Setting Up Employment Contracts for Award-Covered Employees

An employment contract does not replace a Modern Award. It sits on top of it. The contract sets out the specific terms of the employment relationship, while the award sets the legal minimum floor that the contract cannot go below.

This distinction trips up a lot of employers. They write a contract that says "your rate of pay is $25 per hour" and assume that is the end of the story. But if the employee's award entitles them to $29.04 per hour on Saturdays (including casual loading), the contract does not override that. The employee is entitled to the higher amount.

Worse, a poorly drafted contract can create obligations that go beyond the award. A contract that says "you will receive 5 weeks annual leave" creates a contractual entitlement that cannot be unilaterally reduced, even though the award only requires 4 weeks.

This guide covers how to set up employment contracts that work properly with the Modern Award system — contracts that comply with the law, protect your business, and do not create accidental liabilities.

What the Law Requires

The Fair Work Information Statement

Before or as soon as practicable after an employee starts, you must give them the Fair Work Information Statement (FWIS). This is a document prepared by the Fair Work Ombudsman that summarises key workplace rights including:

• The National Employment Standards
• Modern Awards
• Agreement-making
• Individual flexibility arrangements
• Termination of employment
• The right to disconnect

You do not need to draft this yourself — download the current version from the FWO website. But you do need to provide it, and you should keep a record that you did.

For casual employees, you must also provide the Casual Employment Information Statement (CEIS), which covers casual conversion rights.

Mandatory Information in Writing

While the Fair Work Act does not technically require a written contract, failing to provide one is a serious commercial risk. Multiple provisions of the Act and the applicable award require certain information to be provided in writing:

• Employment type (full-time, part-time, or casual)
• Classification level under the applicable award
• Ordinary hours of work (for part-time employees, the agreed days and hours must be specified)
• Rate of pay (which must meet or exceed the award minimum)
• The applicable Modern Award

Essential Contract Clauses

1. Identification of the Parties

State the full legal name of the employer (the entity, not the trading name) and the employee. Include the employer's ABN.

2. Commencement Date

The date the employee starts work. This is important for calculating service periods for leave accruals, notice of termination, and redundancy pay.

3. Employment Type

Clearly state whether the employee is engaged as full-time, part-time, or casual. This affects every downstream calculation — leave entitlements, penalty rates, casual loading, and termination notice.

For part-time employees, the contract must specify:

• The number of ordinary hours per week
• The days on which those hours will be worked
• The start and finish times for each day
• That any variation to these hours requires agreement

For casual employees, the contract should note:

• The engagement is casual within the meaning of section 15A of the Fair Work Act
• The employee will receive a 25% casual loading in lieu of certain entitlements
• Each shift is a separate engagement
• The employer's right to offer or not offer further shifts

4. Classification and Pay Rate

Specify the employee's classification level under the applicable Modern Award and the hourly or annual rate of pay.

If paying above the award rate, make clear that the over-award component is voluntary and can be adjusted, provided the total rate does not fall below the award minimum. Without this language, the entire rate becomes the employee's contractual entitlement and can only be reduced with the employee's agreement.

Example clause:

"Your classification is Level 2 under the Clerks — Private Sector Award 2020 (MA000002). Your hourly rate of pay is $28.00. This rate includes an over-award component of $3.84 above the current award minimum of $24.16. The over-award component may be adjusted at the employer's discretion, provided your total rate of pay does not fall below the applicable award minimum at any time."

5. Hours of Work

For full-time employees, specify the ordinary hours (38 per week or an average of 38 over a roster cycle) and the span during which those hours may be worked.

Include a statement that the employer may require the employee to work reasonable overtime in accordance with the award and section 62 of the Fair Work Act.

6. The Applicable Modern Award

Name the specific award that covers the employee's position. This is not legally required in the contract, but it removes ambiguity and demonstrates that you have identified the correct award.

"Your employment is covered by the [Award Name] [Award Code]. A copy of this award is available on the Fair Work Commission website at fwc.gov.au."

7. Superannuation

State the employer's obligation to pay superannuation at the current guarantee rate (12% of ordinary time earnings) and that the employee will be given a choice of fund.

8. Leave Entitlements

Reference the NES leave entitlements and any additional award entitlements. Do not specify amounts that exceed the legal minimum unless you intend to provide them — a contractual entitlement above the award is binding on the employer.

9. Termination

Include the notice of termination requirements consistent with the NES:

Add an extra week for employees over 45 with at least 2 years' service.

Include the right to terminate without notice in cases of serious misconduct, and the option to pay in lieu of notice.

10. Confidentiality and Intellectual Property

Standard clauses protecting business information and assigning intellectual property created during employment. These are not award matters but are standard commercial protections.

11. Policies and Procedures

State that the employee must comply with the employer's workplace policies and procedures, and that those policies may be amended from time to time. This gives you flexibility to update policies without varying the contract.

Annualised Salary Arrangements

Many employers prefer to pay a fixed annual salary rather than calculating hourly rates, penalty rates, and overtime each pay period. This is permitted under many Modern Awards, but there are strict rules.

