On 28 August 2025, the Labor Government’s Fair Work Amendment (Protecting Penalty and Overtime Rates) Bill 2025 (Penalty Rates Legislation) passed both Houses of Parliament and has now received Royal Assent.
This Insight will briefly explore the objective of the Penalty Rates Legislation and what this means for employers.
The Legislation
The Penalty Rates Legislation fulfils Labor’s pre-election promise to legislate protections for penalty and overtime rates in modern awards. It comes as a direct response to recent employer applications to the Fair Work Commission (FWC) which seek to introduce higher rates of pay in retail, banking, and clerical awards with the intention of absorbing these entitlements.
The Penalty Rates Legislation limits the FWC’s ability to reduce these award rates or to permit terms that substitute these rates which have the effect of reducing any additional remuneration that an employee would otherwise be entitled to receive.
Specifically, the Penalty Rates Legislation will introduce a new section 135A into the Fair Work Act which stipulates that when making, varying, or revoking modern awards, the FWC must ensure that:
- penalty rates or overtime rates are not reduced; and
- modern awards do not include terms substituting penalty rates or overtime rates to reduce an employee’s remuneration.
These restrictions will not only ensure that the penalty and overtime rates currently contained in the modern awards are not reduced, but also that any terms which substitute these rates (such as a “rolled up” base hourly rate) cannot be included in a modern award if it would result in an employee being worse off overall.
The Effect on Employers
The aim of the Penalty Rates Legislation is to protect the employees’ existing entitlements to penalty and overtime rates and to block efforts to absorb these rates into higher base rates of pay, a practice many unions argue leaves employees worse off overall.
Importantly, the Penalty Rates Legislation does not create any new compliance obligations for employers beyond those currently imposed on employers under the Fair Work Act and the modern awards and will not (for the time being) affect employers’ day-to-day operations.
However, there has been significant debate as to whether the new limits on the FWC’s powers will result in changes to the provisions in modern awards that allow for annualised wage arrangements. While the Penalty Rates Legislation will not have retrospective effect, the question has been raised as to whether the new limits on “substitution” provisions will be automatically triggered once the FWC is tasked with reviewing a modern award for some other reason. For now, existing provisions in modern awards which allow for annualised wage arrangements or contractual set-off clauses will remain effective unless revoked or varied.
It is also important to note that the Penalty Rates Legislation will not affect the individual flexibility agreement framework under the modern awards or the enterprise bargaining mechanism under the Fair Work Act.
These changes serve as a timely reminder for employers that they must remain on top of their award compliance, particularly in terms of employee classifications, award interpretation, and ensuring payroll systems are aligned with these obligations.
If you have any questions regarding the Penalty Rates Legislation, Addisons’ Employment & Workplace Relations team can assist.