Chapter 2Key issues
Penalty rates are a good thing. It sends a message to the worker: 'Sorry that you've been inconvenienced. Sorry that you have to stay back and work while everyone else is asleep. Sorry that you missed your child's birthday.'
Without the penalty rates, there was no way we could've afforded to keep things moving. We wouldn't have been able to manage our finances. We wouldn't have been able to pay our loan. We wouldn't have been able to provide what most people call 'the necessities'.
2.1This chapter explores the extent of support for the Fair Work Amendment (Protecting Penalty and Overtime Rates) Bill 2025 (bill) and examines some of the key issues raised by submitters during the inquiry.
General views on the bill
2.2There was broad support for the intent of the bill to protect existing penalty and overtime rates as an enduring part of the modern award system. For example, the Australian Council of Trade Unions (ACTU) argued that the bill:
… would introduce necessary safeguards for employees against penalty and overtime rate reductions in the award context, including the requirement that the FWC assess whether a term substituting overtime or penalty rates would result in a reduction in remuneration for any employee.
2.3The Shop, Distributive and Allied Employees' Association (SDA) submitted that the bill was a 'positive and necessary step that will give protection to the award safety net in that penalty rates cannot disappear from under workers feet' and would provide 'a level of certainty and comfort to workers, especially young workers and women who are relying on penalty rates'.
2.4Other union groups, including the Australian Services Union (ASU), Finance Sector Union (FSU) and Unions WA argued that the bill would establish an important safeguard to prevent exemption rates from having the effect of removing penalty and overtime rates, and eroding the relevant minimum safety net of terms and conditions.
2.5In contrast, employer groups such as the Australian Chamber of Commerce and Industry (ACCI) and the Australian Retailers Association (ARA) and National Retail Association (NRA) expressed concern over the proposed changes as well as potential deficiencies in the drafting of the bill. For example, the ARA and NRA argued that the bill 'unnecessarily constrains the powers of the [FWC] in carrying out its statutory function of maintaining a fair and relevant safety net of employment conditions through the modern award system'.
2.6The Business Council of Australia (BCA) submitted that the bill would 'lock in the current methodology of determining penalty rates and overtime loadings on a proscriptive and resource-intensive and inflexible hourly basis'. Similarly, the Australian Industry Group argued that the bill would impact the FWC's ability to 'address known problems in our notoriously complex award system and to ensure that awards evolve to reflect the inevitably changing circumstances of both workers and employers in the future'.
2.7In addition, the Council of Small Business Organisations Australia (COSBOA) submitted that the proposed changes would 'negatively impact small businesses, reduce workplace flexibility, and undermine the [FWC's] role as an independent industrial umpire'.
2.8In its short submission, the Law Council of Australia suggested that there were already two established lawful means to roll up penalty and overtime rates that means that an 'employee's salary cannot be less than what the employee would have earned had they been paid under the Award'.
2.9In response to the queries about why the bill is required in the context of existing protections, the Department of Employment and Workplace Relations (DEWR) explained the Australian Government's position:
At the moment, when the [FWC] considers applications to make, vary or amend the modern awards, they're applying the modern awards objective in section 134 of the Fair Work Act. That objective contains a number of different principles. Sometimes those principles can pull against each other, and the [FWC] is given the job of then assessing, on the basis of all of those principles and the tensions inherent in the modern award objective, what that outcome is. What this provision in this bill does is to put beyond doubt that the outcome cannot be that penalty or overtime rates are reduced, whether that is directly or through a different arrangement. Whatever the real world outcome is, if you like, the outcome must not be that, those penalty or overtime rates—that additional renumeration—are reduced. It essentially reinforces that floor…
Comments on key elements of the bill
2.10While stakeholder feedback addressed various aspects of the bill, most of the commentary centred on the following issues:
protections for penalty and overtime rates;
impact on flexibility and existing pay arrangements;
complexity and compliance costs;
the independent role of the FWC; and
further proposed safeguards.
