Paying Above the Award? You Could Still Be Underpaying

Many Australian employers assume that paying an employee above the minimum award rate provides a comfortable compliance buffer.

The logic appears reasonable. If the minimum award rate is $30 per hour and the employee receives the equivalent of $35 per hour, it may seem that the additional $5 covers any difference.

Unfortunately, award compliance does not always work this way.

Modern awards can provide employees with overtime, penalty rates, shift payments, allowances, annual leave loading and other entitlements in addition to their ordinary rate. An above-award salary may be sufficient during a standard working week but fall short when the employee works longer hours, weekends, public holidays or changing shifts.

The risk is not limited to hourly paid employees. Salaried employees may remain covered by a modern award, even when their salary is significantly higher than the minimum rate.

For employers, the important question is not simply whether an employee is paid above the award rate. The real question is whether the employee has received at least as much as they were entitled to receive under the award for the work they actually performed.

What does “above award” mean?

An above-award rate is a pay rate or salary that is higher than the minimum amount prescribed by the relevant modern award.

For example, an award may provide a minimum ordinary rate of $30 per hour for a particular classification. An employer may decide to pay the employee $35 per hour because of their experience, labour market conditions or the organisation’s remuneration structure.

The additional $5 may create a buffer against some award entitlements, but it should not be assumed that the buffer covers every payment in every pay period.

The employee’s underlying award entitlements continue to exist unless they have been addressed through a lawful and properly documented arrangement.

Why paying above the award may not prevent underpayment

Underpayment can arise when the value of an employee’s award entitlements is greater than the amount they actually receive.

This can occur for several reasons.

1. The employee is classified at the wrong award level

An employee may be paid above the minimum rate for their recorded classification but below the rate that applies to the work they actually perform.

Consider an employee recorded as a Level 2 worker who receives $2 per hour above the Level 2 award rate. If their responsibilities properly align with Level 4, the above-award payment may still be lower than the correct minimum rate.

The employer should assess classification by reviewing:

• The employee’s actual duties
• The complexity of their work
• Their level of supervision
• Their decision-making authority
• Any responsibility for supervising or training others
• The knowledge, qualifications and licences required
• The classification definitions in the relevant award

Internal job titles and salary grades do not override the classification structure within a modern award.

A role should also be reassessed when responsibilities change. An employee who was correctly classified two years ago may now be performing work at a higher level.

2. Overtime is not being calculated separately

An above-award ordinary rate does not automatically remove an employee’s entitlement to overtime.

Depending on the award, overtime may apply when an employee works:

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

If the employee regularly works additional hours, the value of their overtime entitlement can quickly exceed the difference between the award rate and the higher rate paid by the employer.

For example, an employee paid $5 above the minimum rate may appear to have a generous buffer during ordinary hours. However, several hours of overtime at time and a half or double time may use that buffer and create a shortfall.

Employers should calculate overtime according to the wording of the relevant award rather than assuming that a higher flat rate covers it.

3. Weekend and public holiday penalties are overlooked

Employees working Saturdays, Sundays or public holidays may be entitled to penalty rates.

A flat hourly rate can create an underpayment when it remains unchanged regardless of when the employee works.

Consider an employee whose minimum ordinary rate is $30 per hour but who receives a flat rate of $36 per hour. The employee is paid 20% above the minimum ordinary rate.

If the relevant award requires a Sunday rate of 150%, the award entitlement would be $45 per hour. The employee would therefore be underpaid by $9 for each Sunday hour, despite receiving an above-award rate.

This is why award compliance must be tested against actual working patterns rather than ordinary rates alone.

4. Award allowances are not included

Modern awards may provide allowances when employees perform particular duties, hold certain qualifications or incur employment-related costs.

Common examples include:

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

An employer may believe that an above-award rate incorporates these amounts. However, the business should confirm whether the arrangement allows the higher rate or salary to satisfy the specific entitlement and whether this has been clearly documented.

