Most Australian employees are covered by a modern award. That coverage doesn't switch off when the employee signs a written employment contract. The award sits underneath the contract as a statutory floor — the contract can offer more, but not less, than the award provides. For small-to-medium employers, misreading that relationship is one of the more common sources of underpayment exposure.
This article explains:
- what a modern award is and where it comes from
- how the award interacts with the National Employment Standards and the written contract
- when an employee falls outside award coverage
- a worked example of how the safety net operates in practice
- where a lawyer's help is usually warranted
What a modern award is
A modern award is an industrial instrument made by the Fair Work Commission under the Fair Work Act 2009 (Cth). Each award covers an industry, an occupation, or a defined group of employees, and sets out the minimum terms and conditions that apply to employees in that scope. There are over 120 modern awards currently in operation, ranging from the General Retail Industry Award to the Banking, Finance and Insurance Award to a Miscellaneous Award that catches employees not covered by any other instrument.
Awards typically deal with minimum wages by classification, ordinary hours and rostering rules, breaks, allowances, overtime, penalty rates, casual loading, termination notice, and consultation obligations. They do not deal with every aspect of employment — leave entitlements, public holidays, maximum weekly hours, and a handful of other items sit in the National Employment Standards instead.
How an award sits alongside the NES and the written contract
A useful way to picture the legal hierarchy is three layers stacked from the ground up.
The bottom layer is the National Employment Standards, set out in sections 61 to 131 of the Fair Work Act 2009 (Cth). The NES provides ten minimum entitlements — annual leave, personal/carer's leave, parental leave, maximum weekly hours, requests for flexible working, and so on — that apply to every national-system employee regardless of award status.
The middle layer is the modern award. The award supplements the NES with industry-specific minimums: pay rates, penalty loadings, allowances, rostering rules. Where an award term conflicts with the NES, the NES wins.
The top layer is the written employment contract. The contract can grant the employee more than the award and NES require, and it usually does — base salary above the classification minimum, additional leave, bonus schemes, notice periods longer than the statutory minimum. What the contract cannot do is reduce an entitlement below the award or NES floor. A clause that purports to do so has no effect to the extent of the shortfall.
Two practical consequences follow:
- Award entitlements operate automatically. They apply whether or not the contract mentions the award, and whether or not the employee has read it.
- Contracting parties cannot waive award coverage by agreement. Even if both employer and employee sign a contract saying "the award does not apply", the award still applies if the employee falls within its scope.
When an award does not apply
A modern award only applies where its coverage clause captures the employee, the employer, and the work being performed. Four situations commonly put an employee outside award coverage:
- No award covers the occupation or industry. Senior managerial and professional roles often fall outside every award. The Miscellaneous Award fills some of these gaps but excludes employees in classes of work that were traditionally award-free.
- An enterprise agreement is in place. Once a registered enterprise agreement applies to the employee, the modern award is displaced for the life of the agreement. The agreement must have passed the better-off-overall test against the relevant award to be approved.
- The employee is a genuine high-income employee with a guarantee of annual earnings. This one is narrower than most employers assume, and is covered in detail below.
- The employer is not a national-system employer. Most private-sector employers are. State public sector and some local government employers in certain jurisdictions are not, and may be covered by a different industrial system.
The high-income earner carve-out — read carefully
This is the area where contracts most often go wrong. The headline rule, from sections 47 and 329 of the Fair Work Act 2009 (Cth), is that a modern award does not apply to a "high-income employee". A high-income employee is one whose earnings exceed the high-income threshold and who has a "guarantee of annual earnings" given under section 330.
From 1 July 2025 the high-income threshold is $183,100. The threshold is indexed and changes each year on 1 July, so the figure that matters is the one in force when the guarantee is given.
The crucial point — and the one that trips employers up — is that earning above the threshold is not, on its own, enough to displace the award. The employee must also be given a written guarantee of annual earnings that:
- is in writing
- specifies an annual amount that exceeds the threshold for the guaranteed period (12 months or more)
- is given before or during the guaranteed period
- is accepted by the employee in writing
- includes notice to the employee that accepting the guarantee means the modern award will not apply
A contract clause that simply records a salary above $183,100, without the formal guarantee mechanics, does not put the employee outside award coverage. The Federal Court has confirmed this — see Australian Industry Group v Fair Work Commission and the lines of decisions following it on what counts as a guarantee. The employer in that situation continues to owe award penalty rates, overtime, and allowances on top of the headline salary, unless the contract uses a properly drafted set-off clause that the award itself permits.
