In late August 2025, new workplace laws came into effect that directly affect how penalty rates and overtime are treated under Australia’s award system. If you employ staff who are covered by modern awards in industries such as retail, hospitality, clerical, health, or transport these changes are important for you.
This blog unpacks the new law, what prompted it, and what it means for both employers and employees.
What are penalty rates?
Penalty rates are higher rates of pay that employees receive when they work outside of ‘ordinary’ hours. For example:
- working on a Sunday,
- working on a public holiday,
- working late at night or very early in the morning, or
- working overtime beyond normal daily or weekly hours.
They are designed to compensate employees for working at inconvenient times and missing out on family or social life. They also act as a signal to employers that those hours come at a higher cost.
What has changed?
The new Fair Work Amendment (Protecting Penalty and Overtime Rates) Act 2025 makes two key changes:
- The Fair Work Commission (FWC) can no longer reduce penalty rates or overtime rates in awards.
- The FWC can no longer insert clauses that ‘trade off’ or ‘substitute’ penalty rates or overtime for other arrangements (such as a higher base pay) if that would leave an employee worse off.
In simple terms: penalty and overtime rates in awards are now locked in.
Why did the government make this change?
Employers in retail, clerical and other industries had applied to the Fair Work Commission (FWC) to change awards replacing penalty rates with a single, higher flat rate of pay (arguably a system that is more flexible and easier to administer). Unions warned this would cut thousands of dollars a year from workers’ take-home pay.
Favouring the argument made by Unions, the government implemented legislative reform on the basis it was necessary to protect wages during a cost-of-living crisis and to stop a repeat of the 2017 penalty rate cuts that affected retail and hospitality workers.
What does it mean for employers?
- Awards can’t be watered down
If you have staff covered by an award, you must pay penalty and overtime rates as set out in that award. These rates cannot be removed or substituted in future award reviews.
- Enterprise Agreements face tougher tests
If you use or plan to negotiate an enterprise agreement (EA), the new law makes the ‘Better Off Overall Test’ (BOOT) harder to pass. That’s because the award safety net is now stricter. Any EA that relies on rolled-up or flat rates will need careful modelling to show every employee is still better off than under the award.
- Flexibility agreements still possible
Employers and employees can still use Individual Flexibility Arrangements (IFAs) to vary certain conditions. But an IFA must leave the employee better off overall. Substitution or offsetting penalty rates is much harder to justify under the new law.
- Payroll and rostering need review
Employers who use loaded salary or annualised wage arrangements should check that payroll systems are correctly recognising and paying penalty and overtime entitlements. Even if salaries are above award minimums, employees must not be worse off than if they had received separate penalty and overtime payments.
What does it mean for employees?
For employees, this is a win. Their entitlement to penalty and overtime rates is now guaranteed under awards. It ensures that working on a Sunday, a late night, or a public holiday will continue to attract higher pay.
What do stakeholders say?
- Government: Presents the law as protecting the wages of 2.6 million Australians covered by awards.
- Unions: Strongly supportive, arguing it stops wage cuts through ‘backdoor’ award changes.
- Employer groups: Critical, saying it removes flexibility, increases wage costs, and makes it harder to negotiate innovative pay arrangements that better suit business and workers.
Does it affect existing arrangements?
- Awards: Existing awards are not changed retrospectively. But from now on, they cannot be varied to reduce or substitute penalty/overtime rates.
- Enterprise Agreements: Agreements already approved remain valid. But new agreements, or variations to existing ones, will be tested against the stricter award safety net.
- Flexibility Arrangements and Salaried Arrangements: These still stand, but employers must be able to demonstrate that employees are not disadvantaged compared to award entitlements.
Key takeaways for employers
- Penalty and overtime rates in awards are now locked in place.
- Payroll systems and rosters should be reviewed to ensure correct application of these entitlements.
- Enterprise bargaining will require more careful modelling under the new rules.
- Flexibility agreements remain available but must still leave employees better off overall.
How we can help
At JFM Law, we work with employers navigating the new compliance landscape. Call us on (02) 9199 8597 or email us to ensure your arrangements are lawful and effective.
The information contained in this post is current at the date of editing – 1 October 2025.
