In the final weeks of the 2025 federal election campaign, the Albanese Government has pledged that if re-elected, it would legislate protections for penalty rates in modern awards. While it remains unclear how this will be implemented, the intent is clearly to restrict the Fair Work Commission (FWC) of its discretion to set penalty rates in modern awards, particularly to reduce existing penalty rates.
On 19 April 2025, Federal Workplace Relations Minister Murray Watt announced that:
“A re-elected Albanese Labor Government will legislate to protect penalty rates in awards, ensuring the wages of three million workers do not go backwards.”
Framed as a safeguard against erosion of the minimum safety net, this pledge has prompted significant backlash from employer groups and the Federal Opposition, who warn it undermines the authority of the FWC, reduces award flexibility for employees and increases the burden on employers from a compliance perspective.
The Albanese Government and unions dispute this characterisation of the policy and claim that it simply sets guidance for the FWC to consider in setting penalty rates, this guidance being: do not reduce penalty rates.
If legislated, this policy is significant because it takes discretion for the determination of minimum pay and conditions away from the independent FWC and locks it into legislation which can only be changed by parliament. The FWC has the expertise to independently assess the rapidly changing economic needs of business and workers and make decisions at any time. Making changes to legislation is far more difficult. The policy will make it more difficult for employers and employees who benefit from the certainty and simplicity of higher base annualised salary arrangements that compensate for penalty rates and are likely to push employers away from collective bargaining and into more individualised employment arrangements.
How did we get here?
The catalyst for the election commitment arose from the recent application to the FWC from the Australian Retailers Association’s (ARA) which proposes to amend the General Retail Industry Award 2020 and introduce an opt-in annualised salary arrangement for managerial and higher-level retail employees, which in effect would absorb penalty rates in exchange for higher base pay.
Minister Watt opposed the ARA’s application in his public submission to the FWC, claiming that it could lead to a reduction in worker entitlements, notwithstanding the ARA’s claim that the employees relevant to the application would receive considerably higher wages as a base line, that the arrangement would be opt-in and would have safeguards in place to ensure that employees would be better off overall.
Unions have also raised similar concerns as Minister Watt with recent employer applications to vary the Clerks Private Sector Award and the Banking, Finance and Insurance Award to enable employees under higher classifications to voluntarily agree to be paid a single weekly rate at least 55% above the award rate of pay, designed to offset certain entitlements, including penalty rates (commonly referred to as the ‘exemptions rate case’).
Despite these recent catalysts, this is not the first time Labor has announced a policy seeking to legislate protections for penalty rates.
Former Labor opposition leader, Bill Shorten, committed to reversing a 2017 FWC decision to reduce Sunday penalty rates in modern awards covering the retail and hospitality sectors if elected Prime Minister at the 2019 Federal election.
The 2017 FWC decision, which was upheld by the Full Federal Court, was criticised by the union movement, who campaigned publicly on the issue to pressure the major parties to legislate to reverse the decision.
This recent announcement from the Albanese Government goes further than just reversing a single decision of the FWC to reduce penalty rates under a particular modern award, to a general commitment to, seemingly, stop the FWC from exercising its discretion to reduce penalty rates under any modern award in the future.
Coalition’s stance on penalty rates
Peter Dutton, the Leader of the Opposition, labelled the recent proposal to legislate the protection of penalty rates a “stunt” and a “red herring”.
Mr Dutton confirmed that if the Coalition was elected to Government this Saturday (3 May 2025), it would preserve the status quo and allow the FWC to set wages and entitlements, including penalty rates, in modern awards as necessary.
Potential implications
While the Albanese Government and unions argue that the policy is needed to ensure that workers don’t lose pay when they work unsociable hours, such as on the weekend and public holidays, employer groups have raised concerns about the impact on the FWC in its role as independent wage-setter and on flexibility in the workplace.
The Fair Work Commission’s role
If legislated, this policy will effectively remove the powers given to the FWC to set penalty rates in modern awards. The FWC frequently uses this discretion and power to respond to the evolving needs and conditions of the economy and industry where required.
Employer groups have criticised the policy, noting that the FWC is required to review modern awards on a fair and impartial basis, taking into consideration the needs and practical concerns advocated by both employees and employers regarding the factors set out by section 134 of the Fair Work Act 2009 (Cth).
Therefore, any reduction to penalty rates by the FWC would need to be warranted by current economic and industry needs and any baseless request by employers to reduce penalty rates would be rejected, as the FWC has done previously in the past.
There is a concern, therefore, that this policy hamstrings the FWC ability to react to economic and industry needs.
Reduced flexibility for employees and employers – the end of annualised salary arrangements?
Employer groups also argue that this policy will restrict flexibility as implementing a hard base line entitlement for penalty rates would discourage employers from exploring other more convenient and generous payment arrangements under modern awards.
The recent ARA Application is a prominent example of this, where employees can opt-into a considerably higher annual salary in exchange for the offset of all penalty rates.
In the ARA Application, ARA submits that under this model, the average retail manager employee that opts into this arrangement would be paid $5,841.65 per year more than their counterparts who are paid strictly in accordance with the rates prescribed in the modern award.
In essence, this policy would stop the FWC from varying modern awards to provide for annualised salary arrangements which offset penalty rates but result in employees being considerably better off overall.
Annualised salary arrangements, even where they are more generous than modern award rates, are often attractive to employers due to their ability to streamline compliance with numerous, complicated rates set under the modern award.
It is not yet clear whether a re-elected Albanese Government would go so far as to wind back existing annualised salary arrangements under modern awards, or simply stop the FWC from making further variations which may have the effect of reducing penalty rates, even in circumstances where employees are still better off overall.
Conclusion
While the exact scope of the policy is yet unknown, if legislated, the Albanese Government’s pledge to protect penalty rates will have a direct impact on annualised salary arrangements for modern award covered employees. Employers could see less scope to offer annualised salary models that offset penalty rates under the modern award, even where such models result in higher overall pay.
Because a collective solution under modern awards is not available, employers and employees who want annualised salary arrangements will be more likely to seek out advice about how they can achieve an annualised salary through an individual contract or flexibility agreement, which can be done. By driving parties in this direction, and away from union collectivism, the policy might become an “own goal” for the unions.
The views expressed in this article are general in nature only and do not constitute legal advice. Please contact us if you require specific advice tailored to the needs of your organisation’s circumstances.