Annual Salary vs Modern Award: Is the Salary High Enough?

Paying an annual salary can simplify payroll administration and provide employees with predictable income. However, a salary does not automatically replace the employee’s entitlements under a modern award.

An employee may receive a salary well above the minimum annual equivalent of their award rate and still be underpaid. This can happen when the salary does not adequately cover overtime, weekend penalties, public holiday work, shift payments, allowances or annual leave loading.

The only reliable way to determine whether a salary is sufficient is to calculate what the employee would have received under the relevant award and compare that amount with what the employee was actually paid.

This article explains how Australian employers can complete a practical annual salary compliance check.

Can an employee on a salary still be covered by a modern award?

Yes. Being paid an annual salary does not automatically make an employee award free.

Award coverage is generally determined by the employer’s industry, the employee’s occupation, the work they perform and the coverage provisions within the relevant modern award.

The employee’s salary may be higher than the award rate, but the award can still provide the underlying minimum standard for their pay and conditions.

This means a salaried employee may remain entitled to:

• Minimum award wages
• Overtime
• Weekend and public holiday penalty rates
• Shiftwork penalties
• Allowances
• Annual leave loading
• Minimum breaks
• Consultation and rostering protections
• Other award-specific entitlements

An employment contract can explain how the salary is intended to satisfy monetary award entitlements. However, the amount paid must still be enough to cover what the employee would otherwise have received.

Why multiplying the hourly rate by 38 hours is not enough

A common salary-setting approach is to multiply the employee’s minimum hourly award rate by 38 hours and then by 52 weeks.

For example:

$30 × 38 hours × 52 weeks = $59,280

The employer may then add a margin and offer a salary of $70,000.

This calculation provides a useful starting point, but it only considers ordinary hours. It does not account for the employee’s actual working pattern or additional award entitlements.

If the employee regularly works more than 38 hours, evenings, weekends or public holidays, their total award entitlement may be substantially higher than $59,280.

The salary calculation may also need to include allowances and annual leave loading.

A salary should therefore be tested against a realistic pattern of work rather than a standard 38-hour week that rarely occurs in practice.

What should be included in an annual salary compliance calculation?

The calculation should include every monetary entitlement that would have applied if the employee had been paid directly under the award.

Depending on the relevant award and working arrangement, this may include the following elements.

Ordinary award wages

Begin with the minimum rate attached to the employee’s correct award classification.

Check whether the rate changes based on:

• The employee’s classification level
• Age or junior status
• Apprenticeship or traineeship stage
• Qualifications
• Experience or length of service
• Employment status
• The type of work performed

Do not rely only on the classification recorded in payroll. Confirm that the classification reflects the employee’s actual responsibilities.

Overtime

Determine when overtime applies under the award.

Overtime may be triggered when an employee works:

• More than 38 hours per week
• More than the permitted ordinary hours in a day
• Outside the span of ordinary hours
• Beyond rostered hours
• Without the minimum break between shifts
• Outside agreed part-time hours

Some awards allow ordinary hours to be averaged over a roster cycle. Others contain different overtime rules for day workers and shiftworkers.

Use the provisions of the relevant award rather than applying a general assumption across the workforce.

Weekend and public holiday penalties

Include the value of work performed on Saturdays, Sundays and public holidays.

An employee who occasionally works weekends may remain adequately covered by their salary. An employee who works almost every weekend may require a substantially larger salary buffer.

Public holidays can create a particular risk because the applicable penalty rate may be considerably higher than the employee’s ordinary rate.

Shiftwork penalties

Employees working afternoon, night, permanent night or rotating shifts may be entitled to shift penalties.

The calculation may become more complex when the employee:

• Rotates between day and night shifts
• Works across midnight
• Performs overtime before or after a shift
• Works a weekend shift
• Works a public holiday shift
• Does not receive the minimum break between shifts

For rotating rosters, calculate the entire roster cycle rather than using one standard week.

Award allowances

Identify any allowances connected with the employee’s duties or working conditions.

These may include:

• Leading hand allowances
• First aid allowances
• Tool allowances
• Meal allowances
• Uniform and laundry allowances
• Travel or vehicle allowances
• On-call and recall payments
• Qualification allowances
• Cold, wet, dirty or hazardous work allowances

Some allowances are paid for every hour worked, while others apply weekly or only when a particular event occurs.

