Depending on your industry, you may be required to pay your employees for working late nights, early mornings or public holidays.  Penalty rates must be paid to employees in accordance with the terms of their modern award or enterprise bargaining agreement.  In most industries you are required to pay penalty rates in the evening (after 7pm) and on weekends.  Penalty rates are usually highest on Sundays and public holidays. If you do not pay these penalty rates you may be prosecuted by the Fair Work Ombudsman. It also important to distinguish between penalty rates and overtime: Overtime is usually any work in excess of 38 hours in a week, or outside the ordinary hours listed in an employee’s award or agreement.  Whereas penalty rates are strictly about when those hours are worked and are unrelated to how many hours are worked in a week. There is one way which you can avoid paying penalty rates – by offering what is called an Individual Flexibility Agreement. Under the Fair Work Act, an employer can offer a group of employees an Individual Flexibility Agreement or IFA.  The IFA is a component of an employment contract and can be used to vary certain terms of a modern award or enterprise agreement. The Fair Work Act has a ‘Model Flexibility Term’ which indicates an employer may alter the following five matters in an employees’ contract through an IFA:

  • arrangements about when work is performed;
  • overtime rates;
  • penalty rates;
  • allowances;
  • leave loading.

So for instance, if you have an employee who wants to work Sundays you may want to negotiate an IFA so their Sunday rate is reduced in exchange for another benefit for the employee. There are some important things to know about an IFA before you consider offering one to an employee. For starters, although there are some parallels between an IFA and the pre-existing (now abolished) Australian Workplace Agreements (AWAs) – there are crucial differences: an IFA is only a component of an agreement, while an AWA is a stand-alone individual contract.  Essentially this means, IFA’s cannot be made a condition of entry into an employment contract. While under an AWA the employee had to be at no-disadvantage (“the no-disadvantage test”) when compared with the relevant award or agreement, under an IFA the employer bares the onus of showing the employee is now better off overall (“the better off overall test”).  This means an employee effectively needs to be advantaged by being on an IFA – rather than being at no-disadvantage.  This is an important distinction. The employer’s ‘better off overall’ assessment will usually involve comparing the employee’s financial benefits under the IFA with the financial benefits under the applicable award or enterprise agreement.  In some circumstances, the Fair Work Commission may also consider the employees personal circumstances and any non-financial benefits. IFA’s do not have to be approved by any external body to be binding, but it is not lawful to pressure an employee to enter into an IFA. In theory, IFA’s can bring about flexibility and productivity to workplace agreements.  However, the application of the ‘better off overall test’ can be complicated and an employer can find themselves in legal trouble if an employee later complains about an IFA which did not leave them better off overall.


If you’re still unsure whether or not you’re required to pay penalty rates, call LegalVision today to have one of our business solicitors help you understand your legal obligations to your employees.

Lachlan McKnight
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