Can you still set off an employ­ee’s salary against Award enti­tle­ments? It’s complicated! 

In brief

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.