Annual leave loading

Many awards provide annual leave loading, commonly calculated at 17.5% of the employee’s base rate or by reference to another amount such as applicable shift penalties.

Confirm whether annual leave loading applies and whether the employee’s salary is intended to cover it.

The employer should also consider how the entitlement is handled when employment ends.

Other award-specific payments

Some modern awards contain industry-specific entitlements that may not appear in a standard salary model.

These can include:

• Minimum engagement payments
• Broken shift allowances
• Sleepover payments
• Remote work allowances
• Special rates for particular tasks
• Payments for interrupted or insufficient breaks
• Higher duties payments
• Additional payments for particular qualifications

A salary compliance review should be based on the actual award rather than a generic list of common entitlements.

A practical annual salary calculation

Assume an employee is covered by a modern award with a minimum ordinary rate of $32 per hour.

The employee normally works:

• 38 ordinary hours each week
• Five overtime hours each week
• Eight Saturday hours each month

For illustration, assume:

• The first two weekly overtime hours are paid at 150%
• The remaining overtime hours are paid at 200%
• Saturday work is paid at 150%
• The employee is also entitled to 17.5% annual leave loading

Ordinary wages

38 hours × $32 × 52 weeks = $63,232

Weekly overtime

First two hours:

2 × $48 × 52 weeks = $4,992

Remaining three hours:

3 × $64 × 52 weeks = $9,984

Total annual overtime entitlement:

$4,992 + $9,984 = $14,976

Saturday work

Eight hours × $48 × 12 months = $4,608

Annual leave loading

Assuming four weeks of annual leave:

4 weeks × 38 hours × $32 × 17.5% = $851.20

Illustrative total award entitlement

In this example, a salary of $75,000 would not be sufficient if it were intended to cover all these entitlements. A salary of $90,000 may provide coverage, subject to the employment arrangement, the employee’s actual hours and any other applicable award requirements.

This example is illustrative only. Actual calculations depend on the relevant award and how different penalty and overtime provisions interact.

What is an annualised wage arrangement?

Some modern awards allow employers to pay an annualised wage that incorporates particular award entitlements.

Depending on the award, an annualised wage arrangement may require the employer to:

• Notify the employee of the annualised wage in writing
• Identify which award entitlements are included
• Explain how the annualised wage was calculated
• State the maximum number of overtime or penalty hours covered
• Record the employee’s starting and finishing times
• Obtain acknowledgement of the time record
• Complete a reconciliation every 12 months
• Complete a reconciliation when employment ends
• Pay any shortfall within the required timeframe

The requirements differ between awards. Employers should not assume that an annualised wage arrangement used for one employee can be applied in the same way to employees covered by another award.

What is a salary offset arrangement?

A salary offset arrangement generally involves paying an employee a salary above the minimum award entitlement and using the additional amount to satisfy specified monetary entitlements.

A well-drafted employment contract should identify:

• The applicable modern award
• The employee’s classification
• The monetary entitlements the salary is intended to cover
• The salary amount
• Any assumptions made about working hours
• How additional hours will be treated
• How and when the arrangement will be reviewed

A general statement that the salary covers all award entitlements may not provide enough clarity.

The arrangement should also operate correctly in practice. A contract cannot make an insufficient salary compliant if the employee’s actual award entitlements are higher than the amount paid.

Employment contracts and offset arrangements should be reviewed by an appropriately qualified workplace relations professional or employment lawyer.

Annualised wage arrangement vs salary offset arrangement

The two approaches can appear similar, but they may operate differently.

Employers should understand which approach they are using. Calling a payment a salary does not, by itself, establish either arrangement.

What is an annual salary reconciliation?

An annual salary reconciliation compares:

1. The amount the employee actually received during the review period.
2. The amount the employee would have received under the relevant modern award.

The purpose is to identify whether the salary adequately covered the employee’s award entitlements.

The reconciliation should use actual working records wherever possible, including:

• Ordinary hours
• Overtime
• Weekend work
• Public holiday work
• Shiftwork
• Allowance-triggering events
• Annual leave
• Unpaid leave
• Changes in classification or duties

If the award entitlement is higher than the amount paid, the employer may need to pay the employee the difference within the timeframe required by the award or applicable arrangement.

How to complete an annual salary reconciliation

Step 1: Confirm the relevant award

Review the industry, occupation and coverage provisions to determine which award applies.

Step 2: Confirm the employee’s classification

Compare the employee’s actual duties with the classification definitions in the award.