A worked example
Priya runs a 40-person speciality engineering firm in Sydney. She hires a CAD drafter on a written contract that offers a salary of $95,000 plus four weeks' annual leave. The contract is silent on overtime, allowances, and penalty rates. The Professional Employees Award 2020 covers the role.
The award provides for a minimum salary at the relevant classification, plus penalty loading for work performed outside ordinary hours and on public holidays, plus a tool allowance. The four weeks' leave in the contract matches the NES. The $95,000 salary is above the award classification minimum.
Six months in, the drafter raises an underpayment claim. The drafter has worked a number of weekends and public holidays during a deadline-heavy project. The contract says nothing about the award; Priya assumed the salary "covered everything".
What the Fair Work Ombudsman is likely to find:
- The award applies. The drafter is not a high-income employee, has no guarantee of annual earnings, and is not under an enterprise agreement.
- The annualised salary may absorb some award entitlements, but only if the contract contains an explicit set-off clause and only to the extent of the gap between the salary and the award classification rate. Without that clause, weekend and public holiday loadings are owed on top of the $95,000.
- Back-pay is calculated on the award rates Priya did not pay, plus superannuation on the underpaid wages, plus potential civil penalties.
The lesson — the contract did not displace the award. It sat on top of it. The unpaid award amounts crystallised every pay cycle the drafter worked penalty hours, whether or not anyone in the business was tracking them.
Where a lawyer's input usually pays for itself
A lot of award-and-contract questions resolve cleanly with a few hours of legal review. The work tends to fall into one of three buckets.
Award coverage audit. Identifying which award (if any) applies to each role is the first piece of work. It looks deceptively simple — the Fair Work Ombudsman's award finder is a starting point — but coverage clauses are written by reference to the principal purpose of the work, not the job title. Roles that straddle two awards, or that look modern but sit in a traditionally award-free classification, are where employers make expensive guesses. A lawyer will read the coverage clauses, look at the actual duties, and document the reasoning so a later FWO inquiry has something concrete to respond to.
Contract drafting and set-off clauses. A well-drafted contract uses an annualised salary together with a set-off clause that allocates the salary across specified award entitlements — base, overtime, penalties, allowances — in a way the award itself authorises. This is technical work. Set-off clauses fail when they are too broad, when they do not match the award's annualised wage provisions, or when the employer cannot show a reconciliation each year.
Guarantee of annual earnings. For genuinely senior roles above the threshold, drafting a compliant guarantee under section 330 is straightforward but easy to get wrong. The written notice that the award will no longer apply, the form of the employee's acceptance, and the term of the guarantee all need to line up.
How Artificer Legal can help
We work with founders, directors, and in-house operators at small-to-medium businesses on exactly this layer of employment compliance. Typical engagements include reviewing existing contracts against the applicable award, drafting set-off and guarantee-of-annual-earnings clauses, advising on the contract changes that follow an annual wage review, and responding to Fair Work Ombudsman correspondence when something has gone wrong.
The deliverable is usually a short legal advice plus a cleaned-up template. We aim to leave a business with a contract package it can use for the next several hires without rework.
In summary
A modern award is not displaced by signing an employment contract. The award is a statutory floor that operates automatically once an employee falls within its coverage, and a contract can build on the floor but cannot cut beneath it.
In practice, three points matter most for an SMB employer. First, identify which award (if any) covers each role, and document the reasoning. Second, if you pay above the award minimum, use a properly drafted set-off clause so the salary genuinely absorbs award entitlements — do not assume an all-in figure does this by default. Third, do not treat the high-income threshold as a magic line; the award only switches off where there is a formal written guarantee of annual earnings that complies with section 330 and the threshold figure in force when the guarantee is given. Get those three right and most of the underpayment risk goes with them.