Federal Court Decision – What Employers Must Do with Annualised Salary Workers
A recent Federal Court ruling has introduced important changes for employers who pay employees on an annualised salary when those employees are covered by an award or enterprise agreement. The decision makes clear that annual salaries can no longer be used to offset employee entitlements over the course of a year. Instead, compliance must be demonstrated in each individual pay-period.
Here’s what you need to know, why it matters, and what you should do.
“Annualised salary arrangements are more than a payroll mechanism. When employers apply them correctly in each pay period, they uphold transparency, respect employee entitlements, and strengthen trust across the workplace.”
Key Points from the Ruling
The Federal Court (Justice Perram) determined that employers cannot rely on an annual salary to meet award or agreement entitlements across the entire year. Instead, any “set-off” of the salary against those entitlements must be assessed on a pay-period-by-pay-period basis.
If an employee’s salary for a given pay period falls short of what they are owed under the award (including penalties, overtime, allowances, etc.), the employer must top it up in that specific pay period. Surpluses in one period cannot be carried forward to cover deficits in another.
Why the Ruling Matters
Employers using annualised salary arrangements now face greater administrative burden. Where employee work hours and patterns fluctuate, ensuring compliance per pay period will require close monitoring and possibly more resource investment.
Contracts with “set-off” clauses (where an employer says the annual salary covers all award obligations) will need to be carefully reviewed. It will not be enough simply to show that over a year the salary totalled more than what was required; each pay period must stand on its own.
Record keeping will be under greater scrutiny. Employers must keep accurate, detailed records of hours worked, start/finish times, overtime, penalties, allowances, etc. Simply relying on high-level summaries or rosters without supporting evidence may no longer suffice.
Practical Example
To illustrate the implication:
Before the decision: Suppose Anna is on an annual salary of $70,000 and paid fortnightly. Her award requires $2,497 per fortnight; her salary provides $2,692. Over some periods she might work penalty or overtime hours that push her award entitlement above $2,692; in others, she might work “only” her standard hours and be ahead. Employers may have argued that the annual salary averaged out to cover all entitlements over the year.
After the decision: If in a fortnight Anna’s award entitlement is $2,750 (because of overtime or penalties), the employer must top up the $2,692 salary by $58 in that pay period. Any fortnights where the salary “exceeded” the entitlement cannot be used to compensate for others where there was a shortfall.
What Employers Should Do Now
To ensure compliance and avoid risk, employers should:
Review employment contracts that include annual salary and set-off clauses. Ensure that the contract wording reflects the need to meet award entitlements in each pay period.
Audit payroll practices: assess whether every pay period meets the relevant award obligations. Identify periods of shortfall, and adjust practices accordingly.
Upgrade record keeping systems: track all hours worked (including overtime and penalties), start and finish times, allowances and bonuses. Ensure records are detailed, reliable, and accessible.
Avoid informal arrangements: informal or undocumented understandings about variations to entitlements carry risk. Ensure everything is documented and consistent with award requirements.
Seek legal or specialist advice if unsure, especially in roles with fluctuating hours, or where annualised salary arrangements are used extensively.
What Might Happen Next
This decision is subject to appeal. Until then, however, it sets a legal precedent indicating how similar cases are likely to be judged.
Employers should prepare for increased scrutiny from regulators such as the Fair Work Ombudsman. They are likely to focus on set-off arrangements and whether employers are keeping adequate records.
Some organisations may decide that annualised salaries are no longer practical in certain roles, particularly those with variable hours, shift penalties or frequent overtime. Alternatives (such as more precise hourly or shift based pay) may become more common.
Conclusion
This ruling signals a shift. Employers can no longer rely on annual salary figures alone to meet legal obligations under awards and agreements. Instead compliance must be demonstrated every pay period. For many businesses this will mean reviewing contracts, adjusting pay practices, strengthening record keeping, and being vigilant about potential shortfalls.
If your organisation uses annualised salary or set-off clauses, now is the time to act. Staying ahead will reduce the risk of non-compliance and protect both your people and your organisation.