Modern awards provide for additional pay in certain circumstances to compensate employees for working outside the standard spread of hours, during unsocial hours or on special days.

The following are four common situations (not exhaustive) where higher pay rates may apply. 

Weekends—most modern awards provide penalty rates for employees required to work on weekends. 

This reflects the disruption to typical work-life balance and recognises the personal time employees give up to work on these days.

Public holidays—when an employee agrees to work on a public holiday, modern awards generally require that they be paid a significantly higher rate of pay. 

Employers cannot automatically roster employees on public holidays—they must first seek the employee’s agreement. 

This penalty rate acknowledges the importance of public holidays and the inconvenience of working on these occasions. 

Overtime—when an employee works outside their ordinary hours (such as beyond their daily or weekly limits), modern awards usually entitle them to overtime rates. 

These rates may increase depending on how many hours of overtime are worked or what day the overtime falls on. 

Overtime penalties are a control mechanism generally used to discourage excessive hours and compensate employees for working beyond what is considered reasonable. 

Shiftwork—when a business operates around the clock or has irregular hours, employees classified as shiftworkers may be entitled to additional penalties for working nights, early mornings or rotating rosters. 

These provisions help address the physical and social toll shiftwork can have on employees. 

When higher rates might not apply 

While modern awards outline entitlements to penalty rates, there are situations where an employee may not receive these separately. 

This is usually where the employee is paid a salary while engaged on a contract that includes a common law set-off clause or has entered into an individual flexibility arrangement (IFA). 

Common law set-off clauses 

Some employers choose to pay employees an annual salary that is designed to incorporate award entitlements such as overtime, weekend and public holiday penalties via a common law set-off in the contract. 

These arrangements must be carefully structured to ensure that the employee remains better off overall compared to the award. 

Key compliance requirements include: 

• the salary must be high enough to absorb any entitlements that would otherwise be payable
• the set-off clause must be clearly stated in the employment contract
• the arrangement must be regularly reviewed to ensure that the employee is not worse off in practice. 

If these conditions are not met, the employer may still be liable to pay penalties on top of the annual salary. 

A note on the Coles and Woolworths cases

Recent court decisions—Fair Work Ombudsman v Woolworths Group Limited, Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd, Baker v Woolworths Group Limited and Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092—highlight the importance of ensuring that employees are better off in each pay period, not just overall. 

This has major implications for salary arrangements that try to average out penalty rates over time. 

To remain compliant, employers must ensure that employees are never worse off in any individual pay cycle. 

IFAs 

An IFA is a written agreement between an employer and an employee to vary certain award terms such as penalty rates or loadings, provided the employee is still better off overall. 

Important safeguards include that the IFA: 

• must be genuinely agreed to and not forced on the employee 

• must be agreed on after commencement of employment and cannot be a condition of employment 

• must be documented in writing and kept as part of the employment record 

• cannot result in the employee receiving less than their legal minimum entitlements. 

IFAs are commonly used to accommodate flexibility around working hours or remuneration arrangements but they must always be compliant with the Fair Work Act 2009 (Cth). 

Summary 

Understanding when higher pay rates apply and when they don’t is essential for compliance with the Fair Work Act and modern awards. 

Businesses should ensure that salary arrangements, contracts and rostering practices align with their obligations—particularly where above-award salaries or IFAs are used. 

Regular reviews are strongly recommended to confirm that employees remain better off overall and seeking professional advice can help reduce the risk of costly underpayment claims. 

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