It is common to pay staff according to the minimum hourly rate under a modern award, plus any additional award entitlements the employee should receive.

However, it’s also possible to choose to pay a flat hourly rate higher than this minimum with the intention of not paying penalty rates or award entitlements, which can often be easier from an administrative perspective.

While this can be done, employers should know exactly how to do it to ensure that employees are not underpaid.

Pay entitlements under a modern award

Employees are entitled to receive a minimum hourly rate under the Health Professionals and Support Services Award 2020. This hourly rate is determined by their classification under the award and a casual will receive a 25 per cent loading on top of this.

An employee also has certain entitlements under the award. These are:
•    overtime penalty rates
•    weekend penalty rates
•    public holiday penalty rates
•    shiftwork penalty rates
•    allowances
•    an annual leave loading.

Paying an above-award rate of pay

The purpose of an above-award rate of pay is to pay an employee a flat hourly rate (or total salary package) that is intended to compensate for, and be in satisfaction of, all minimum pay entitlements under the award.

In practice, this means that when working overtime, or on the weekend when penalty rates apply, an employee will still receive their normal flat hourly rate.

It is expected that over the course of the entire pay period, receiving the flat rate will leave them better off financially than if they had just received the minimum hourly rate and any award entitlements that are applicable.

In best practice, an above-award pay rate should be high enough that this rate will never fail to compensate an employee for their minimum entitlements.

What does it look like in a contract?

The arrangement must be set out in a contract, outlining the purpose of the above-award rate of pay. This kind of clause is referred to as a set-off clause.

Typical wording may state that the employee’s remuneration is ‘paid in satisfaction of their entitlements under the award’ or that their remuneration may be used to ‘set off’ any entitlements under the award that the employee may have.

Specific reference to the relevant award clauses can further strengthen the validity of the set-off clause.

Common query

I pay my employees a higher hourly rate and have told them that that’s what they’ll receive for all hours worked, but this isn’t in their employment contract. What does this mean?

If a set-off clause in an employment contract doesn’t outline that the purpose of the rate is to pay in satisfaction of an employee’s minimum entitlements, then it becomes the case that the employee should receive their award entitlements in addition to the above-award rate.

This also applies in the total absence of an employment contract, unless there was some kind of written documentation outlining the nature of their pay with agreement from both parties.

In this case, it is quite likely that the employee is being underpaid their minimum pay entitlements and back payment may be necessary.

If an employer wants to change an employee’s remuneration structure to include a set-off clause, this can only be done on written agreement since an employee cannot be forced to change a material condition of their employment.

What happens if the pay rate isn’t enough?

If an employee’s above-award pay rate is not sufficient to compensate them for their minimum entitlements in any individual pay period, the employee should receive a ‘top-up’ payment.

This is common during periods where an employee might work a significantly larger amount of overtime than expected and we recommend that members engaged in a set-off clause arrangement regularly review their employee’s pay to ensure that they are never underpaid.

In addition, the difference between the above-award rate and the minimum hourly rate will affect just how many hours an employee can work without being entitled to a top-up payment.

For employers only paying slightly higher than the minimum hourly rate, we would recommend keeping a careful eye on the employee’s pay.

A common misunderstanding is that if an employee will receive more than the minimum over an annual period, then there is no need to make top-up payments in each pay period, since over the course of the year it all evens out. This is not correct.

Case law has set the very firm precedent that an employee cannot be left worse off than the award in any individual pay period or pay cycle.

Common query

The award minimum pay rates went up. Do I have to increase my employee’s above-award rate?

An employee must always receive at least their minimum pay. When there’s an increase to the award minimum pay rates, an employer must confirm that the employee’s above-award pay rate is still in satisfaction of their minimum entitlements or make any necessary adjustments.

However, the fact that the remuneration is still in satisfaction of their minimum pay doesn’t mean that an employee can’t negotiate a pay increase with their employer and it is still best practice to maintain consistent performance and pay reviews with employees.

Keeping an employee’s wage stagnant can have a negative effect on job satisfaction and employee retention.

In summary

While it is possible to pay employees an above-award rate, it’s important to make sure that it’s done correctly and that employees are never underpaid.

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