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29 May 2023

It Depends – Can an employee make an underpayment claim when their annual salary is higher than their minimum Award entitlements?

In this edition of ‘It depends’, associate Megan Cheng talks about what an all‑inclusive annual salary is and whether an employee who is paid an all-inclusive annual salary can still successfully make an underpayment claim.

In this edition of ‘It depends’, associate Megan Cheng talks about what an all‑inclusive annual salary is and whether an employee who is paid an all-inclusive annual salary can still successfully make an underpayment claim.

Video transcript

Hi and welcome to another edition of It depends. As many employers would be aware, modern Awards set out the minimum rate of pay and other entitlements that employees are entitled to receive. A frustrating but preventable issue that sometimes arises is when an employee is paid an all-inclusive annual salary that is greater than their minimum Award entitlements, but the employee is still able to successfully make an underpayment claim. Today we’ll be talking about how employers can avoid this issue.

What is an all-inclusive annual salary?

An employer can pay an Award covered employee an all-inclusive annual salary that is paid in satisfaction of their minimum rate of pay, overtime, allowances, penalties and loadings that the employee is entitled to receive under the relevant Award. Usually, the annual salary is set at a rate that is quite a bit higher than what the employee would be entitled to receive if they were paid strictly in accordance with the Award.

Can an employee who is paid an all-inclusive annual salary still successfully make an underpayment claim?

It depends on several factors, but most importantly, the wording of the employment contract. In order for an employee’s all-inclusive annual salary to actually be paid in satisfaction of their Award entitlements at law, the employment contract must contain an appropriately worded clause to set off the employee’s Award entitlements. The set off clause must state that the annual salary is paid for all hours worked and then specifically list out the Award entitlements that the annual salary is paid in satisfaction of. Importantly, employers also need to make sure that the annual salary is sufficient to adequately compensate the employee for all of their Award entitlements. Employers also need to make sure that they keep detailed time records of all hours worked by employees, including any overtime and work on weekends and public holidays.

What happens if an employment contract does not have an appropriate set-off clause?

If an employment contract doesn’t have an appropriately worded set off clause, then it is possible for an employee to make a claim for unpaid overtime, allowances, penalties and loadings, even if the employee’s annual salary is far greater than their minimum Award entitlements.

What should employers do?

This often becomes a frustrating and complex issue for many employers, but it is one that can be avoided. Employers should make sure that they understand the legal requirements and review their employment contracts to check that there is an appropriately worded set off clause. Employers should also make sure that they keep detailed time records of all hours worked by employees, and review the relevant Award to make sure that there aren’t any other specific requirements for paying employees an annual salary. If you need any advice or assistance with reviewing your employment contracts, feel free to get in contact with a member of our team.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.

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Megan-Cheng-web
Megan Cheng
Associate

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