The Fair Work Act (FW Act) requires employers to pay employees all of their pay and entitlements for the work they perform in full, in money by a prescribed method and at least monthly. In limited circumstances, an employer can take money out of an employee’s pay before it is paid to them (called a ‘permitted deduction’). Awards, enterprise agreements and employment contracts may also have rules about when and how to pay employees.

Employers need to pay their employees in a way that is consistent with all of these requirements. If an employer doesn’t pay an employee all of their pay and entitlements consistent with these requirements, they need to pay the employee back so the employee receives all of their outstanding pay and entitlements in full as soon as possible.

Employer obligations

The FW Act (s 323) requires an employer to pay an employee their pay and entitlements in relation to work performed by the employee:

• in full (except for permitted deductions – see Deductions and related issues)
• in money by a prescribed method
• at least monthly.

The prescribed payment methods are cash, cheque, money order, postal or similar order, electronic funds transfer (or a combination of these methods) or another method authorised under an award or enterprise agreement.

Awards, enterprise agreements and employment contracts can all contain information about what, when and how an employee has to be paid. For example, some awards provide that employees have to be paid weekly or fortnightly.

To ensure that an employee is paid correctly, including different entitlements that need to be paid, employers must first check the applicable award or enterprise agreement as well as FW Act requirements.

Employees may also have terms in their employment contract about what, when and how they have to be paid. Employers need to apply any contractual terms in a way that is consistent with the FW Act and any applicable award or enterprise agreement.

Annualised wage arrangements

Some awards contain provisions which allow employers to enter into annualised wage arrangements with employees. Annualised wage arrangements enable employers to pay their employees fixed regular amounts every pay period, even when their employees’ hours fluctuate.

Awards contain rules around how to set and formalise an annualised wage for employees to have the benefit of an annualised wage arrangement, including for example by requiring a minimum amount above the weekly minimum award rate that employers have to pay.

An award that does this is the Restaurant Award. The annualised wage arrangements in the award changed from 1 September 2022 and are summarised below.

Example: Restaurant Award

An annualised wage arrangement has to be agreed to in writing by an employee and employer and kept as a time and wages record with a copy given to the employee. The annualised wage needs to be set at a rate that is at least 25% more than the employee’s weekly minimum award rate, multiplied by 52.

The annualised wage can include payment for:

• minimum award rates for the employee’s classification level
• split shift allowance
• overtime
• penalty rates
• annual leave loading.

However, the annualised wage can only cover an employee working up to a weekly average of 18 penalty rate hours (excluding time worked from 10pm to midnight, Monday to Friday) and 12 overtime hours over their roster cycle. If an employee works more than these hours, they need to be paid at the employee’s minimum hourly rate, plus any applicable penalty or overtime rates.

Employers need to keep records of the employee’s start and finish times each day, and any unpaid breaks. These records need to be signed or digitally acknowledged as accurate by the employee at the end of each pay period or roster cycle.

Employers also need to review and reconcile annualised wage arrangements at least every 12 months after the arrangement started, or when the arrangement or employment ends. Any shortfalls between the annualised wage over that period and the amount the employee would have been entitled to for their work under the award need to be paid within 14 days of completing the reconciliation.

See our guide to annualised wage arrangements in the hospitality and restaurant industries for more information.

Visit Annualised wages to find out about annualised wage arrangements.

Offsetting award entitlements

Some employers may try to rely on an employment contract or a separate agreement to offset above-award pay rates or salaries against award entitlements. This is not an annualised wage arrangement.

Employers should seek independent advice before attempting to enter into these arrangements to ensure that they comply with all relevant obligations under the FW Act and any applicable award or enterprise agreement. The Fair Work Ombudsman (FWO) cannot advise on specific contractual arrangements or agreements.

When an underpayment is identified

If an employer hasn’t met their obligation to pay employees all of their pay and entitlements when they were required to, they need to back pay the employee so that the employee receives all of their outstanding pay and entitlements.

A common question when back paying employees is whether an employer can calculate back pay by looking at what an employee was paid overall in a period and comparing it to what an employee should have been paid overall for the same period, or whether an employer can apply higher amounts paid for one or more pay entitlements to satisfy a different entitlement that was underpaid.

Whether an employer can do either of these things depends on the circumstances, including any annualised wage provisions in an applicable award or agreement and the terms of the employment contract, but generally:

• employers need to pay their employees in full for each pay period. This means that if they pay their employee more than the minimum amount in one pay period, they can’t use this to satisfy a less than minimum amount paid in another pay period
• if employers pay their employees more than the minimum amount for one entitlement, they can’t use this to satisfy an underpayment of a different entitlement.

Correcting an underpayment

When an employer corrects an underpayment, they need to pay superannuation contributions on the amount paid if:

• the employee is eligible for superannuation payments and,
• the amount paid is for ordinary time earnings.

Visit Tax and superannuation to find out more about superannuation payments.

Sometimes when an employer corrects an underpayment, they may also have to pay interest on the underpaid amount. For example, the Federal Circuit Court, Family Court or Federal Court can all make orders that an employer pay interest on underpaid amounts.

Even if an employer considers they have corrected an underpayment, if the FWO finds that the employer has not back paid an employee in full, the FWO will require the employer to pay more so the employee gets their full entitlement.

If an employer discovers an underpayment of a former employee, they should correct the underpayment by paying the former employee what was underpaid. Visit I think I've underpaid my employee for more information.