Annualised salaries can be a practical and flexible way to pay employees, particularly in industries where hours fluctuate due to seasonal demands, weather conditions or operational requirements. However, they also carry legal risks for employers if not implemented or maintained correctly.
For employers in Victoria, especially those operating in farming, agribusiness and rural industries, understanding how annualised salaries function under modern awards is critical. These awards contain strict rules around the format of written agreements, record keeping and ‘no disadvantage’ protections for employees.
This article explains how annualised salaries operate and highlights some of the key obligations which employers must meet to remain compliant under the annualised salary provisions of modern awards, including more specifically, the Pastoral Award 2020.
What is an annualised salary?
An annualised salary is a fixed yearly amount which is paid to an employee rather than their wages being determined on an hourly basis. It is designed to compensate the employee for a range of entitlements that would otherwise be paid separately under an award, including:
- Minimum wages
- Ordinary hours of work and rostering
- Allowances and special allowances
- Overtime rates
- Penalty rates
- Annual leave loading
- Payment for public holidays
Under an annualised salary arrangement, the employer and employee agree to a single annualised sum that is intended to cover some, or all of the above entitlements, in addition to, what would be, their hourly rate for their work.
Whatever the agreement is, employers must ensure the salary genuinely compensates the employee for the work performed.
The introduction of annualised salaries under the Pastoral Award 2020
As of the first full pay period commencing on or after 1 March 2020, the Pastoral Award 2020 was varied to allow employers and employees to enter into written agreements for annualised wages.
This change was welcomed by many farming businesses, as it offers greater flexibility than strict hourly payment models. However, the variation also introduced detailed compliance requirements that employers must follow.
Annualised salary arrangements under the Pastoral Award are similar to an Individual Flexibility Agreement (IFA) and includes safeguards to ensure employees are not disadvantaged.
'Handshake agreements' are not enough!
An annualised salary arrangement must be agreed to in writing; meaning verbal agreements will not be sufficient.
The written agreement must clearly define:
- The annualised wage payable
- Which award provisions are included in the annualised salary
- The method used to calculate the annualised salary, including:
- Each separate component of the salary; and
- Any assumptions made about overtime or penalty rates
- The outer limit of ordinary hours that may attract penalty rates in a pay period or roster cycle
- The outer limit of overtime hours that may be worked without additional payment
This level of detail is designed to promote transparency and prevent underpayment.
A copy of the agreement must be provided to the employee, and the employer must keep a copy as part of their time and wages records.
What happens if an employee works more than the agreed hours?
Annualised salaries are not unlimited in scope.
If, in any pay period or roster cycle, an employee works more than the hours specified in the agreement, the employer must:
- Pay the employee additional wages for those extra hours, on top of the annualised salary; or
- Enter into a formal time off instead of overtime (TOIL) agreement
This is where many employers get caught out. Without accurate records of hours worked, it can be difficult, if not impossible, to prove compliance.
The importance of accurate time records
Even when employees are paid an annualised salary, employers must still keep detailed time records.
Under the Pastoral Award 2020, employers are required to keep records of:
- Starting and finishing times; and
- Any unpaid breaks taken.
These records must be signed off by the employee each pay period or roster cycle.
This obligation often surprises employers who assume salaried employees do not need to complete timesheets. In reality, accurate time records are essential to demonstrate that the employee has not been disadvantaged and to protect the business in the event of a Fair Work audit or dispute.
The 'No disadvantage' requirement
One of the most critical elements of an annualised salary arrangement is the no disadvantage test.
The annualised salary must be no less than what the employee would have earned under the award for the work performed over the relevant period.
This applies:
- Over each 12-month period; or
- Over the shorter period if the employee’s employment ends before 12 months
If, after performing a reconciliation, it is found that the employee has been underpaid, the employer must pay the shortfall within 14 days.
Mandatory annual reconciliation
Employers cannot simply assume their annualised salary calculations remain accurate.
At least every 12 months, or upon termination, employers must:
- Tally the hours worked by the employee;
- Calculate what the employee should have been paid under the award; and
- Compare that amount to what was actually paid.
If there is any shortfall, it must be rectified promptly.
Failing to conduct these reconciliations can expose employers to underpayment claims, penalties and reputational damage.
Using rate calculators and templates
To assist employers, industry tools are available to help calculate compliant annualised salaries.
While these tools are helpful, they should not be used as a substitute for tailored legal advice. Every workplace is different, and assumptions that work for one business may not be appropriate for another.
Base rate of pay and NES entitlements
Another common trap relates to the base rate of pay.
Under the Fair Work Act, entitlements such as annual leave and personal/carer’s leave must be calculated based on the base rate of pay, not the loaded or annualised rate.
The base rate of pay does not include:
- Overtime;
- Penalty rates;
- Allowances; or
- Loadings.
In most cases the base rate will be the award base rate.
Getting this wrong can result in underpaid entitlements and significant backpay exposure.
Terminating an annualised salary agreement
An agreement for an annualised salary can be terminated:
- By either party giving 12 months’ notice; or
- At any time by mutual agreement.
Importantly, termination of the agreement does not terminate the employee’s employment. Instead, the employee will revert to being paid strictly in accordance with the award.
This distinction is critical and should be clearly explained to both parties when entering into the arrangement.
Risks of getting it wrong
Annualised salaries can be highly effective, but non-compliance can be costly.
Potential legal risks include:
- Underpayment claims;
- Fair Work Ombudsman investigations;
- Backpay orders; and
- Civil penalties.
For farming and agribusiness employers, these risks are often compounded by complex rostering patterns, seasonal peaks and informal workplace practices.
How Maddens Lawyers can help
At Maddens Lawyers, our Employment Law team regularly advises Victorian employers on:
- Implementing compliant annualised salary arrangements
- Reviewing existing salary structures
- Drafting award-compliant written agreements
- Conducting underpayment reviews
- Responding to Fair Work Ombudsman investigations
With a strong understanding of regional industries, farming operations and agribusiness, we provide practical, commercially focused advice tailored to your business.
If you are considering an annualised salary arrangement, or are unsure whether your current arrangements comply with employment law, obtaining advice early can save significant time, cost and stress down the track.
Visit www.maddenslawyers.com.au or call us on 1800 915 228.
