At a franchisor presentation last night, a franchisee asked me a question that I suspect plays out in workplaces across Australia every single day.
A promising candidate negotiates a higher hourly rate. The employer agrees — and to keep things simple, says the rate also covers the tool allowance and annual leave loading. Everyone shakes hands. Easy.
Is that okay?
The short answer: it can be done. But the longer answer is where most employers get caught out — and the stakes have never been higher.
Start with the modern award
Whatever industry you operate in, there’s almost certainly a modern award sitting underneath that employment relationship. The award sets the minimum entitlements: base rates, penalties, overtime, allowances, loadings. You cannot contract out of it. You can pay above it — but you cannot make a private deal that delivers less than what the award requires.
So when you “load up” a rate to absorb allowances and loadings, you’re essentially saying: the higher rate I’m paying covers all of that. Whether that holds up legally depends entirely on how it’s documented and whether it actually delivers — every pay period.
Two legitimate pathways
There are really two compliant ways to structure a loaded rate:
- Annualised wage arrangement clauses — some modern awards (not all) contain a specific clause permitting an annualised salary that absorbs identified award entitlements. These clauses are prescriptive. They require written agreement, identification of which entitlements are absorbed, an outer limit on hours, and an annual reconciliation.
- Individual Flexibility Arrangements (IFAs) — every modern award contains an IFA clause. IFAs can vary specified terms of the award (often penalty rates, overtime, allowances, loadings, or how ordinary hours are arranged) for an individual employee. But they too are prescriptive: written, signed, genuinely agreed, and — critically — the employee must be better off overall than they would have been under the unvaried award. This is the Better Off Overall Test (BOOT).
The BOOT is not a one-time exercise
Award rates increase. Allowances increase. The Fair Work Commission’s annual wage review almost always lifts minimum rates — usually from 1 July each year. A loaded rate that comfortably passed the BOOT in July 2024 may be sailing very close to the wind by July 2026.
This means BOOT calculations and IFA terms need to be reviewed at least annually, and ideally whenever there’s a meaningful change to the employee’s hours, duties, or roster pattern.
Why the recent cases matter — even if you’re not a supermarket
In September 2025, the Federal Court handed down its decision in FWO v Woolworths; FWO v Coles [2025] FCA 1092. Class action proceedings against Super Retail Group (owner of Supercheap Auto, Rebel, BCF and Macpac) on similar grounds have been flagged to follow.
A few takeaways every Australian employer should absorb:
- Set-off clauses only work within a pay period. The Court held that you cannot pool over-award payments across 6 or 12 months to fix underpayments in another period. Section 323 of the Fair Work Act requires entitlements to be paid in full in each pay period. Woolworths’ attempt to “pool” across 26 weeks was found ineffective.
- A loaded salary does not switch off your record-keeping obligations. Even where a salary is intended to absorb overtime, penalties and allowances, you still need to keep records of the hours that would have attracted those entitlements. Clock-in/clock-out data alone wasn’t sufficient.
- Inadequate records flip the burden of proof. Under section 557C of the Fair Work Act, if you haven’t kept the records you’re required to keep, you carry the onus of disproving an underpayment allegation. That is a very difficult place to be standing in court.
- The exposure is enormous. The combined claims exceeded $116 million, on top of more than $300 million already remediated. Personal liability for officers is a live risk under the accessorial liability provisions.
What this means for the franchisee’s handshake
Going back to the original question: agreeing to a higher rate that “includes” the tool allowance and annual leave loading is not automatically wrong — but as a casual verbal agreement, it’s almost certainly non-compliant.
To do it properly:
- Check whether your award has an annualised wage clause, and whether it fits your situation
- If not, use an IFA — drafted in accordance with the award’s IFA clause
- Identify exactly which award entitlements the loaded rate is intended to absorb
- Run the BOOT, document it, and keep the working
- Keep records of actual hours worked, including any that would have attracted penalties or overtime
- Diarise an annual review
A loaded rate that’s been carefully structured is a legitimate, useful tool. A loaded rate built on a handshake is a slow-burning compliance problem waiting to be discovered — by an employee, the FWO, or a class action firm.
How Harrisons can help
At Harrisons we regularly review award coverage and classification levels, run BOOT calculations, and draft employment contracts and IFA templates for clients across a range of industries. If you’re using loaded rates — or thinking about offering one to a new hire — it’s worth a conversation before the handshake, not after.
Claire Harrison is the Founder and Managing Director of Harrisons, a flourishing HR consulting business that sprouted in 2009 from Claire’s passionate belief that inspiring leaders and superstar employees are the key success factor to any business. With over 20 years’ experience, Claire has worked as a HR Director of multi-national organisations, as a Non-Executive Board Director, and a small business owner. Claire’s corporate career includes working with companies such as BHP, Westpac, Fonterra and Mayne Nickless.