Award Annualised Salary Clauses

Several awards contain specific annualised salary clauses that set out:

• Which entitlements the annual salary must cover (e.g., base rate, overtime for a specified number of hours, penalty rates, allowances)
• The maximum number of overtime or penalty rate hours the salary covers
• A requirement for the employer to keep records of actual hours worked
• A mandatory annual reconciliation comparing the salary paid to the entitlements the employee would have received under the award

For example, clause 22 of the Clerks Award allows annualised salary arrangements, but the employer must:

1. Advise the employee of the annualised salary and which award provisions it is intended to cover
2. Keep a record of the employee's start and finish times each day
3. Conduct an annual reconciliation within 12 months or upon termination
4. Pay any shortfall within 14 days of the reconciliation

Common Law Set-Off Clauses

Where the award does not contain an annualised salary clause, employers sometimes rely on a "common law set-off" clause in the contract. This allows above-award payments to be offset against specific award entitlements.

A valid set-off clause must:

• Clearly identify which award entitlements the salary is intended to cover
• Ensure the salary is sufficient to cover all identified entitlements for the hours actually worked
• Be tested each pay period (not just annually)
• Not reduce any NES entitlement

The High Court confirmed the validity of set-off clauses in Poletti v Ecob (1989), but subsequent decisions have narrowed their application. A poorly drafted set-off clause provides no protection.

The Danger of Insufficient Salaries

If a salaried employee works regular overtime or weekend shifts, and the salary does not cover the total award entitlements for those hours, the employer owes the difference. This is one of the most common sources of large underpayment claims.

Example: A Level 3 clerk on a salary of $58,000 per year ($29.58/hr based on 38 hours/week). If they regularly work 42 hours per week, the extra 4 hours trigger overtime at 150% ($37.02/hr) and 200% ($49.36/hr). Over a year, the overtime component alone could exceed the salary premium, creating an underpayment.

Individual Flexibility Arrangements (IFAs)

Modern Awards allow employers and individual employees to agree to vary certain award terms through an Individual Flexibility Arrangement. The flexibility term in each award (usually clause 7) specifies which conditions can be varied.

Common IFA uses include:

• Varying the span of ordinary hours
• Changing how overtime is taken (e.g., TOIL arrangements)
• Adjusting allowances
• Changing leave arrangements

An IFA must:

• Be in writing and signed by both parties
• Result in the employee being better off overall compared to the award
• Not reduce any NES entitlement
• Include a termination clause (either party can terminate with 13 weeks' notice)
• Not require the employee to sign as a condition of employment

IFAs are useful but limited. They cannot be used to reduce base pay rates or eliminate penalty rates entirely.

Contracts for Different Employment Types

Full-Time Contract Essentials

• 38 ordinary hours per week (or average over a roster cycle)
• Specify the days and span of hours
• Reference to reasonable overtime
• Leave entitlements (annual, personal, compassionate, parental)
• Notice of termination per NES

Part-Time Contract Essentials

• Agreed number of hours per week (must be fewer than 38)
• Agreed pattern of work (days, start and finish times)
• Process for varying hours (must be by agreement)
• Pro-rata leave entitlements
• Guarantee of minimum engagement per shift (usually 3-4 hours depending on the award)

Casual Contract Essentials

• Casual employment stated clearly
• 25% casual loading referenced
• No guarantee of ongoing hours
• Minimum engagement per shift specified (per award — typically 2-4 hours)
• Reference to casual conversion rights under section 66A-66M of the Fair Work Act
• Statement that the Casual Employment Information Statement has been provided

Probation Periods

The Fair Work Act does not have a concept of a "probationary period" as such. However:

• Employees with less than 6 months' service (or 12 months for small businesses with fewer than 15 employees) generally cannot bring an unfair dismissal claim
• A contract can specify a probationary period, but it does not remove the employer's obligation to pay award rates and entitlements during that period
• Contractual probation periods should match the minimum employment period for unfair dismissal protection

How AirComply Helps

Before you draft a contract, you need to know the correct award, classification level, and current pay rates. AirComply's calculator covers all 155 Modern Awards and gives you the current rates instantly.

Check award rates now — free for all awards and classification levels.

Frequently Asked Questions

Does an employment contract override a Modern Award?

No. An employment contract cannot provide less than the Modern Award minimum. If the contract specifies a lower rate or fewer entitlements than the award, the award prevails. The contract can provide more than the award but not less.

Do I legally need a written contract?

There is no single provision that requires a written contract in all cases. However, multiple requirements under the Fair Work Act, NES, and applicable awards require certain matters to be documented in writing. A written contract is best practice and protects both parties.

Can I include a restraint of trade clause?

Yes, but restraint clauses must be reasonable to be enforceable. Courts assess reasonableness based on the scope (what activities are restrained), geography (where the restraint applies), and duration (how long it lasts). An overly broad restraint will be struck down. Get legal advice.

What happens if I do not specify the correct award in the contract?

The correct award applies regardless of what the contract says. If you name the wrong award, you are still obligated to pay under the correct one. Naming the correct award in the contract demonstrates you have identified it and reduces the risk of applying the wrong rates.

Can I change the terms of an employment contract?

Generally, both parties must agree to any variation. Unilateral changes to fundamental terms (like pay rates) can constitute a breach of contract or a constructive dismissal. The exception is changes to workplace policies that are incorporated by reference — these can be updated unilaterally if the contract reserves that right.

Do I need a new contract after each Annual Wage Review?

No. If the contract correctly references the award and specifies that pay rates will be at or above the applicable award rate, the rate automatically adjusts when the award rate changes. However, you should notify employees of the new rate and update payroll.