Some allowances only apply when a particular event occurs. A general payroll rate may not reflect when or how frequently those events happen.

5. Shiftwork payments are calculated incorrectly

Shiftworkers may be entitled to additional payments for afternoon, night, permanent night, rotating or continuous shiftwork.

These arrangements can become complex when employees work across midnight, change shifts, work weekends or complete overtime immediately before or after a rostered shift.

A business may pay a general above-award rate but fail to calculate:

• Afternoon or night shift penalties
• Permanent night shift rates
• Weekend shiftwork penalties
• Overtime performed by a shiftworker
• Public holiday shift payments
• Minimum breaks between shifts

The higher ordinary rate may not be enough to cover these additional entitlements.

Businesses with rotating rosters should test the entire roster cycle rather than reviewing a single week. A short sample may overlook the periods in which the employee’s award entitlements are highest.

6. The employee’s annual salary has not kept pace with award increases

A salary may have provided a sufficient compliance margin when it was first introduced but become inadequate over time.

Minimum award wages usually change following the Fair Work Commission’s Annual Wage Review. From the first full pay period starting on or after 1 July 2026, minimum award wages increased by 4.75%.

When an employee’s salary remains unchanged, the gap between their salary and the award entitlement becomes smaller. The risk is greater when the employee is also working longer hours or a different roster than when the salary was originally set.

Employers should review award-covered salaries whenever:

• Minimum award rates increase
• The employee’s hours change
• A new roster is introduced
• Weekend or public holiday work increases
• The employee takes on additional responsibilities
• New allowances become applicable
• The role moves to a higher classification

Annual salary reviews should consider award compliance separately from market remuneration and performance increases.

7. Annual leave loading has been missed

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

An employer may intend for an annual salary to incorporate annual leave loading. However, this should be considered within the salary calculation and supported by clear contractual wording.

The treatment of annual leave loading may also affect an employee’s final pay when employment ends.

Employers should confirm:

• Whether the relevant award provides annual leave loading
• How the loading is calculated
• Whether it is paid when annual leave is taken
• Whether the salary is intended to incorporate it
• How the entitlement is treated on termination

Can an employer use an above-award payment to offset other entitlements?

In some circumstances, an employer may use an above-award payment to satisfy certain monetary award entitlements. However, paying more than the minimum rate does not automatically create a general credit that can be applied to anything owed under the award.

A reliable arrangement should identify:

• The modern award and classification applying to the employee
• The award entitlements the higher payment is intended to satisfy
• How the salary or above-award rate was calculated
• The assumptions made about working hours
• Any limit on overtime or penalty hours covered
• How actual entitlements will be compared with payments
• When the arrangement will be reviewed or reconciled

The payment should be sufficient to cover the identified entitlements during the relevant period.

The contract should also be reviewed when the employee’s award, classification, salary or working arrangement changes. Wording created for a former role may not adequately cover the employee’s current circumstances.

What is a salary offset clause?

A salary offset clause explains that an employee’s salary or above-award payment is intended to satisfy specified monetary entitlements under an applicable modern award.

The clause should be specific enough for the employee and employer to understand what is included. It may refer to entitlements such as ordinary wages, overtime, penalty rates, allowances and annual leave loading, where appropriate.

A broad statement that the salary covers “all award entitlements” may not provide the same clarity as an arrangement that identifies the relevant award entitlements and the basis of the salary calculation.

The contract alone is not enough. The employer still needs to confirm that the amount paid is at least equal to the employee’s actual award entitlement.

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

What is an annualised wage arrangement?

Some modern awards contain annualised wage arrangement provisions. These provisions allow an employer to pay an annual wage that incorporates specified award entitlements, subject to particular requirements.

