Should You Introduce Annualised Wages or Salaries in Your Business?

If you're considering transitioning one or more employees to an annualised salary, it's important to understand what it involves, your obligations under the Fair Work Act and relevant awards, and whether it's the right fit for your operations.

What Is the difference between an Annualised Wage and Salary?

An annualised wage arrangement is a mechanism built into many modern awards to allow employers to combine ordinary hours, overtime, penalties and other entitlements into a fixed annual amount paid to the employee each pay period over the year.

A salary is a broader contractual payment arrangement, in which an employee (who may or may not be covered by an award) is paid a yearly amount which may include offsetting overtime and other entitlements.

The key issue in both cases is whether the employee is still receiving at least the minimum entitlements that apply to them.

For employees who are not covered by an award, the National Employment Standards (NES) still apply. You may pay an award-free employee a salary, but the arrangement must still ensure they receive at least their minimum NES entitlements.

The basic rule is that your employee must be better off than what they would have been under any applicable modern award or, for award-free employees, the NES.

Awards and Classifications

The first step is to determine whether your employee is covered by an award. If you are unsure, Fair Work has a tool you can use.

Once you have identified the award, classify the employee’s position using the classification section of the award. This will help you determine their minimum hourly rate and the entitlements that apply to them.

You then need to calculate what the employee would be paid over the year under the award. Include ordinary hours, expected overtime, penalty rates, allowances, leave loading and any other entitlements you intend the annualised wage or salary to cover.

If the award allows annualised wages, you must also follow the specific rules set out in that award. Some awards require you to record the assumptions used in the calculation, notify the employee in writing, and reconcile the arrangement against the hours actually worked.

It is good practice to build in a buffer above the minimum amount, so the employee remains better off if their hours vary slightly. Communicate clearly with the employee so everyone understands what is included in the arrangement and what is not.

Best Practices for Employers

Use a written agreement that clearly states what is included in the salary. Whether your employee is covered by a modern award or the NES you can formalize the agreement in an employment contract. Fair work has an Employment Contract Tool which is very easy to use.  

If the employee is covered by an award ensure you include the correct award clauses in your contract for all entitlements that you are offsetting, we have set out a sample below.

Annual salary
You will be paid a total annual salary of $95,000, plus super which will be paid separately. This salary is paid in equal weekly instalments into your nominated bank account.

This annual salary compensates you for:

·    38 ordinary hours of work per week,

·       An average of 7 hours of overtime per week, paid at 150% of the minimum award rate in accordance with clause 32 of the Manufacturing and Associated Industries and Occupations Award 2020 (MA000010), and

·       Annual leave loading of 17.5%, in accordance with clause 34.4 of the Award.

The total amount has been calculated to ensure that your annual salary exceeds the minimum entitlements you would otherwise receive under the Award, including all overtime and leave loading entitlements.

If the employee is not covered by an award, it would still be good practice to set out what NES entitlements your salary covers.

Review Annually

At the end of each financial year most modern awards release updated pay guides. This is the time to ensure your contracts still comply. For Salaried workers that means ensuring that the salary still covers the NES.

While annualised wages greatly reduce time spent in record keeping during pay periods – you need to keep time records and reconcile the actual hours worked at least once a year to ensure no underpayments have occurred.

Annualised wages and salaries can be a great tool for rewarding loyalty, streamlining payroll, and providing predictable income to staff. However, they require careful setup and regular oversight.

If done properly, they can strike a fair balance between operational efficiency and employee satisfaction.  Consider your business needs, speak to your employees, and if in doubt, seek professional HR or legal advice before making the change.