George Calombaros, Michael Hill Jewellers and the Shangri La Hotel have recently been in the spotlight for underpaying staff. Penalty rates can be difficult to calculate if you don’t understand the relevant award or enterprise agreement your employee is under. If you don’t comply, the Fair Work Ombudsman can investigate, and you may need to pay substantial penalties. This article will explain what you must comply with and whether your employees are entitled to penalty rates. 

What are Penalty Rates?

Penalty rates are higher rates of pay that some employees are entitled to if they work:

  • weekends;
  • public holidays;
  • late nights; or
  • early mornings.

For example, some hospitality workers will be paid at time and a half if they work on a Sunday. This means that if they usually get paid $20 an hour, they will receive $30 an hour on weekends.

Penalty rates are different from working overtime. Overtime is when your employee works more than 38 hours per week or outside the ordinary hours listed in the employee’s agreement.

Modern Award 

A modern award outlines the entitlements that an employee in a particular role and industry should receive. Each award specifies when penalty rates will apply. If you do not wish to pay your employees based on a modern award, your employment agreements must clearly outline how they will be paid. 

However, your employment contracts cannot undercut any obligations within modern awards. So, if you propose a different rate of pay, you still must compensate your employee for all entitlements they would have under the award.

Different awards may apply to employees in the same business. After determining your employee’s award, you must ensure that you classify the employee against the correct ‘level’ of that award. 

For example, a level one kitchen attendant should be paid different rates to a level two or three kitchen attendant.

Awards are updated every financial year. So, you must keep up to date with any legal changes about penalty rates in your current award. If you don’t know the relevant award and end up underpaying your workers, you could face serious legal consequences.

Alternative Agreements

The entitlements that you wish to provide your employees might not always match up with what is under the relevant award. In that case, if you want to put an agreement in place that is an alternative to your relevant modern award, you can choose between an:

  • individual flexibility agreement (IFA); or 
  • enterprise agreement (EA).

However, you cannot use these agreements to pay your employees less than what is prescribed under the award. Instead, you can only put an alternative arrangement in place if your employee will be better off overall due to this agreement. Fair Work will consider this carefully when deciding whether to approve your IFA or EA.  

The agreement you choose must outline which penalty rates apply. You must strictly follow what is specified surrounding penalty rates and pay your employees accordingly. 


As an employer, if you are found to have underpaid your staff you will need to pay both: 

  • the relevant backpay; and
  • any extra penalties.

The Fair Work Commission can apply additional penalties of up to $63,000 per breach of your relevant modern award. 

For example, if you do not pay both penalty rates and overtime, you can be legally responsible for paying for two breaches totalling $126,000.

You can also face penalties of up to ten times higher than this if your breach is a ‘serious contravention’. A serious contravention happens when the courts find that:

  • you knew you were contravening an obligation under workplace laws; and 
  • the contravention was part of a systematic pattern of conduct within your business.

Fair Work can also take you or any other employees to court if you were involved in the business’ contravention. A person involved in the company’s contravention can include:

  • company directors;
  • human resources managers;
  • accountants;
  • businesses involved in the supply chain; and 
  • other managers.

Key Takeaways

Whether or not you need to pay penalty rates to your employees will depend on the modern award that applies to your business. But, if you choose to put an agreement in place that is alternative to modern awards, your employees must be better off due to this agreement. You must ensure that you are aware of the relevant laws surrounding penalty rates. You could face hefty fines if you fail to pay your employees correctly. If you have any questions about whether you need to pay your employees penalty rates, contact LegalVision’s employment lawyers or fill out the form on this page. 

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