How To Set Annual Salaries In Australia: Legal, Super & Contracts

Setting an employee’s annual salary can feel like a balancing act.

On one hand, you want to offer something competitive so you can attract and keep great people. On the other, you need to make sure the number you put in the contract actually works in practice - across minimum wage obligations, modern awards, overtime and penalty rates, superannuation, leave entitlements, and payroll processes.

And here’s the key point many small business owners miss: an annual salary isn’t just a “nice round number” you agree on with a candidate. In Australia, salary arrangements can create legal risk if they aren’t set up properly - especially if you assume a salary automatically covers everything.

Below, we’ll walk you through a practical, Australia-specific framework for setting an annual salary, including the legal obligations to watch for, how superannuation fits in, and how to document it properly in your employment contracts.

What Does “Annual Salary” Actually Mean In Australia?

An annual salary is usually expressed as a fixed amount per year (for example, $78,000 per annum) paid in regular instalments (weekly, fortnightly, or monthly).

For small businesses, the most common reason to use an annual salary is simplicity: you can budget more easily, your employee has stable income, and payroll can be more straightforward than tracking hourly wages.

But “salary” doesn’t mean “anything goes”. In Australia, a salary still sits inside a legal framework, including:

• National Employment Standards (NES) under the Fair Work Act (e.g. annual leave, personal/carer’s leave, notice of termination)
• Modern awards or enterprise agreements (if they apply)
• Minimum wage obligations
• Superannuation rules
• Payroll obligations (pay slips, record-keeping, tax withholding)

So the right question isn’t just “what annual salary should I offer?” - it’s “what annual salary can I offer that keeps me compliant, and matches how the employee will actually work?”

Salary Vs Wages (And Why It Matters)

In everyday language, people often use “salary” and “wages” interchangeably. Legally and practically, there are differences:

• Wages are usually calculated by the hour, with additional amounts added for overtime, penalty rates, allowances, etc.
• Salary is typically a fixed annual amount (though you still need to account for the underlying entitlements the employee would have received under an award or the NES).

For small businesses, problems tend to arise when a salary is treated as a shortcut around awards, overtime, or record keeping. A compliant salary is not a “set and forget” figure - it should be reviewed against the employee’s actual hours and entitlements.

Step 1: Work Out The Minimum You Must Pay (Awards, Minimum Wage And Classifications)

Before you settle on an annual salary, you need a baseline: the minimum legal pay for that employee in your business.

In many cases, that baseline comes from a modern award - which is essentially an industry or occupation-based rulebook setting minimum pay rates and conditions.

Check Whether A Modern Award Applies

A modern award may apply depending on:

• your industry (e.g. retail, hospitality, manufacturing), and/or
• the employee’s role (e.g. admin, clerical work, sales)

If an award applies, it usually sets:

• minimum hourly rates
• penalty rates (weekends, public holidays, late nights)
• overtime rules
• allowances
• break entitlements

If you want to pay an annual salary instead of the award’s hourly structure, it’s important to check whether the award has specific rules for paying salaries (often called annualised wage or similar arrangements). Many awards set extra requirements such as written agreement terms, time recording, and periodic reconciliation to ensure the employee is not underpaid.

Confirm The Correct Classification Level

Awards don’t just say “pay the award rate”. They typically have classification levels (for example, Level 1, Level 2, Level 3) based on duties, skills, experience, and responsibility.

If you choose the wrong classification, your salary calculation can be wrong from day one - and underpayment issues often start here.

If you’re not sure what classification applies, it’s worth getting advice early, because fixing classification mistakes later can be time-consuming and expensive.

Don’t Forget The National Minimum Wage

If no award applies, the National Minimum Wage may set the floor. But even where the minimum wage is the baseline, you’ll still need to comply with NES entitlements and any other applicable workplace laws.

Step 2: Decide What The Salary Needs To Cover (Hours, Overtime, Penalties, Allowances)

Once you know the minimum entitlements that apply, the next step is to define what your proposed annual salary is intended to cover.

