Are You at Risk When Paying a ‘Flat Rate’?

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The implementation of flat hourly rates of pay for your employees can initially seem like an easy way to simplify wage calculations, allowing you to streamline the payroll process. However, members need to be aware of the potential legal minefield which they are stumbling into when looking to put employees on a flat hourly rate of pay.

There is a misconception that where employees are paid a flat rate above the award minimum hourly rate, overtime, penalty provisions, and allowances do not apply. Under the Fair Work Act 2009 (Cth) any alternative arrangements need to meet the minimum standards as prescribed by the National Employment Standards and modern award provisions so paying a flat rate can often compound problems rather than solve them.

Under modern awards employers are able to incorporate entitlements such as:

  • Overtime
  • Penalty rates
  • Allowances
  • Leave loading

into an individual employee’s flat hourly rate of pay by mutual written agreement.

However, to be lawful these arrangements need to be formalised in an Individual Flexibility Arrangement (IFA) in accordance with the modern award’s specific provisions.

When implementing IFAs employers have the responsibility to ensure these arrangements pass the Better Off Overall Test, more commonly referred to as the “BOOT” test.

The BOOT involves weighing up the advantages and disadvantages of the IFA to the employee. A comparison of the employee’s entitlements under the proposed IFA against their entitlements under their award should form part of the IFA’s terms and show that the employee is better off under the IFA.

The Fair Work Ombudsman’s Best Practice Guide on the use of individual flexibility arrangements advises that when deciding if the employee is better off overall, you should consider the following questions:

  • Who initiated the request?
  • What entitlements are being changed? (For example, hours, overtime, penalty rates, etc.)
  • What is the value of these entitlements under the award?
  • Does changing the employee’s span of hours change their penalty rates?
  • Is the employee better off financially? (For example, will they receive more on a flat rate of pay under the IFA than they would as separate entitlements under their award?)
  • Are there any situations where the employee wouldn’t be financially better off? (such as a roster cycle or after a certain amount of overtime.)
  • Are there any other circumstances or characteristics unique to the employee that should be considered? (For example, factors such as the employee’s family commitments, their health, whether they have a second job, study or other interests.)

In order to implement a flat hourly rate of pay, members need to follow these processes and not simply start paying their employees higher rates of pay. They also need to advise employees that penalties and overtime are now incorporated into their hourly rate of pay and obtain consent to the terms of the IFA. Without an IFA, informal arrangements are highly unlikely to be legally binding. Failure to comply with the relevant agreement provisions could result in underpayments to employees which could prompt a union or a Fair Work Ombudsman investigation resulting in back pay and possible fines.

It is also important that members review IFAs regularly (at least annually) to ensure the entitlements of the employee under the IFA do not fall below their award. This is important when circumstances change, for example when the pay rates under awards are reviewed (this typically occurs annually from 1 July).

NatRoad’s advisors are experienced in assisting employers meet their legal obligations in employment matters, including the drafting of Individual Flexibility Arrangements. For more information and advice about your obligations, contact a NatRoad advisor on (02) 6295 3000 or info@natroad.com.au.


NatRoad communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Our advisors are available to clarify any questions you have and provide the right advice for your business and workforce. Contact David at david.johns@natroad.com.au or Richard at richard.calver@natroad.com.au, or on (02) 6295 3000.