Protections for penalty and overtime rates
2.11Many submitters highlighted the importance of protecting penalty and overtime rates for award reliant employees who would be disproportionately affected by cuts to overtime and penalty rates. For example, the ASU argued that its members would face financial hardship if these rates were removed:
… ASU members rely upon this additional remuneration not just for compensation for working unsociable hours, but also as a trade-off mechanism to meet their living expenses. The cost of living has stung low paid workers, and penalty and overtime rates are necessary for them to try to remain financially stable. Without such remuneration, workers will never be able to meet increasing cost of living expenses, nor will they be able to save for a home or have a holiday.
2.12According to DEWR, there are around '2.6 million award-reliant employees that are more likely to be women (59.8%), work part-time (66.7%), be under the age of 35(57.3%), and employed on a casual basis (48.3%)'. DEWR noted:
Approximately 20.3% of all employees in Australia are paid at the applicable minimum wage rates in the 121 modern awards in operation. [FWC] analysis has found, noting that the award-reliant workforce is more likely to be part-time and lower paid, that the wages paid to the modern award‑reliant workforce constitute only about 10.5% of the national 'wage bill'. For these workers, penalty and overtime rates and a strong minimum safety net form an important part of their take-home pay and economic security.
2.13The ACTU indicated that of these award reliant workers, nearly '1.2 million of them work on weekends. Nearly 900,000 of them work night shifts. And these are overlapping categories—you can work both night shifts and weekends'. Inaddition, the ACTU noted that 'half a million of them do shift work, and 660,000 of them work overtime'.
2.14The committee also heard evidence from several workers, who outlined their personal experiences. Forexample, Mr Vincenzo Tuccitto told the committee that 'our payroll is heavily dependent on penalties in order to make it worth it, keep our bills paid and all that sort of stuff. I can't tell you how many Christmases I've been at work for or Easters I've worked'.
2.15Ms Emily Dick, an employee of Officeworks, explained the real life impact that working unsociable hours has on her ability to spend time with loved ones:
Working on the weekends impacts my relationship with my partner because my partner works full time and he also does gigs on the weekends, so working those odd hours is like ships sailing in the night.
2.16Ms Ruth Sumner, a longstanding Coles employee, echoed the sacrifices that many workers endure routinely to provide for their families:
I do Sundays at the moment. It already impacts time with my grandkids…Without penalty rates, I'd still have to give up my Sundays with them, and there would be no reward.
2.17Mr Noah Ward, a school cleaner with Serco, highlighted the importance that many jobs that attract penalty rates have on the economy and society as a whole:
Without these jobs, or people to take them, society would literally stop dead. Nothing would happen. Lots of these jobs take place at irregular or unusual hours, when people are heading home for dinner or going to sleep. All these family milestones are missed, as well. Even something as simple as being able to watch the news on TV or that TV show that you want to watch with your family—you can't do that, because you're working unusual hours.
2.18Per Capita submitted that 'penalty and overtime rates make up an essential part of their take-home pay and is the difference between meeting essential expenses and falling behind'. Per Capita argued that:
Reductions in the total take home pay of award reliant employees caused by cuts to overtime and penalty rates would disproportionately affect workers with less workplace power (casual and young employees) and cuts to these rates is also likely to disproportionately impact women, potentially widening the gender pay gap.
2.19Professor Chris F. Wright told the committee that in contrast to negotiating rolled up pay arrangements via collective bargaining, exchanging award penalty rates for higher base salaries could lead to employees being worse off. Professor Wright argued:
The collective bargaining system, with its in-built protections, provides a more appropriate venue for rolled up pay arrangements to be negotiated. Allowing employers to propose higher base pay in exchange for removing award penalty rates could be presented to employees on a take‑it‑or‑leave‑it basis. Such arrangements could also set precedence for eroding penalty rates among other groups of workers, including those who are lower paid.