This is where many small businesses get caught out - because it’s easy to assume:

“We’re paying a salary, so overtime/penalties don’t apply.”

In many cases, overtime and penalties still matter. Even if you pay a fixed salary, you need to be confident the employee is being paid at least what they would have earned under the relevant award (including any award-specific annualised wage requirements) and the NES for the hours and patterns they actually work.

Start With A Realistic Hours-and-Patterns Snapshot

To set a compliant annual salary, map out how the employee will actually work in practice. For example:

• Will they work consistent 9-5 weekdays?
• Will they work weekends?
• Will there be late nights or early starts?
• Do busy periods require extra hours?
• Are there on-call requirements?
• Are there allowances you need to pay (e.g. travel, uniform, tools)?

Even if you can’t predict every week, you should have a reasonable estimate. If the role is likely to involve regular additional hours, the salary should be built with that reality in mind.

Be Careful With “Reasonable Additional Hours”

Many employment contracts for salaried employees include wording that the employee may be required to work “reasonable additional hours”. That concept exists under the Fair Work Act - but it’s not a blank cheque.

Whether additional hours are “reasonable” can depend on factors like:

• health and safety risks (fatigue)
• the employee’s personal circumstances
• business needs
• the amount of notice given
• whether the employee is compensated for those additional hours

Practically, if your employee regularly works significant overtime and the salary doesn’t compensate them appropriately (when compared to their award/entitlements), your business can be exposed to underpayment claims.

Step 3: Include Superannuation Correctly (And Avoid “Super Included” Confusion)

When setting an annual salary, you need to be very clear about whether the figure is:

• exclusive of superannuation (e.g. “$80,000 + super”), or
• inclusive of superannuation (e.g. “$88,800 inclusive of super”).

This is one of the most common salary-setting mistakes we see - especially when offers are made quickly or in casual emails.

Should You Quote Salary “Plus Super” Or “Inclusive Of Super”?

Many small businesses choose to quote base salary plus super, because:

• it’s clearer for employees
• it reduces disputes about what the “real” salary is
• it makes payroll setup more straightforward

That said, some businesses do quote a package amount “inclusive of super”. You can do this, but you need to document it carefully, and ensure the employee understands the breakdown.

Be Clear In The Employment Contract

However you structure it, make sure it’s clearly reflected in the Employment Contract.

In particular, your contract should spell out:

• the base salary amount
• superannuation contributions (and that they will be paid in accordance with superannuation law)
• pay frequency (weekly/fortnightly/monthly)

This is one of those areas where “we agreed verbally” or “it was in the email chain” can become messy later - so it’s worth getting it right upfront.

Remember Super Is Usually Based On Ordinary Time Earnings

Superannuation is commonly calculated on an employee’s ordinary time earnings (and not necessarily on every dollar paid). Because the rules can be nuanced depending on how payments are structured (including certain allowances, loadings, and overtime), it’s important your payroll setup matches the legal requirements.

If you’re not sure whether your salary figure should be treated as inclusive or exclusive of super, get advice before you issue the offer - it’s much easier to fix early than after months of payroll.

Step 4: Put The Salary Terms In A Proper Employment Contract (Not Just An Offer Email)

Even if you’re confident the annual salary is competitive and compliant, you still need to document it properly.

A well-drafted contract doesn’t just confirm the number - it sets expectations about how work will be performed, and reduces the risk of disputes later.

Key Contract Clauses To Consider For Salaried Staff

When you employ someone on an annual salary, your contract should typically cover:

• Position and duties: so there’s clarity about what the salary is paying for
• Hours of work: ordinary hours, and how additional hours will be handled
• Remuneration structure: annual salary, pay frequency, and whether salary is inclusive/exclusive of super
• Leave entitlements: annual leave, personal/carer’s leave, and other NES entitlements
• Termination and notice: including minimum notice requirements and any payment in lieu provisions
• Confidentiality and IP: especially if they’ll create content, designs, code, or client materials
• Workplace policies: so you can set behavioural and operational expectations clearly

If you’re hiring casually (where salary is usually not the right structure), you would generally use a different contract type, such as an Employment Contract (Casual).

