The basis of any employment relationship is an employee’s contract of employment. But what should it include? Should a contract of employment refer to an applicable award if its terms are already covered in the contract?

Consider this scenario: a person accepts employment as a structural engineer. There is some confusion as to whether the contract of employment should refer to the applicable modern award – the Professional Employees Award 2020. The employee is to be paid an annual salary considerably above the minimum award rate of pay.

Does there need to be a reference to the applicable award if its terms are covered in the employment contract?

 

Do employment contracts have to refer to a modern award?

A modern award is not automatically implied into a contract of employment, which means the modern award does not automatically have contractual effect. The terms and conditions of the applicable modern award apply under the Fair Work Act.

If the parties intend for the terms of the applicable award to have contractual effect, they may be incorporated into an employment contract. If the contract provides a lesser entitlement than the applicable award, the more favourable term in the award will prevail.

The terms of the contract of employment are also subject to the minimum legislative entitlements under the National Employment Standards. The Fair Work Act (s61) sets the minimum standards that apply to the employment of employees, which cannot be displaced.

See Byrne and Frew v Australian Airlines Limited [1995] HCA 24. 

 

Over‑award payments and annualised salaries

Where an employee is paid an over‑award salary, the contract or letter of offer should clearly state:

  • which award entitlements the salary is intended to compensate for; and

  • whether the salary is paid in satisfaction of minimum award obligations.

Common entitlements that may be offset include:

  • overtime or additional hours;

  • annual leave loading; and

  • certain allowances.

Simply stating that a salary is “over award” is often insufficient. Many modern awards now contain annualised wage clauses requiring:

  • clear identification of what the salary covers;

  • record‑keeping of hours worked; and

  • periodic reconciliation to ensure employees are not disadvantaged.

Failing to do this can expose employers to underpayment claims.

 

High Income Exclusion

The Fair Work Act provides a ‘high income employee’ exclusion from the application (but not the coverage) of a modern award. An employer who employs such an employee under a modern award can agree to avoid or modify the award.

To be a high income employee the following requirements must be met:

  • an employee’s guaranteed annual earnings must exceed the high income threshold. The threshold changes every year so be sure you check the Fair Work Commission website for the latest figures

  • an employee must have a ‘guarantee of annual earnings’ – a written undertaking by an employer to pay an employee more than the high income threshold for a future period of 12 months or more, and

  • an employee accepts the undertaking within 14 days of the employee being employed or a date on which an employer and employee agree to vary the employee’s terms and conditions.

However, a high income employee remains “covered” by an award, meaning the employee has access to the unfair dismissal laws under the Fair Work Act. 

 

Superannuation and overtime in salaried roles

The Australian Taxation Office Superannuation Guarantee Ruling (SGR 2009/2) explains the meaning of overtime payments when determining an employee’s ordinary time earnings (OTE) for the purposes of calculating an employer’s superannuation guarantee contribution.

This ruling describes overtime payments which are not considered OTE:

  • Payments for work performed during hours outside the employee’s ordinary hours of work

  • This is so whether the payments are calculated at an hourly rate or the employee gets a specific loading, or an annualised or lump sum component of a total salary package, that is expressly referable to overtime hours as remuneration for overtime hours worked.

  • However, some employees, particularly some managers and professionals, receive an annual salary within a remuneration package that recognises in a non-specific way that the employee may often be expected to work more than the ordinary hours of work prescribed. The whole amount of salary payable under such a package is OTE, unless overtime payments are distinctly identifiable as mentioned in item #2.

 

The bottom line

  • An employment contract does not have to refer to a modern award.

  • Modern awards apply by law, regardless of whether they are mentioned.

  • Referring to the award can reduce risk and improve clarity.

  • Paying above award rates does not remove award obligations unless a valid high income guarantee applies.

  • Over‑award and annualised salary arrangements must be carefully documented.

A well‑drafted contract should clearly explain how pay is structured, what industrial instruments apply, and how compliance with the Fair Work Act and NES is ensured.