Why this matters to you
If you're managing payroll in Australia, annualised salaries probably feel like a double-edged sword. On one hand, they promise consistency and simplified calculations. On the other, they've become a compliance minefield that's caught out some of the country's largest employers.
You're under pressure to get pay right – every time, for every employee. The rules are complex, the penalties are severe, and your team is already stretched thin. One miscalculation, one missed reconciliation, and you could be facing underpayment claims, Fair Work investigations, and remediation bills that run into the millions.
The truth is, annualised salaries don't eliminate your award obligations – they just change how you deliver them. And if you don't have the right processes, systems, and knowledge in place, you're exposed.
The real-world cost of getting this wrong
In 2025, the Federal Court ruled against two of Australia's largest supermarket chains for annualised salary breaches. The remediation bill?
$300M+
Woolworths remediation
$7M+
Coles remediation
The Court ruled that annual salary payments can only legally offset award entitlements that accrue within the same pay period.
These aren't outliers. They're warnings.
What exactly is an annualised salary arrangement?
An annualised salary is an arrangement where you pay a fixed annual amount – usually divided into equal weekly, fortnightly, or monthly instalments – instead of calculating each award component separately every pay period.
This arrangement is designed to:
- Simplify pay calculations for roles with variable hours
- Provide employees with predictable, consistent pay
- Bundle base pay, overtime, and penalties into one figure
Critical Limitation
Annualised salary arrangements are only available if your employee's modern award contains an annualised salary clause. Not all awards include this provision. You must check your specific award before implementing this arrangement.
The Four Pillars of Annualised Salary Compliance
If your award allows annualised salaries and you choose to use them, you must meet these four non-negotiable requirements:
1. Document Everything Upfront
Before the arrangement begins, you must clearly document:
- • Which award components the salary is intended to cover
- • The "outer limits" of hours and overtime included
- • The annualised amount and how it was calculated
- • When reconciliation will occur
2. Track Hours – Even for Salaried Staff
For most awards with annualised salary clauses, you must record:
- • Start time each day
- • Finish time each day
- • All unpaid breaks
Critically: The employee must acknowledge or sign these records each pay period. This requirement applies even though they're on a "salary."
3. Reconcile at Least Annually
At minimum every 12 months – and whenever employment ends – you must:
- • Calculate what the employee would have earned under the award for actual hours worked
- • Compare this to the annualised amount actually paid
- • Pay any shortfall within the timeframe specified by the award
4. Pay Beyond Outer Limits at Award Rates
If an employee works beyond the "outer limits" specified in the arrangement, those additional hours must be paid at the applicable award rates – not absorbed into the salary.
This means you need systems that can flag when outer limits are approached or exceeded.
Common Mistakes That Lead to Underpayment
Even well-intentioned organisations make these errors:
Assuming "salary" means no hour tracking
The award still requires time records for reconciliation purposes.
Setting the salary too low
If actual hours consistently exceed expectations, the salary won't cover entitlements.
Forgetting to reconcile on termination
You can't wait for the annual reconciliation – it must happen when employment ends.
Using annualised salaries without an award clause
If your award doesn't permit it, the arrangement may not provide the protection you expect.
Not paying beyond outer limits
Hours beyond the agreed limits must be paid separately at award rates.
How Reconciliation Actually Works
The reconciliation process compares what you paid against what the employee was entitled to under the award. Here's what's involved:
Reconciliation Steps
- 1
Gather time records
Collect all start times, finish times, and breaks for the reconciliation period.
- 2
Calculate award entitlements
Apply award rates to actual hours worked, including overtime, penalties, and allowances.
- 3
Compare to annualised payments
Total the annualised salary payments made during the same period.
- 4
Pay any shortfall
If award entitlements exceed annualised payments, pay the difference within the award's specified timeframe.
Pro tip: Many organisations align reconciliation with annual remuneration reviews. But remember – termination reconciliation cannot wait for the regular cycle.
Should You Continue Using Annualised Salaries?
This is a question worth revisiting. The 2020 Fair Work Commission changes made annualised salaries significantly more complex. What was once a straightforward "catch-all" approach now requires robust processes, constant vigilance, and considerable administrative overhead.
Before you commit to continuing with annualised salaries, ask yourself:
- Are you guaranteeing employees more than the current mandated high-income threshold? If so, this may be a simpler alternative to dealing with award provisions.
- How much time is your payroll team spending on the admin required to make this work?
- Are your processes efficient, or are they a soul-destroying waste of time?
- Are you confident that you're complying with all provisions under the Fair Work Act 2009?
- Do you have the right framework (systems, documentation, tools, review meetings, processes) in place to support compliance?
- Can you be confident that employees are recording start and finish times and breaks accurately in the absence of an automated time and attendance system?
- Do your employees understand their agreements and the part they play in ensuring their pay is correct?
- Are your employees actually getting paid the right amount?
Alternatives to Annualised Salaries
If the time and effort required to make annualised salaries work is too much, or you can't get it right, there are alternatives which may be easier to manage:
Pay an hourly rate higher than the award
Instead of a salary, pay employees an hourly rate that is higher than the award (while still adhering to award conditions).
Pay above the high-income threshold
Pay more than the current mandated high-income threshold, which may exempt you from some award provisions.
How the Right Payroll System Makes This Manageable
Managing annualised salary compliance manually is error-prone and time-consuming. A purpose-built payroll system can automate the heavy lifting:
Automatic time capture
Integrated time and attendance eliminates manual record-keeping.
Real-time award interpretation
Continuously calculates entitlements as hours are worked.
Outer limit alerts
Flags when employees approach or exceed agreed limits.
Automated reconciliation
Calculates shortfalls and triggers top-up payments automatically.
Frequently Asked Questions
Which awards allow annualised salary arrangements?
Not all modern awards include annualised salary clauses. You must check your specific award to confirm it allows this arrangement. Common awards with these clauses include the Clerks Award, Banking Award, and Professional Employees Award.
How often must we reconcile annualised salaries?
At minimum, you must reconcile every 12 months and whenever an employee's employment ends. Many organisations align this with annual remuneration reviews, but termination reconciliations cannot wait.
Do we still need to track hours for salaried employees?
Yes. For most awards with annualised salary clauses, you must record start times, finish times, and unpaid breaks – and have the employee acknowledge these records each pay period.
What happens if we underpay during the year?
If reconciliation reveals a shortfall, you must top up the employee's pay within the timeframe specified by the award clause. Failure to do so is a breach of the Fair Work Act.
The Bottom Line
Annualised salary arrangements can simplify payroll administration – but only if you meet the compliance requirements. Track hours, document everything, reconcile regularly, and pay shortfalls promptly.
The alternative? Join the growing list of organisations facing remediation bills, reputational damage, and Fair Work scrutiny.
With the right systems and processes, annualised salary compliance doesn't have to be a burden – it can be built into how you operate. You can spend less time checking calculations and more time on the strategic work that actually moves your organisation forward.