Australian Penalty Rates

Friday, 18 March 2016


Like many countries, Australia has a national system where employers are required to pay additional rates for time worked beyond the normal hours of work. There is a legislative maximum on the number of normal or ordinary hours that can be worked for full-time employees and for persons who are not full-time employees. For full-time employees the average weekly hours must not exceed 38 and for non full-time employees it is the lesser of 38 hours and the employee’s ordinary hours of work in a week.

The Fair Work Commission (FWC) - an independent statutory body - determines when ordinary hours can be worked and the remuneration for working additional hours. There are many variations for working ordinary hours. They can include shift work (for which a percentage premium is paid for each shift - for example if ordinary hours are worked on an afternoon shift the most common premium is 15% per hour and on a night shift the most common premium is 30% for each hour worked), 12 hour days, any 5 days out of seven.

However, the most common approach involves ordinary hours being worked Monday to Friday with an eight hour spread often between 6am and 6pm. In retail and hospitality, ordinary hours can be included on Saturday morning. That is, an employee can work an ordinary 7.6 hours within that spread of hours. Any additional hours beyond 7.6 hours per day is paid for at overtime rates or commonly called “penalty” rates. Some weekend work and public holidays also attracted penalty rates. Historically, the reason why they are called penalty rates is two-fold. Firstly, it was to discourage employers from working employee’s additional hours beyond the ordinary hours and then secondly to “penalise” the employer if it did want additional hours worked by placing a premium cost on those hours.

When these concepts were developed, the Australian society did not have the availability of shopping, banking, transport, etc. as it does today. Hence the term “unsociable hours” also came into use when referring to hours beyond ordinary hours. A constant which hasn’t changed and is a major factor in ordinary hours of work, is school hours for young families.

With the changes in the demands of society, the so-called 24/7 era, the cost of employment throughout the week has become the subject of greater controversy. This has led to greater demand for flexibility in working patterns.

Whilst there has been calls for change over many years, it appears that there is a convergent of pressures which will bring about change. This article deals with two factors – the report of the Productivity Commission and the test case currently before a Full Bench of the Fair Work Commission where employers’ have sought change. It should be stressed that whilst change is sought there is not an application for the abolition of penalty rates.

The Productivity Commission View

The Productivity Commission (PC) is the Australian Government's independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians.

On 19 December 2014, the then treasurer of Australia, the Hon. J B Hockey requested that the PC undertake an inquiry into the workplace relations framework. It dealt with many matters but for the purpose of this paper attention is given to penalty rates.

The PC concluded that preserving the status quo on penalty rates for long hours and night work is largely justified and it accepted that penalty rates were a legitimate and continuing feature of Australian Industrial Relations. However, the PC noted that the level of weekend penalty rates was the most controversial. It noted that the weekend penalty rates varied substantially across industries and the labour market. In particular, it identified the hospitality, entertainment, retail, restaurants and cafes (HERRC) as the area of greatest concern.

In these areas it concluded that the “penalty” or deterrence concept had become an irrelevant argument because of the legitimacy of business in the sectors identified opening 7 days a week. It concluded that the HERRC is vital to lively cities and regional communities.

The PC concluded that the need to consider change was caused by a multitude of social and economic trends:

  • Rising female participation rate, increasing access to services outside normal week hours
  • The lifting of restrictions on trading hours
  • Decline in religious observance
  • Rising household income driving demand for discretionary consumer services, and
  • The trend towards shopping as a recreation.

It noted that the access to technology has reduced the need for face to face shopping, but many consumers still preferred to buy items in person.

Whilst it accepted that most people preferred to have time off during weekends because institutional arrangements were geared to a Monday to Friday regime (schooling/childcare/public transport), it did conclude also that many people prefer working weekends (those studying for example).

The PC took into account the bargaining power of the HERRC sectors and stated that some regulation of penalty rates is needed given that employers may use bargaining power to set weekend rates lower than efficient levels.

In the HERRC sectors it concluded that the Sunday penalty rate was set too high and there was a case for a reduction in the current rates and a need for greater consistency. In the view of the PC, the Sunday penalty rate should be lowered to the Saturday rate which would have both social and economic consequences.

The Fair Work Commission Test Case

Employer groups in the HERRC sectors decided that an application would be made to the FWC to reduce penalty rates. This is a test case which commenced in April 2015 and continues today. The employers have various proposals for reduction in penalty rates on weekends and public holidays. They range for seeking a flat penalty rates of 125% for working on either Saturday or Sunday to reducing all such penalty rates by 25%.

The employers drew upon the Report of the PC to argue that changes in society and needs of the HERRC sectors required change to occur.


There is little doubt in my mind that penalty rates for weekend work will change. The most likely change will be to create identical penalty rates for Saturday and Sunday. At what level will be a matter for judgment of the FWC. It is also likely that change will occur to public holiday rates and the interaction between the cost of employing full-time and casual employees. The trade union movement is concerned about the casualisation of the workforce and this needs careful consideration

However, there is one issue which will cause some concern. The PC has referred to the lack of bargaining power in the HERRC sectors which gives rise to some protection being necessary. This will present a dilemma for FWC because the strength of bargaining power has the capacity to confuse the approach to fixing a safety net of terms and conditions for employees under the jurisdiction of the Commission. Whilst some areas of the Fair Work Act deal with the interaction between bargaining power and the fixation of minimum terms and conditions of employment, these are very narrow in application.


I am grateful to Mr. T Lyle for his research and assistance in the preparation of this paper. Tom is studying international law. His work and effort was more detailed than my summary but it assisted greatly.

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