If You Have A Company, Make Sure The Right People Approve The Hire

If your business is run through a company, it’s also worth checking that the right person (or people) have authority to approve remuneration and sign employment contracts - particularly for senior hires.

In some businesses, that authority comes from internal governance documents such as a Company Constitution (or shareholder arrangements). This is less about the salary rules themselves, and more about making sure the contract is properly authorised.

Salary Set-Off And “All-In” Pay Clauses: Use With Care

Some businesses use “set-off” clauses (sometimes called “all-in salary” clauses) to state that the annual salary is paid in satisfaction of award entitlements such as:

• penalty rates
• overtime
• allowances

This can be a useful approach - but only if it’s implemented carefully, and the salary is high enough to genuinely cover those amounts over time.

It’s also important to remember that some awards contain specific annualised wage clauses with conditions (for example, record-keeping of hours and regular reconciliation). A general “all-in” clause in a contract doesn’t override an award, so you should check the award wording before relying on set-off alone.

If the employee’s working patterns change, or if the salary wasn’t calculated based on realistic assumptions, these clauses may not protect you from underpayment risk.

Step 5: Build In A Compliance “Safety Net” (Pay Reviews, Record Keeping, And Policy Support)

Once your salaried employee starts work, your obligations don’t stop. A sustainable annual salary approach includes ongoing checks, so your salary remains compliant as the business (and the role) evolves.

Do Regular Pay And Role Reviews

We often recommend small businesses schedule periodic reviews (for example, every 6-12 months) to confirm:

• the role duties haven’t shifted into a higher award classification
• the employee’s hours haven’t crept up significantly
• there aren’t recurring overtime/penalty patterns that should be compensated separately
• the salary still stacks up against the minimum award/NES entitlements (and any annualised wage reconciliation requirements, if relevant)

This is particularly important if your business has seasonal peaks, or if you’re scaling quickly and roles change fast.

Have Clear Workplace Policies To Support How Salary Roles Operate

Salary arrangements often work best when your business also has clear policies around hours, time recording, and conduct.

For example, if you use technology at work or handle sensitive client information, a Workplace Policy suite can help set expectations and reduce misunderstandings.

Know Your Notice And Termination Settings

If you ever need to end the employment relationship, pay and notice obligations can be misunderstood (particularly for salaried employees).

It’s important to ensure your contract clearly sets out termination processes and aligns with minimum legal requirements, including whether payment in lieu of notice may apply.

This isn’t just about legal compliance - it’s also about maintaining a professional process that protects your business reputation and reduces dispute risk.

Consider Your Privacy And Record-Keeping Settings

Once you hire staff, you’ll handle personal information (tax file declarations, bank details, emergency contacts, medical certificates) as part of payroll and HR administration.

Good privacy practices and clear internal processes can reduce risk - and depending on your business, having a fit-for-purpose Privacy Policy may form part of that compliance foundation.

Key Takeaways

• Setting an employee’s annual salary in Australia isn’t just about picking a competitive number - it needs to align with minimum legal entitlements under the NES and any applicable modern award.
• Before offering a salary, you should understand the role’s realistic hours, overtime patterns, penalty rate exposure, and allowances, so you can avoid underpayment risk.
• Be clear whether the annual salary is inclusive or exclusive of superannuation, and document the salary structure carefully.
• A properly drafted employment contract helps define salary terms, hours, and expectations, and can reduce disputes as your team grows.
• Salary compliance is ongoing - regular reviews, good time/records practices (including any award annualised wage reconciliation steps), and clear workplace policies can help ensure salary arrangements stay compliant as roles evolve.

Note: This article is general information and isn’t legal, tax or accounting advice. Salary packaging, PAYG withholding and super calculations can be technical - consider speaking with an employment lawyer for workplace compliance and an accountant or payroll professional for payroll/tax setup.

If you’d like help setting up compliant annual salary arrangements and employment contracts for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.