2.20Some employer and business groups claimed that the bill would harm job creation and productivity, as well as disadvantage small and medium businesses, particularly in the retail and accommodation/hospitality sectors. For example, ACCI submitted that the bill was out of step with the needs and reality of modern workplaces:
Any reduction in the range of existing or future options for workplaces to achieve, maintain or improve flexibility and productivity should be resisted as this risks business viability, investment and jobs. This is particularly so for small business workplaces, who already struggle with a mammoth list of regulatory compliance burdens, ongoing encroachment of managerial prerogative, and a range of other financial and economic pressures.
2.21The National Electrical and Communications Association (NECA) submitted that that the bill would reduce the likelihood of meeting the national target of 1.2 million new homes over five years:
At the moment overtime can be managed through agreed arrangements that are currently lawful and/or provided for under relevant awards, having regard to the fact that to be lawful, these arrangement must ensure that the employee remains better off overall than they would otherwise be under the relevant award.
2.22The ARA emphasised that its application before the FWC 'contains significant benefits for employees and for employers of all sizes, right across the sector'. They argued that if this was 'not permitted in the award, it is not realistic that this benefit will ever become available to most employees through enterprise bargaining—most notably, those in smaller businesses'.
2.23In a similar vein, the BCA argued that the bill would mean the FWC would be 'unable to include higher base salary terms in awards, such as the banking and finance industry, that significantly benefit a large number of finance workers by increasing their pay and allowing flexibility in when their hours are worked'.
2.24However, other participants pointed to studies which found that that there was no evidence to suggest any improvement to employment outcomes for those affected by the penalty rate cuts. Indeed, Professor Wright noted that rolled up pay arrangements could often result in underpayment:
Studies have found that previous penalty rate reductions have failed to deliver promised employment growth. Other studies have found that rolled up pay arrangements often result in underpayments due to inadequate reconciliation. Cutting penalty rates can exacerbate recruitment and retention challenges, especially in low-paid sectors with high job vacancies. This is because they can reduce job quality, which can drive workers away and worsen staff shortages, an outcome that is evidently bad for business.
2.25Further, DEWR emphasised that the bill would not materially affect the status quo, with nothing in the bill preventing the use of exemption rates:
Nothing in this bill would prevent an exemption rate being put in place, provided that it meets the requirements of new section 135A. If the exemption rate does not reduce the additional remuneration that the employee would be entitled to under the modern awards objective 134(1)(da), then that exemption rate is absolutely permitted under that bill.
2.26DEWR also agreed that the bill would not prevent employers and employees from discussing and agreeing flexible work arrangements or from entering into individual flexibility agreements:
The bill doesn't apply retrospectively and also does not affect bargaining or the individual flexibility arrangements, meaning there is an avenue for negotiation on these issues with employees.
Impact on flexibility and existing arrangements
2.27Several submitters raised concerns about the possible removal of current exemption rates within the modern awards framework. For example, Clubs Australia sought clarity that the bill would not inadvertently capture legitimate, long-standing pay arrangements:
Managers of licensed clubs have beneficial salary exemption arrangements under Clause 18.4 of the Registered and Licensed Clubs Award 2020. These arrangements have operated transparently for over a decade, have not been subject to industrial disputes, and deliver above-award outcomes for workers.
2.28Similarly, the Chamber of Commerce and Industry WA (CCIWA) submitted that exemption provisions benefited employers by making modern awards 'more flexible, easier to comply with and meet the work practices that are prevalent in their industry'. CCIWA argued that:
Under these proposed changes, if a variation was to be brought forward for awards involving current exemption clauses, the FWC would be required to remove those exemption clauses for tens of thousands of employees who have agreed and are content with their arrangements, if it is found one person covered by that award was disadvantaged by the exemption clause.
2.29In relation to enterprise bargaining and individual flexibility arrangements, COSBOA argued that 'by making award flexibility more difficult and prescriptive, the bill undermines bargaining and innovation in employment practices across industry sectors'. COSBOA submitted that:
Engagement in the Enterprise agreements process amongst small businesses is low. Small Businesses lack sophisticated expertise of HR resources and employment specialist to undertake bargaining for enterprise agreements and necessarily rely on Awards for this purpose.
