What employers need to know about penalty rates and allowances

Once you’ve identified the correct base rate to pay your employees, you’ll also need to ensure that any penalty rates are applied, and relevant allowances are paid. These are often areas where businesses make mistakes that lead to them underpaying their employees, so it is crucial for businesses to understand what they need to pay their employees and when they need to pay them each rate.

Types of penalty rates

There are a number of different conditions and situations that could trigger penalty rates to apply to an employee’s shift, or part of it. Penalty rates can apply to employees working:

  • longer hours,
  • weekends,
  • public holidays,
  • late nights,
  • and early mornings.


Overtime is the most common form of penalty rate and should be applied when work is performed outside of in addition to the ordinary hours listed in an award or agreement. The overtime rate will change depending on the award or agreement, the amount of overtime worked, the type of employee (full-time, part-time, casual) and other factors. In some awards or agreements an employee is allowed additional time off instead of being paid at an additional rate. This is known as ‘time off in lieu’, commonly referred to as ‘TOIL’.

Public holidays

Public holidays generally have the highest penalty rates and depending on the award or agreement, they can range from 150% to 250% of the base rate. However, similar to overtime, in some awards or agreements employers can give the employee an extra day off, or an extra day of annual leave instead of the additional pay rates, in some circumstances.


Depending on the employee’s role and the award or agreement they are covered by, they may be entitled to be paid an allowance. Allowances will be paid for employees who use their own equipment at work, work in hazardous or unpleasant conditions or incur an expense for doing their job. Common allowances include:

  • uniform or laundry allowance,
  • travel allowance,
  • first-aid allowance, and
  • tool and equipment allowance.

The impacts of workplace arrangements on penalty rates and allowances

Many employees enter into workplace arrangements that are different to the relevant award or agreement provisions that they are covered by. Examples of this are having annual salaries, employment contracts, individual flexibility arrangements or a guarantee of annual earnings.

These arrangements are set to take into account all additional penalties and allowances that may be incurred. In theory this should work, however in recent times we’ve seen many large businesses inadvertently underpay staff on salaries, as they’ve failed to sufficiently take into account the additional loadings they should have been paid and overtime they worked. When using a workplace arrangement it is crucial that the employer checks that they are paying their employees correctly and sufficiently, to make sure overtime or other loadings are appropriately covered. This can be done via payroll audits or annual reconciliations, where the employee’s pay is compared to the exact amount they should have earnt based on the hours they worked.

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