Since their commencement on 1 January 2010, all Modern
Awards have had a standard clause 2.2 which allows employers to
absorb monetary obligations imposed by the Modern Award into over
award payments (Absorption Clause).
This clause has allowed employers, who pay employees above the
minimum award rates, to offset the over award payments against
Modern Award obligations and successfully defend claims for
additional Modern Award entitlements (including overtime, penalty
rates and allowances) by establishing that the over award payments
made to the employees meet or exceed the Modern Award
This is an extremely convenient clause for employers, as it
clearly identifies the interaction between payments made above the
minimum award rates (Over Award Payments) and
monetary obligations imposed under a Modern Award.
Although properly drafted employment contract clauses can allow
employers to offset Over Award Payments against Modern Award
entitlements, the Absorption Clause can be relied upon by employers
who do not have appropriate clauses in their employment contracts
(or no written contract at all) for award covered employees.
However in the course of the current 4 Yearly Review of
Modern Awards (Review), the Full Bench of the
Fair Work Commission has considered the Absorption Clause
1 and has expressed the view that this clause was
relevant only to the transitional period following the introduction
of Moderns Awards, which expired on 31 December 2014.
The Full Bench has suggested that the Absorption Clause has
served its purpose and is no longer necessary to achieve the
objectives of modern awards as specified in the Fair Work Act
The Full Bench observed that "Modern Awards are part of
the minimum safety net of the terms and conditions established by
the Act" and that "it is not the function of
such a minimum safety net to regulate the interaction between
minimum award entitlements and overall award payments"
which are "adequately dealt with by common law principles
of set off".
Although it seems clear that the Full Bench intends to remove
the Absorption Clause from Modern Awards, it has decided not to
fully determine the issue at this time, and indicated that it would
revisit take home pay provisions prior to the conclusion of the
Review before deciding whether or not to retain the Absorption
Clause in its current form or with amendments.
What should employers do?
Although the Absorption Clause remains in effect for the time
being, it is clear from the Full Bench decision that this situation
is likely to change in the near future.
Employers who pay Over Award Payments should take immediate
steps to ensure that they have maximum protection against any
potential claims from employees for additional Modern Award
entitlements and against allegations that they have not correctly
made payments under the relevant Modern Award.
It is otherwise risky for employers to simply rely upon common
law principles of set off.
Employers should review their employment contracts, for all
levels of employees, to ensure that they include an
appropriate clause that clearly identifies and specifies that the
basis on which Over Award Payments are made is that they are offset
against any monetary obligations imposed by a Modern Award or to
which the employee may be otherwise legally entitled
All employment contracts for new employees should include an
Although an employer cannot force an existing employee to agree to
a new employment contract to include an Offset Clause, there are
appropriate times, such as during a wage/performance review or when
an employee changes role, when a new employment contract can be
implemented. Of course employers should take such an opportunity to
fully review their employment contract to ensure that any other
relevant alterations are made at this time.
1 FWCFB 6656.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
An employee that refused a reasonable offer of settlement was ordered by the FWC to pay his ex-employer's legal costs.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).