2.30The Australian Hotels Association argued that the removal of annualised wage and absorbed salary arrangements from modern awards could 'increase the potential or inadvertent payroll errors, particularly for small businesses who are far more likely to undertake payroll themselves'.
2.31However, Professor Wright told the committee that 'existing awards wouldn't be affected unless the [FWC] were to decide that the existing arrangements within an award, when it comes up for review again, don't fulfil the modern award objectives'.
2.32The ACTU also stated that the bill simply requires the FWC to ensure that exemption rates are 'high enough to effectively cover those penalty rates and overtime rates forgone to make sure they do not have the effect of "reducing the additional remuneration any employees would otherwise receive"'.
2.33DEWR pointed out that the bill would 'not amend s 139(1)(f) of the Fair Work Act, which allows for annualised wage arrangements which require employers to reconcile an employee's wage with their entitlements to ensure they are not financially worse off'. DEWR noted that the bill:
… preserves the operation of individual flexibility arrangements under s 144 of the Fair Work Act, which allow employers and employees to vary award terms to meet genuine business and employee needs, provided the arrangement does not leave the employee worse off than under the award terms.
2.34In addition, DEWR noted that employers and employees would 'still be able to enter into employment contracts that offset above award pay rates against award entitlements'. DEWR indicated that 'such arrangements must continue to comply with relevant obligations under the Fair Work Act, any applicable modern award and the common law. Employees must not be paid less than they would receive under the applicable award'.
Complexity for businesses
2.35Some participants contended the bill could have potential negative impacts on smaller employers, particularly in relation to increasing both payroll complexity and compliance costs for smaller businesses. For example, COSBOA argued that:
Modern awards are already intricate and complex, with over 121 different awards governing pay rates, penalty entitlements, and conditions. Removing the discretion of the independent umpire to tailor awards to changing business environments will increase the risk of non-compliance among small businesses that lack specialised HR resources.
2.36In addition, COSBOA stated that locking 'penalty and overtime rates at inflexible levels will directly increase costs for small businesses operating in sectors with irregular trading hours' and argued that 'many of these businesses already face tight margins and rising costs for energy, rent, and inputs'.
2.37Similarly, ACCI submitted that the bill risks removing Modern Award terms that allow workplaces to adopt simple and efficient payroll practices through the use of exemption and salary terms. This would force employers to adopt complex and time-consuming record and calculation practices, and lock in these practices in moving forward. ACCI argued that:
This will be an unproductive and unnecessary outcome for employers that will cost more time and more money, reducing the amount of time and money available to manage and invest in their own business, and impact improvements in wages for employees.
For employers, administration using such terms is easier and provides cost predictability. Employers don't need to calculate changing penalty rates each week, which is particularly beneficial for small businesses who are far more likely to do payroll themselves.
2.38However, while Professor Wright agreed that penalty rates could add complexity in calculating pay rates for workers, he also highlighted the risks associated with rolled up pay rates, especially for low paid, award reliant workers:
Penalty rates can make it more challenging for employers to calculate employees' pay rates. Rolled up pay rates, or pay arrangements where employees receive higher overall pay in exchange for penalty and overtime rates, can be a legitimate solution to this complexity. However, the misuse of these arrangements by some employers that have eroded workers' pay highlights the risks of these arrangements. The award system, the role of which is to serve as a safety net to protect the lowest paid, is not the place to take these risks.
Independence of the FWC
2.39Concerns were raised that the proposed changes would remove the FWC's ability to exercise independent, evidence-based adjustment of awards. Forexample, CCIWA stated that the bill 'represents a significant departure from this modern framework, creating a situation where our system of awards has limited relevance to society and workplaces in Australia'.
2.40Likewise, the BCA argued that it was 'critical to preserve the authority and powers of the FWC to review and test the appropriateness of legacy penalty rate frameworks and their fitness for purpose to grow employment and productivity in the Australian economy in the context of global competition'.
