Australia: Can you still set off an employee's salary against award entitlements? It's complicated!


In the area of set offs in employment law, a word of warning to cut through some of the complexity. You won't necessarily achieve the objective of being able to satisfy award obligations, unless you go about it in the correct fashion.

We get technical about the mechanism by which you may, as an employer, meet your award obligations by paying employees above award rates. There's been some uncertainty, so Richard Ottley and Simon Obee aim to cut through the complexity.

The issue

A topic which often creates confusion and uncertainty amongst employers is their ability to "set off" over award payments made to employees, against employee entitlements derived from awards. The Full Bench of the Fair Work Commission in its 4 yearly review of modern awards [2015] FWCB 6656, recently reviewed the law in this area.

Its decision, amongst other things, highlights the fact that paying above award rates may provide protection from (award) underpayment claims in certain circumstances, including where there is a clause in an employment contract which specifically provides for a set off arrangement.

Over award payments in practice

Many employees in Australia are covered by a modern award which will apply to their occupation or the industry in which they work. Awards typically set the minimum rate of pay for ordinary hours worked, with (higher) minimum rates for working on weekends and when performing overtime.

Most awards also provide for allowances to be paid to employees in certain situations. This might be, for example, an allowance for supervising other employees ("leading hand allowance") or for doing certain types of work for which extra compensation is deemed appropriate (working in particularly hot or cold conditions, etc). Many awards also provide that employees should be paid a higher rate of pay whilst they are on annual leave ("annual leave loading").

Working out the exact rate of pay an employee is entitled to at any given time, when taking into account all these factors, can be a bureaucratic headache for employers. As a result, many choose to pay above the minimum hourly award rate of pay, on the assumption that this will adequately compensate an employee for award entitlements such as overtime and allowances etc (without the need to pay them anything extra).

It is common therefore, when asking an employer if they pay allowances or overtime, to hear the response "we don't have to, because we pay above the award".

The idea is that by paying sufficiently above the award minimums, an employer will not have to concern itself with the payment of overtime, or have to keep referring back to the award to check if an allowance is payable. This is an application of the common law principle known as "set off", in this case, where an over award payment is set off against an award entitlement. Such a practice is usually (and should be) accompanied by accurate record keeping, demonstrating that the remuneration paid is adequate to satisfy all award entitlements.

However some questions have lingered as to the effectiveness of these arrangements.

The recent Full Bench decision (above) looks at the continuing relevance of "set off" in the employment context and also notes key principles which inform whether arrangements between employer and employee will be effective in protecting against underpayment claims.

The Full Bench decision

The Full Bench decision did not concern an underpayment claim per se, but rather "set off" was considered in an assessment of the relevance or otherwise of the so-called "absorption clause" in modern awards.

The absorption clause in modern awards had stated:

The monetary obligations imposed on employers by this award may be absorbed into overaward payments. Nothing in this award requires an employer to maintain or increase any overaward payment

The decision noted that the operation of this clause has been subject to different interpretations, with some arguing that the clause gives an employer a right to set off any award overpayment against any entitlement under an award, regardless of what is stated (or not stated) in a contract of employment.

The Full Bench made clear in its decision, that the absorption clause was concerned with protecting employers from obligations to maintain and increase an over award payment (for example when the minimum award rates increase from time to time), and was not directed towards a general ability to set off outside this context. The Full Bench stated however, that now transitioning to modern awards was complete, the absorption clause is no longer necessary and should be removed.

Significantly and helpfully it also expressed the following view:

For completeness, we would observe that ...... we are not persuaded that there are any award derived barriers to the operation of the common law principles of set off.

Modern awards are part of the minimum safety net of terms and conditions established by the Act. It is not the function of such a minimum safety net to regulate the interaction between minimum award entitlements and overaward payments. Such matters are adequately dealt with by the common law principles of set off to which we have referred and should be left to individual employers and employees to determine.

The Full Bench therefore affirmed that "set off" arrangements should be left to be agreed between the employer and employee and dealt with under existing common law principles.

The Full Bench in its decision also quoted with approval, the common law principles that govern "set off" as summarised in the case of James Tuner Roofing Pty Ltd v Peters [2003] WASCA 28. These include the following:

  1. If no more appears than that (a) work was done; (b) the work was covered by an award; (c) a wage was paid for that work; then the whole of the amount paid can be credited against the award entitlement for the work whether it arises as ordinary time, overtime, weekend penalty rates or any other monetary entitlement under the award.
  2. However If the whole or any part of the payment is appropriated by the employer to a particular incident of employment the employer cannot later claim to have that payment applied in satisfaction of his obligation arising under some other incident of the employment. So a payment made specifically for ordinary time worked cannot be applied in satisfaction of an obligation to make a payment in respect to some other incident of employment such as overtime, holiday pay, clothing or the like even if the payment made for ordinary time was more than the amount due under the award in respect of that ordinary time.

Following on from the first quote from the Turner decision, where an employer agrees to pay an amount for a particular job to be done (ie an annual salary to perform a particular role) but with no discussion about the components of that pay, it would appear that that there is a strong argument that over award payments could be used to offset amounts payable under an award. Following on from the second quote from the Turner decision, where an employer agrees to pay an employee a certain amount for ordinary hours of work (as distinct from all hours of work), then regardless of how high above the award minimum this payment is, it cannot be set off against hours of work which are not ordinary hours such as overtime or penalty rates.

Lessons for employers

The common law principles of "set off" in the employment context are alive and well, and have not been subsumed or eclipsed by the modern award system or legislative change.

Generally speaking (and absent dedicated alternative industrial arrangements), employers who fail to include an appropriately calibrated "set off" provision in their employment contracts, will be at an elevated risk of an underpayment claim, if an employee is not paid in accordance with applicable award requirements. Having said that, it should be remembered that mechanisms other than a "set off" provision may be utilised by employers to address award obligations.

Although, absent a contractual "set off" provision, there remains authority to argue "set off" principles in relation to an underpayment claim by an employee who is paid above an applicable award, such arguments are likely to be fraught and the outcome somewhat mercurial.

For more information, contact:

Richard Ottley, Partner
Phone: +61 2 9233 5544

Simon Obee, Solicitor

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.

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