct regular reconciliations (usually annually and on termination) and pay any shortfall.

 

 

An example: Clerks-Private Sector Award 2020

A modern award will usually contain a clause which identifies the terms which can be included in an annualised salary. For example the Clerks-Private Sector Award 2020 (cl. 18) provides:

18.1 Annual wage instead of award provisions

  • An employer may pay a full-time employee an annualised wage in satisfaction, subject to clause 18.1(c), of any or all of the following provisions of the award:

    • clause 16 – Minimum weekly wages

    • clause 19 – Allowances

    • clauses 21 and 24 – Overtime and penalty rates, and

    • clause 32.3 – Annual leave loading.

  • Where an annual salary is paid an employer must advise an employee in writing of the annual salary that is payable and which of the provisions of an award will be satisfied by payment of the annual salary.

 

18.2 Annual salary not to disadvantage employees

  • The annualised wage must be no less than the amount the employee would have received under this award for the work performed over the year for which the wage is paid (or, if the employment ceases earlier, over such lesser period as has been worked).

  • The employer must each 12 months from the commencement of the annualised wage arrangement or upon the termination of employment of the employee calculate the amount of remuneration that would have been payable to the employee under the provisions of this award over the relevant period and compare it to the amount of the annualised wage actually paid to the employee. Where the latter amount is less than the former amount, the employer shall pay the employee the amount of the shortfall within 14 days.

 

18.3 Base rate of pay for employees on annualised wage arrangements

For the purposes of the National Employment Standards, the base rate of pay of an employee receiving an annual salary under this clause comprises the portion of the annual salary equivalent to the relevant rate of pay in clause 16 – Minimum weekly wages and excludes any incentive-based payments, bonuses, loadings, monetary allowances, overtime and penalties.

 

Individual Flexibility Arrangements (IFA)

Some awards allow annual leave loading to be varied through an Individual Flexibility Arrangement (IFA). For example, in clause 5 of the Manufacturing and Associated Industries and Occupations Award 2020 includes an “award flexibility” clause that permits variation of:

  • overtime rates

  • penalty rates

  • allowances, and

  • leave loading.

However, IFAs:

  • must be genuinely agreed to, without pressure

  • must leave the employee better off overall

  • must be in writing

  • can be terminated by either party in accordance with the award.

An IFA is different from an annualised salary arrangement and should not be used casually to absorb entitlements without meeting award conditions.

 

The bottom line

An employer should refer to the applicable modern award regarding annualised salaries or award flexibility provisions. Where an over-award payment is paid to include certain award conditions such terms should be identified and any agreed arrangement should be in writing.