Step 3: Confirm the review period

Most reconciliations cover a 12-month period, but a shorter period may apply when employment ends or the salary arrangement changes.

Step 4: Collect time and payroll data

Gather timesheets, rosters, leave records, payroll reports and records of allowance-triggering events.

Step 5: Calculate the award entitlement

Calculate what the employee should have received under the award for the actual hours and conditions worked.

Step 6: Calculate the amount paid

Include the salary and any separate payments that can properly be counted towards the relevant award entitlements.

Step 7: Compare the two amounts

Determine whether the employee received at least the value of their award entitlements during the applicable period.

Step 8: Correct any shortfall

Pay any amount owed and review whether the employee’s ongoing salary remains appropriate.

Step 9: Retain supporting records

Document the data, assumptions, calculations, approvals and corrective action.

Should salaries be tested annually or every pay period?

The answer depends partly on the relevant award and the arrangement being used.

An annual reconciliation may be required under an annualised wage provision. However, employers should not assume that one annual calculation addresses every potential compliance issue.

Some arrangements may require entitlements to be satisfied within a particular pay period. Employers should also avoid allowing a known shortfall to continue until the end of the year.

A practical control framework can include:

• Payroll checks each pay period
• Quarterly monitoring of overtime and penalty hours
• Reviews following roster or role changes
• A full annual reconciliation
• A reconciliation when employment ends

More frequent monitoring helps identify when an employee is approaching the maximum hours assumed within their salary.

Common annual salary compliance mistakes

Using 38 ordinary hours as the entire salary calculation

This ignores overtime, weekend work, allowances and other award entitlements.

Assuming a high salary guarantees compliance

The outcome depends on what the employee would have received under the award, not whether the salary appears generous.

Failing to record salaried employees’ hours

Without reliable time records, the business may not be able to calculate the employee’s actual award entitlement.

Using an outdated classification

If the employee’s responsibilities have increased, the salary may be tested against the wrong minimum rate.

Overlooking award increases

A salary buffer becomes smaller when award rates increase but the salary does not.

Ignoring irregular working periods

A standard working month may show sufficient salary coverage while a period containing public holidays, overtime or additional shifts creates a shortfall.

Treating the employment contract as the calculation

Contract wording supports the arrangement, but the employer must still test whether the amount paid was sufficient.

Forgetting to reconcile when employment ends

Some awards require a reconciliation when the employee’s employment terminates.

Warning signs that a salary may need review

An annual salary compliance check should be prioritised when:

• The employee regularly works more than 38 hours
• Working hours are not recorded
• The employee works evenings or weekends
• The employee works on public holidays
• The employee receives no separate allowances
• The employee has taken on additional responsibilities
• The classification has not been reviewed recently
• The salary has remained unchanged after award increases
• The employment contract does not identify included entitlements
• Annual reconciliations have not been completed
• The employee has raised concerns about workload or pay
• Managers use the salary to justify unlimited additional hours

These indicators do not automatically establish an underpayment, but they show where further testing may be needed.

Annual salary compliance checklist

Before confirming that a salary is sufficient, check that:

• The correct modern award has been identified
• The employee has the correct classification
• The current award rate has been used
• Actual working hours are available
• Overtime has been calculated
• Weekend and public holiday penalties have been included
• Shiftwork provisions have been reviewed
• All applicable allowances have been included
• Annual leave loading has been considered
• The contract identifies the entitlements covered
• Maximum additional hours have been assessed
• The required reconciliation has been completed
• Any shortfall has been corrected
• The salary has been reviewed for the coming year

If several of these questions cannot be answered confidently, the salary arrangement may require a more detailed review.

A salary should be calculated, not assumed

Annual salaries can provide flexibility and predictability for both employers and employees. However, the salary must be supported by the correct award, classification, contractual arrangement and payroll records.

The safest approach is to calculate the employee’s award entitlement using their actual working pattern and compare it with the amount paid. This turns a broad assumption about salary coverage into a documented compliance assessment.

Remunera supports Australian employers with modern award coverage reviews, employee classification assessments, annual salary modelling and salary reconciliation calculations. We help businesses understand whether existing salaries provide sufficient coverage and model the cost of different working arrangements.

Learn more about Remunera’s Modern Award Compliance and Employee Classification Review.

This article provides general information and does not constitute legal advice. Modern award coverage, annualised wage arrangements and salary offset provisions depend on the circumstances of each employment relationship.