2.41Similarly, the CCIWA contended that the bill would 'result in an assessment that effectively neutralises the FWC from having any ability to make decisions that accurately reflect the needs of the community'. CCIWA argued:
Under this proposal, any variation to Modern Awards that could be beneficial to the majority of employees and employers may be prohibited, if it results in the reduction in remuneration to a single award covered employee. This is a significant departure from the variation of Awards and will, in effect, create static awards that are out of touch with relevant and productive business practices.
2.42This view was echoed by the ACCI, which submitted that the proposed changes would 'undermine the capacity for the FWC to function effectively and responsively and is an unreasonable incursion into its long-standing independence as the industrial umpire'.
2.43However, the FWC is guided by various criteria in its decision making, and the ACTU cited the 2022 inclusion of a gender equality objective into the modern awards objective of the Fair Work Act as an example of these criteria evolving to meet modern workplace expectations:
… some have claimed that the bill interferes with the commission's role as the independent umpire. This is to misunderstand the role of parliament and the commission. The parliament has set, and occasionally adjusts, the statutory criteria which guide the exercise of the commission's award-making variation and revocation powers. Parliament did so recently in 2022 by introducing a gender equality objective into the modern awards objective of the Fair Work Act.
2.44DEWR noted that it would still be up to the FWC 'to determine how the principle is interpreted and applied in practice to any future award variation process, through its usual consultative processes where employer representatives and unions will have the opportunity to present their views'.
2.45DEWR pointed out that the bill would 'not apply retrospectively, which means that if the [FWC] makes a decision on the current award variation matters before the bill is passed, those decisions will not be overridden by passage of the bill'. DEWR went on to note that:
Consistent with the Australian Government's Policy Impact Analysis framework, the department assessed the impacts of this reform on Australian individuals and businesses. Through this assessment process, the department determined there would be no change to regulatory impost for employers, including small businesses (those with less than 20 employees) who employ around 30.5% of award-reliant employees.
Further proposed safeguards
2.46Several submitters raised concerns regarding compliance with obligations to record working hours and carry out periodic reconciliations. For example, while supporting the bill, the ASU noted that if exemption rate applications currently before the FWC are successful, there would no longer be a requirement for employers to keep time and wages records:
… the requirement to keep time and wages records only applies to employers if they are under an obligation to pay penalty rates or overtime rates. That is one of the reasons that big business is making these applications in the [FWC]—because, once an exemption rate is in place, they no longer have an obligation to pay overtime or penalty rates. Therefore, the regulation requiring them to keep accurate records of the hours worked and the wages paid to employees is no longer in effect. It would also make it very hard to scrutinise or test any exemption rates arrangements that are in place if there are no accurate time and wages records in place.
2.47Similarly, the FSU told the committee there was a 'substantial problem with annualised salaries in our award and employers not doing their reconciliations required under those existing annualised salary arrangements'. The FSU submitted that:
Without detailed record-keeping of hours worked, employers cannot demonstrate that they are meeting their obligations to properly pay their workers, not only under the BFI Award but also the Fair Work Act. Nor can employers show that they are ensuring safe and healthy workplaces if they do not even know how many hours their employees are working.
2.48To address these concerns, the ASU recommended that the Fair Work Regulations 2009 be amended to explicitly require employers to keep time and wages records even if an exemption rate is in effect.
2.49The Australian Industry Group argued that an amendment of this kind may inhibit employers' ability to offer flexible working arrangements to workers, such as working from home because they wouldn't have visibility of the hours being worked:
In order to ensure compliance with the award, firstly, some employers may be reluctant to agree to some flexible arrangements that will have them working from home and won't let them work the way they want or let them work at home….
2.50However, as DEWR pointed out at paragraph 2.33 above, and throughout their evidence, the bill does not prevent employers and employees from entering into individual flexibility agreements (IFAs), and that varying work hours, or work patterns is very often included in IFAs:
One of the common, practical ways that people enter into what we call IFAs or those flexibility arrangements is to be able to adjust their hours like that, which is certainly not prohibited by the bill.
