An annual salary looks simple from the outside: a fixed dollar figure, paid in equal instalments across the year, in exchange for an employee's work. The complexity arrives when you need to know what that figure is allowed to cover. A salary can absorb penalty rates, overtime, allowances and loadings in some situations but not others, and that difference is where underpayment claims come from.
This guide walks through how annual salary arrangements actually operate in Australia: who regulates them, how the National Employment Standards and modern awards set the floor, how superannuation attaches to the salary, what an annualised wage arrangement requires, and the records and reconciliations that keep the whole system honest.
Who does what when a salary is set
Four parties shape how a salary works in practice:
- Employer: sets the salary structure, classifies the role, pays each instalment and keeps the records that prove the arrangement is lawful.
- Employee: works the agreed hours and can refuse additional hours that are not reasonable under s 62 of the Fair Work Act.
- Fair Work Ombudsman (FWO): investigates complaints, audits employers, issues compliance notices and can take court proceedings for penalties.
- Fair Work Commission (FWC): sets modern award minimum rates in its annual wage review, with changes usually taking effect on 1 July, and approves enterprise agreements.
- Australian Taxation Office (ATO): enforces the superannuation guarantee, so the current super rate and the definition of ordinary time earnings matter to every payroll.
The interests mostly align: a compliant salary gives the employee certainty and the employer protection. The tension is structural. The employee wants the headline figure to reflect the hours actually worked, while the employer wants one fixed number to cover as much as possible. The law resolves that tension through the award or enterprise agreement and the contract, not through goodwill.
What an annual salary actually is
An annual salary is a fixed amount agreed for 12 months of work, usually expressed as a yearly figure and paid in equal weekly, fortnightly or monthly instalments. The Fair Work Act 2009 (Cth) requires wages to be paid in full, in money, at least monthly: see s 323. The instalments must keep coming regardless of whether the employee works slightly more or fewer hours in a given week, within the agreed arrangement.
The hours anchor comes from the National Employment Standards. Under s 62 of the Act, an employer must not request or require a full-time employee to work more than 38 hours in a week unless the additional hours are reasonable. The employee can refuse additional hours that are unreasonable, and one of the factors in deciding reasonableness is whether the employee receives overtime payments, penalty rates or other compensation for them. That link between hours and compensation is the point where a salary either holds up or fails.
Paid annual leave sits underneath the salary too. Every non-casual employee accrues 4 weeks of paid annual leave per year of service, and 5 weeks if the award or agreement defines them as a shiftworker for National Employment Standards purposes: see s 87 of the Act.
The distinction between salary and wages is practical rather than legal. A salary is an annual figure that does not fluctuate with weekly hours. Wages are usually paid hourly, so each pay cycle reflects the hours actually worked and the penalties that attached to them. Businesses with stable rosters tend to prefer salaries; businesses with variable hours often stick with wages.
What triggers the rules: award coverage and the NES
The National Employment Standards apply to every national system employee, whether or not a modern award covers them. They are the floor: maximum weekly hours, annual leave, personal leave, notice of termination and the rest. A salary can never be used to contract out of them.
A modern award or enterprise agreement then layers specific rules on top. If an award applies, it sets the classification, the minimum rates, the ordinary hours and span of hours, and the penalties, overtime, allowances and loadings attached to them. The award is the trigger for most of the compliance machinery in this article. If the role is truly award-free, the salary must still be at least the national minimum wage, which the FWC updates each year in its annual wage review, and must deliver every National Employment Standards entitlement.
The key habit is to check award coverage and classification before setting the figure, because the classification determines the minimums the salary has to beat. Getting the classification wrong is one of the most common ways a well-intentioned salary becomes an underpayment.
How superannuation sits alongside the salary
Superannuation is not part of the salary unless you say it is. The superannuation guarantee is a separate obligation: the employer must pay at least the statutory rate into the employee's fund on top of the cash salary, unless the parties have agreed the advertised figure is inclusive of super.
The rate is 11.5% for the 2024-25 financial year and rises to 12% from 1 July 2025, the final step in the legislated schedule: see the ATO's super guarantee rates. The base for the calculation is the employee's ordinary time earnings (OTE), defined in s 6 of the Superannuation Guarantee (Administration) Act 1992 (Cth) as earnings for ordinary hours of work plus over-award payments, shift loadings and commission. Overtime payments generally fall outside that definition, because they are not earnings for ordinary hours.
Whether you advertise a figure as plus super or inclusive of super is a drafting choice, not a legal requirement. Both are lawful provided the employer still pays at least the statutory rate on OTE. But the two figures mean very different cash outcomes: an $80,000 salary plus 12% super delivers $80,000 in cash, while an $80,000 package inclusive of super delivers roughly $71,430 in cash and $8,570 in super. If the headline says inclusive, the contract should say so, and payroll must still hit the statutory rate on the OTE base.
Bonuses and allowances complicate the calculation. Payments that fall within OTE attract super, so a sales commission or a shift loading usually does, while a purely discretionary bonus may not. Payroll configuration errors on these points are a common source of back-pay liabilities.
What a salary can lawfully absorb
This is the heart of the mechanism. A salary absorbs award entitlements in one of two ways: an annualised wage arrangement under the award itself, or a contractual offsetting arrangement.
