In a decision with important implications for employers, the
Full Bench of Fair Work Australia (FWA) recently
confirmed that the use of set-off clauses in contracts of
employment is not inconsistent with modern awards.1
Set-off clauses in employment contracts operate so that
over-award earnings are set-off against specific requirements in an
Prior to the decision, there had been some uncertainty about
whether set-off clauses can be used to satisfy modern award
Example of a set-off
An employee may be paid $300 pa over minimum award wages (the
over-award payment). This over-award payment may absorb or set-off
an annual leave loading that the employee has an entitlement to
under an Award and which is not specifically paid to the
The critical aspect of the use of set-off clauses is that the
over-award payment does actually absorb all award entitlements that
are not specifically paid to the employee.
In the decision, the Full Bench confirmed that it is:
"generally accepted that if
the salary is expressly paid in compensation of all award
entitlements and the amount paid exceeds the amount due under the
award then the arrangement is not inconsistent with the
The Full Bench noted that the variation sought in the decision
may "reduce existing flexibility and require changes in
practices which have operated for many years" and
rejected the position that the "only arrangements which
can legally be entered into are those expressly provided for in the
While the Full Bench's decision was made in respect of the
Clerks Award, the comments of the Full Bench appear to have general
application to the use of set-off clauses as a means to
conveniently satisfy minimum entitlements.
Under the system of modern awards set up by the Fair Work
Act 2009 (Cth) (FW Act), there are a
number of "mechanisms" to deal with varying, satisfying
or excluding minimum award entitlements. These include individual
flexibility agreements and high income guarantees. In our view,
despite the other available mechanisms, set-off clauses are a
legitimate and functional alternative to satisfy monetary
entitlements contained in an award. The Full Bench's comments
are entirely consistent with this approach.
Importantly, however, set-off clauses cannot operate to exempt
employers from non-monetary obligations contained in an applicable
modern award (such as, for example, the obligation to consult about
major workplace change).
Implication for Employers
FWA's decision clarifies that modern awards do not prohibit
the use of set-off clauses.
Importantly, as has always been the case, set-off clauses are
only useful in circumstances where remuneration paid to an employee
is not less than what an employee would otherwise receive under an
Employers must continue to proceed carefully in utilising
set-off clauses and ensure that an employee's salary is
sufficient to compensate the employee in place of applicable award
entitlements. Failing to do so exposes employers to breaches of the
applicable award, and may give rise to fines of up to $33,000 per
We recommend that employers obtain advice about using set-off
clauses, particularly in relation to appropriate drafting.
1 Clerks – Private Sector Award 2010
(AM2009/185) Fair Work Australia  FWAFB 969.
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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