2.51DEWR provided further evidence that record-keeping is central to any applications to the FWC to substitute penalty or overtime rates in modern awards.
2.52In its more recent assessments of applications where substitute employee entitlements have been considered, the FWC has 'required record keeping as a means of assessing whether an employee is worse off under a substitution term':
For example, standardised annualised wage arrangements in modern awards require recording of hours worked. This reconciliation process works as the principal mechanism to ensure 'rolled up' rates do not leave employees worse off.
2.53Furthermore, where the Fair Work Ombudsman is investigating cases of alleged underpayment, and the employer does not meet their record-keeping requirement:
… they will need to disprove any allegations of underpayment including in the context of applicable modern award terms. Additionally, record‑keeping and pay slip breaches may attract fines issued by the Fair Work Ombudsman via infringement notices or result in other enforcement action, such as litigation.
Committee view
2.54For the 2.6 million Australians who rely on modern awards, penalty rates and overtime are essential components of their take home pay. These Australians rely on their penalty rates and overtime.
2.55If passed, this bill would protect the penalty rates and overtime of these workers. It will ensure that existing penalty and overtime rates remain an enduring part of the modern award system and guide the work of the Fair Work Commission (FWC) in ensuring a fair and relevant safety net of terms and conditions for award reliant workers.
2.56These workers—who often undertake challenging jobs at times that many Australians are spending with their loved ones, and too often at the expense of their own commitments, relationships and wellbeing—rely on such safeguards.
2.57This bill will provide these workers with the certainty that they will not be worse off when faced with a proposal to forego their penalty rates and overtime in favour of a 'rolled up rate', such as an exemption rate.
2.58In response to the evidence received from union groups that without clear requirements for employers to keep time and wages records, employees may be left vulnerable to arrangements that undermine their rights under the award, the committee sought and received assurance from the department that this would not be the case.
2.59The committee notes that the bill expressly requires the FWC to ensure that where award terms substitute penalty and overtime rates, the pay that employees would otherwise have received from the penalty and overtime rates is not reduced. The department cited contemporary consideration of terms where the FWC has required record keeping as a means of assessing whether an employee is worse off under a substitution term. However, in light of the concerns raised, the committee believes that the Government should monitor this closely.
2.60In response to concerns raised by the Australian Industry Group and employer groups about the operation of the bill, the committee notes that the bill will not impact the framework for making individual flexibility arrangements under modern awards; does not constrain the FWC's power to vary modern awards to remove ambiguity or uncertainty or correct errors; and the changes will not apply retrospectively. Employers' current operations, including terms in modern awards that already provide for a 'rolled up' pay arrangement, will continue after the commencement of the bill. Addressing a key concern raised by employers during consultation, an amendment to the bill has confirmed that nothing in the bill will require the FWC to initiate a review of existing award terms.
2.61Further, the committee notes that the bill would not impact the making of enterprise agreements, which remain a key mechanism for negotiating entitlements, including penalty and overtime rates, subject to the FWC's approval and the requirements of the Fair Work Act 2009.
2.62In response to concerns raised that the bill would inhibit the FWC in its role, the committee notes that the FWC is guided by many criteria in its decision making. The bill preserves the FWC's role as the independent workplace tribunal, empowering the FWC to interpret and apply the protection in the bill in a way that is appropriate and fair in the circumstances.
2.63The bill will have no material impact on the status quo, but simply inserts a safeguard to ensure that penalty and overtime rates are not reduced, and that workers' rights to be fairly compensated for penalty and overtime rates under a 'rolled up rate' cannot be infringed.
2.64Overall, the committee believes that the bill is an important step in ensuring that the overtime and penalty rates that millions of Australians rely upon remain a secure part of the modern award safety net. The committee therefore recommends that it be passed without delay.
2.65The committee recommends that the bill be passed.
Senator Marielle Smith
Chair
Senator for South Australia