21 November 2013 Dispensing with awards - Can you pay employees a lump sum amount that meets your award obligations?

By Warwick Ryan, Partner

The challenge in business to keep up with changes and awards can be particularly problematic.

Many business owners don’t have a full understanding of what awards apply to their staff and even less of an idea of what obligations those awards contain.  This occurs because in reality business owners are busy trying to run their business and do not have the time to become experts in industrial relations.

One of the common questions we are asked is:  

"can I pay my staff member a lump sum amount that will cover off my obligations under the Award?"

The simple answer is 'yes' and there are three principal methods for doing this under the Fair Work Act (the Act):

  1. Enterprise Agreement (EA): An EA is the easiest way to simplify your employment arrangements and make sure that they comply with the obligations under awards and the Act.  EAs allow employers and employees to negotiate directly to come up with an agreement which will entirely replace the award in its effect.  For a medium to large enterprise, it is an excellent way of ensuring that you are not leaving any contingent liabilities (in the form of underpayment of wages claims) on your balance sheet.

  2. Individual Flexibility Arrangement (IFA): IFA's are individual arrangements that vary the award.  Currently, the variations may only be limited to a certain number of items although this is likely to change.  Further, it is not scrutinised by a third party, which can lead to errors, but also makes the process easier. Finally, employees or the employer can terminate the agreements within the required notice period (which the new Federal Government is looking to extend out to 90 days).

  3. Common Law Contracts: Since the early 70's, following a line of cases, employers have been entitled to offset their additional obligations under an award for over award payments made to the employee.  Generally, it requires the insertion of a particular term within your contract that sets out clearly what clauses the award is intended to cover by making lump sum payments.

There are a range of options employers can chose from to pay their staff above the award and do so in a way that successfully excludes or reduces the effect of the award from that point.  However, the key is making sure that you are providing sufficient remuneration to them such that it would outweigh their entitlements under the award.

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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