insight
Annualised Salary in 2026: How to Stay Compliant, Avoid Underpayments, and Protect Your Business
Annualised salary arrangements can simplify workforce pay and budgeting — but in 2026, compliance has never been more important. With evolving Fair Work laws, recent Federal Court rulings, and stronger enforcement, Australian employers must understand what’s required to pay fairly every pay period.
What Is an Annualised Salary?
An annualised salary is a fixed regular payment over the year that is intended to cover an employee’s base pay and, where permitted, award entitlements such as penalties, overtime, allowances and leave loading — provided the arrangement complies with the relevant award or agreement. It’s not simply paying a salary in lieu of hourly rates.
Why Compliance Matters More in 2026
- Award rules are detailed and specific. Not all awards allow annualised wages, and those that do require robust documentation and record-keeping.
- Pay period compliance is now essential. The 2025 Federal Court ruling clarified that employers can’t rely on being “better off overall” if any individual pay period falls short of entitlements.
- Stronger enforcement and penalties. Non-compliance can lead to backpay liabilities, fines, and regulatory scrutiny.
Core Compliance Requirements
Agree in writing: Document how the annualised salary was calculated, what it includes, and the award entitlements it covers.
- Set outer limits: Clearly define the maximum ordinary hours, penalty rate hours and overtime that the annualised rate covers.
- Keep detailed records: Maintain accurate timesheets/rosters, including start & finish times and unpaid breaks.
- Reconcile annually: Compare what would have been paid under the award with what was actually paid and pay any shortfall.
Pitfalls Employers Must Avoid
- Failing to record hours: Time recording is mandatory — you cannot assume compliance without it.
- Neglecting pay period checks:Overreliance on annual totals can lead to underpayments and compliance breaches.
- Unclear contracts:Ambiguous or incomplete agreements increase legal risk — especially after the most recent 2025 rulings.
The Role of Automation
Using a sophisticated workforce management solutions can help your business:
- Record time accurately
- Support reporting of hours worked against an annualised salary agreement
- Alert you to potential underpayments
- Inform annual reconciliation processes
Using integrated workforce management, payroll and HCM technology can help reduce risk and administrative burden — critical in the current compliance landscape.
Conclusion
Annualised salaries offer operational efficiencies — but employers must stay proactive to comply with Australian wage laws in 2026. Clear written agreements, robust record-keeping, regular reconciling, and the right payroll tools are essential to protect your people and your business reputation.
FAQs
What is an annualised salary in Australia?
An annualised salary is a fixed annual amount paid to an employee that may include their base pay and certain award entitlements such as overtime, penalties, allowances, and leave loading — but only where the relevant award or agreement allows it. Employers must still ensure the employee is paid at least what they would have earned under the award for each pay period.
Are annualised salaries legal in Australia in 2026?
Yes, annualised salaries are legal in Australia in 2026 if they comply with Fair Work requirements. This includes having a written agreement, accurate time recording, defined outer limits of hours, and regular reconciliation to ensure no underpayment occurs.
Do all awards allow annualised salary arrangements?
No. Not all modern awards permit annualised wages or salaries. Employers must check the specific award or enterprise agreement covering the employee before implementing an annualised arrangement.
Do employees on annualised salaries still need to record their hours?
Yes. Employers must keep accurate records of hours worked — including start and finish times and unpaid breaks — even when employees are paid an annualised salary. This is essential for compliance and reconciliation purposes.
What are “outer limits” in an annualised salary agreement?
Outer limits define the maximum number of ordinary hours, overtime hours, penalty rate hours, or allowances that are covered by the annualised salary. If an employee works beyond these limits, the employer must pay the additional hours separately at the applicable award rates.
Do annualised salaries need to be checked each pay period?
Yes. Recent court guidance confirms that employers must ensure employees are not underpaid in any individual pay period, not just across the year as a whole. Being “better off overall annually” is not sufficient if a pay period falls below award entitlements.
What happens if an employee is underpaid on an annualised salary?
If an annualised salary does not fully cover award entitlements, the employer must pay the shortfall. Underpayments can result in back pay obligations, penalties, and potential regulatory action by the Fair Work Ombudsman.
How often must annualised salaries be reconciled?
Employers must reconcile annualised salaries at least annually and on termination of employment. The reconciliation compares the amount the employee was paid with what they should have received under the award for the hours worked.
What must be included in a compliant annualised salary agreement?
A compliant agreement should include:
- The annualised wage amount
- Which award entitlements are included
- How the salary was calculated
- Outer limits of hours and penalties
- Reconciliation arrangements
- Confirmation that hours will be recorded
Can an annualised salary replace overtime payments entirely?
No. An annualised salary can only replace overtime payments up to the defined outer limits and only if permitted by the award. Any overtime worked beyond those limits must be paid separately.