Annualised wage arrangements under awards
Many modern awards allow an employer and employee to agree on an annualised wage: a fixed regular amount each pay period, instead of paying an hourly rate plus penalties and allowances as they arise. The FWO's guidance on annualised wages sets out the rules that make these arrangements work:
- The annualised wage must not be less than the employee would have received from wages and entitlements under the award for the work performed over the year.
- The arrangement must be recorded in writing, including the annualised wage amount, which award entitlements it covers, how it was calculated, and the maximum penalty rate or overtime hours the employee can work in a pay period or roster cycle without extra payment.
- The employer must record the employee's starting and finishing times and unpaid breaks, and the employee must confirm the hours in writing or electronically.
- The arrangement must be reviewed every 12 months, or when employment ends if that happens sooner. If the annualised wage fell short of the award entitlements for the period, the employer must pay the difference.
These model clauses now appear in many awards following the Fair Work Commission's review of annualised wage arrangements, which concluded in 2019. The arrangement is a compliance framework, not a shortcut: the wage has to be calculated against what the award would actually have delivered, and the review is where any shortfall is found and paid.
Contractual offsetting
Where the award does not have an annualised wage clause, or the employer prefers a simpler contract structure, an employment contract can still provide that the salary covers specified award entitlements such as minimum rates, penalties, overtime, allowances and annual leave loading. The FWO calls this a contractual offsetting arrangement.
Offsetting only works if the contract clearly identifies what the salary is intended to cover and the salary is genuinely enough to cover it. The FWO's guidance advises employers to seek independent advice before relying on offsetting arrangements and to keep the records that show the salary actually met the award entitlements in each pay period or roster cycle. A vague clause that simply says the salary includes all entitlements is a common source of underpayment claims.
Leave loading, allowances and bonuses
Leave loading is an extra payment made when an employee takes annual leave. It is not a National Employment Standards entitlement: it comes from the award or agreement. Where it applies it is commonly 17.5% of the base rate, as the FWO's library article on leave loading explains. If the salary is meant to cover leave loading, the award clause or contract must say so, and the records must show it.
Allowances under an award, for tools, travel, meals or uniforms, work the same way: they are entitlements that a salary can absorb only through an annualised wage clause or a clear offsetting provision. Bonuses are different in kind. They can be discretionary or formula-based, and the contract should state which, how they are calculated and whether they attract super. Because commission payments fall within OTE, formula-based incentives usually do.
Records, pay slips and the annual review
Record-keeping is what separates a lawful salary from an allegation. Section 535 of the Fair Work Act requires employers to make and keep employee records for 7 years, and the obligation is a civil remedy provision. The FWO's guidance for annualised wages adds specifics: records of any loading, penalty rate or allowance payable, any overtime hours where a penalty or loading applies, and the signed time records described above.
The stakes of missing records are higher than they look. If an employer has not kept the required records, s 557C of the Act reverses the burden: the employer must disprove allegations about contraventions. In practice, a missing timesheet can turn a salary dispute into a back-pay demand the employer cannot rebut.
Pay slips must also carry the right information. For a salaried employee, the pay slip must show the annual rate of pay. And the review triggers are not optional extras: an annualised wage should be checked when award rates change in the July wage review, when the employee changes classification, and when the pattern of hours changes significantly, not just on the 12-month anniversary.
Where salaries go wrong
The recurring failures follow a pattern:
- Assuming the salary absorbs everything: It does not, unless an award clause or the contract clearly provides for it and the records prove it.
- Letting reasonable additional hours become routine: The s 62 reasonableness test is partly about compensation. If regular overtime becomes the norm, the salary that never paid for it stops looking reasonable.
- Advertising inclusive of super without the cash figure: The employee signs for a headline number, then discovers the cash component is lower than expected.
- Vague set-off wording: A clause that does not name the entitlements it covers is worth little in a dispute.
- Skipping time records for salaried staff: Records are not optional just because the pay does not vary.
- Missing super on OTE components: Commission, shift loadings and over-award payments can attract super that payroll never calculated.
- Forgetting award-free minimums: Even with no award, the salary must clear the national minimum wage and every National Employment Standards entitlement.
When to bring in a lawyer
A lawyer's value concentrates at three points. First, at the design stage: confirming award coverage and classification, and drafting the salary clause, the offsetting wording (if any) and the bonus terms so they match the award. Second, at the review stage: running the 12-month reconciliation and checking the salary against rate changes after each July wage review. Third, when the FWO comes knocking: responding to an audit or a compliance notice, or assessing a back-pay claim, where the records you kept decide how much leverage you have.
None of these require a full-time employment lawyer on staff. A review of a handful of contracts and a payroll configuration check is a modest, one-off exercise, and it is cheaper than defending an underpayment claim. A firm such as Artificer Legal can tell you in a free consultation whether your salary structure needs work before you pay for a full review.
The annual review is where the risk lands
The single moment that decides whether a salary arrangement survives scrutiny is the annual reconciliation. If the salary never fell below what the award would have delivered, the review is paperwork. If it did, the difference must be paid, and the earlier the shortfall is found the smaller it is. Employers who build the review into the calendar, check award rates after each July increase and keep signed time records from day one are the ones who treat annualised salaries as the compliance framework they are. If your contracts and payroll have never been checked against the award, that review is the place to start.