Depending on the award, the employer may need to:

• Document the annualised wage in writing
• Identify the entitlements included
• Explain how the annual wage was calculated
• State the maximum overtime or penalty hours covered
• Record the employee’s starting and finishing times
• Complete an annual reconciliation
• Complete a reconciliation when employment ends
• Pay any identified shortfall within the required period

The requirements differ between awards. Employers should review the exact annualised wage clause applying to each employee rather than using one standard approach across the entire workforce.

A practical example of an above-award shortfall

Assume an employee’s minimum award rate is $30 per hour. The employer pays a flat rate of $36 per hour for every hour worked.

During one week, the employee works:

• 30 ordinary weekday hours
• Eight Sunday hours
• Four overtime hours

For illustration, assume the award provides:

• 100% of the base rate for ordinary hours
• 150% for Sunday hours
• 150% for the first two overtime hours
• 200% for the remaining overtime hours

The award calculation would be:

The employee’s flat-rate payment would be:

42 hours × $36 = $1,512

In this week, the flat rate is sufficient because the employee received $42 more than the illustrative award entitlement.

However, if the employee worked additional Sunday or overtime hours, the calculation could produce a shortfall. The employer therefore needs a repeatable process for testing actual working patterns rather than relying on the percentage by which the flat rate exceeds the ordinary award rate.

This example is for illustration only. Actual outcomes depend on the terms of the relevant award, including how ordinary hours, overtime and penalties interact.

How to test whether an above-award salary is sufficient

Employers can use the following process.

Step 1: Confirm award coverage

Identify the correct modern award or enterprise agreement by reviewing the employer’s industry, the employee’s occupation and the coverage provisions.

Step 2: Confirm the classification

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

Step 3: Map the working pattern

Collect reliable information about ordinary hours, overtime, weekend work, public holidays, shifts, breaks and other working conditions.

Step 4: Identify all monetary entitlements

Document the minimum wages, overtime, penalties, allowances, leave loading and other payments that may apply.

Step 5: Calculate the award entitlement

Calculate what the employee would have received under the award during the chosen test period.

Step 6: Compare the result with actual payments

Compare the award entitlement with the salary, wages and other payments the employee received during the same period.

Step 7: Test higher-risk periods

Include pay periods containing overtime, weekend work, public holidays, shift changes and leave. Testing only a standard week can create a misleading result.

Step 8: Correct and document any issues

If a shortfall is identified, review the affected period, calculate the amount owed, correct the payroll process and retain evidence of the action taken.

Warning signs that an above-award arrangement needs review

Your business may have an increased underpayment risk if:

• Employment contracts do not identify the applicable award
• Salary clauses refer generally to “all entitlements”
• Employee classifications have not been reviewed recently
• Salaries were not checked following the 2026 award increase
• Working hours are not recorded for salaried employees
• Employees regularly work evenings, weekends or public holidays
• Part-time employees frequently work additional hours
• Payroll applies the same flat rate to every type of hour
• Allowances are handled manually
• Annual salary reconciliations are not completed
• Position descriptions do not reflect current responsibilities
• The business relies entirely on payroll software to confirm compliance

The presence of one of these indicators does not automatically mean an employee has been underpaid. It does mean the arrangement deserves a closer look.

Paying above the award is valuable, but it must be tested

Above-award salaries and hourly rates can help businesses attract and retain employees while making pay administration simpler. The problem is not the use of an above-award payment. The risk arises when the business assumes that the payment automatically satisfies every award obligation.

A robust process should connect five elements:

• The correct award
• The correct employee classification
• The employee’s actual working pattern
• Every applicable monetary entitlement
• The amount the employee actually received

When these elements are reviewed together, the employer can determine whether the above-award arrangement provides genuine coverage or creates an underpayment risk.

Remunera supports Australian employers with modern award coverage reviews, employee classification assessments, above-award salary testing and cost modelling. We help businesses translate award requirements into practical employment and payroll arrangements.

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

This article provides general information and does not constitute legal advice. Award coverage, salary arrangements and employee entitlements depend on the circumstances of each employment relationship.