Many employers have a system where they pay an employee above their award entitlements, on the understanding it is to ‘cover off’ on certain items such as overtime pay or shift loadings. The arrangements are recorded in various ways (we have seen it all at NB Employment Law), usually by way of employment contracts but also a verbal ‘gentleman’s agreement’ or even in the form of Facebook messages.
The introduction of Annualised Wage Agreements into various awards (but not all awards) was not intended to displace the ability of employers and employees to have a written agreement regarding salary arrangements covering off on award entitlements.[1]
Many employers have continued to rely on contractual arrangements with their employees as opposed to Annualised Wage Agreements, given such arrangements usually require hours to be monitored and audited pursuant to an outer band of ordinary & overtime hours. Given the continued reliance by employers on offset clauses in employment contracts, it is useful to revisit the requirements to be satisfied in order to allow an employer to effectively rely upon them.
Categorising the payments
A review of historical decisions in the matter of Textile, Clothing and Footwear Union of Australia v Givoni Pty Ltd[2] concluded the case authorities supported a proposition that, where payment is made to an employee towards an award entitlement (and is in excess of that obligation), the excess amount cannot be later applied towards a different award entitlement.
In that decision, the Court gave the example that above award payments being applied towards ordinary time wages cannot later be applied towards overtime wages (unless it has been agreed upon).
In the matter of Australia and New Zealand Banking Group Limited v Finance Sector Union of Australia,[3] the Court was tasked with resolving a dispute involving the employer’s attempt to offset payments made under a retirement/severance scheme (which formed part of the terms and conditions of employees) against their award entitlement to long service leave. In deciding the dispute, the Court noted that there must be a “close correlation” between the contractual obligation and the award entitlements, however it was “not necessary that the same label be used”. In the facts of this particular case, it was determined the retirement/severance scheme was intended to subsume the award entitlement to long service leave, despite the different labels being used.
Detail required when drafting an offset clause
It would therefore appear a certain level of detail is required with respect to an offset clause, in order for a Court (in the event of a dispute) to determine how the above award entitlements are to be applied. Failure to specify a sufficient level of detail may affect an employer’s ability to apply above award payments in satisfaction of award entitlements.
Avoid Relying Upon Poorly Drafted Employment Contracts
This is a particular risk where employers rely on template employment contracts, without understanding the legal effect of its clauses. Where there is a poorly drafted employment contract, a Court may elect to interpret its terms contra proferentem meaning it is interpreted against the interests of the person seeking to rely on its terms. In the case of an employer, this means it is possible a Court may construe the terms of the employment contract in favour of the employee, making it more difficult to argue an offset clause accounted for a particular award entitlement.
Many employment contracts also feature an ‘entire agreement’ clause. This creates several potentially unfavourable scenarios for an employer. The first example is that, a separate agreement that an above award payment is being made in satisfaction of certain entitlements could be excluded by the ‘entire agreement’ clause, as it does not form part of the employment contract itself. It may also mean that, where the offset clause was featured in a previous employment contract but not the most recent employment contract, the ‘entire agreement’ clause may prevent an employer from relying on the terms of any previous employment contracts.
Practical considerations
The use of offset clauses is usually part and parcel with the payment of a salary, as opposed to an hourly rate of pay. Care needs to be taken in how the offset clause is worded. This was the case in Kent v Tal & Ors[4] where the lack of “express term” in the employment contract permitting above award payments to be applied against overtime meant the employer remained liable to compensate the employee for unpaid overtime and weekend penalty rates. This was despite the employer’s assertions that the employee had been paid $10,000.00 more than what they would have received, had they been paid strictly in accordance with the relevant award.
It is, however, important to appreciate that merely paying an employee a salary does not necessarily entitle an employer to disregard the terms of an award or the industrial laws in general, even where there is an employment contract containing an offset clause. As an example, regulation 3.34 of the Fair Work Regulations 2009 (Cth) requires an employer to keep records of overtime hours, if they are required to be paid to an employee under an award or other instrument. An employment contract with an offset clause would not displace these record keeping obligations.
In particular, the Clerks – Private Sector Award 2010, Local Government Industry Award 2010 and Manufacturing and Associated Industries and Occupations Award 2010 has very specific requirements regarding record keeping, overtime and ordinary hours. Refer to the article Annualised Salary Changes In Modern Awards – A Checklist for more information.
Of course, the wage or salary being paid under the employment contract must actually be above the minimum requirements of the award. If the salary or award is insufficient to cover off on the award entitlements, it is open for an employee to claim the shortfall as an underpayment. A salient reminder of this was recently given in the matter of Manchee v BTIG Australia Ltd[5] where it was observed at paragraph 44:
If an employer, in satisfaction of the undifferentiated entirety of its obligations under a contract to make monetary payment for hours worked, makes a wage payment that equals or exceeds the totality of its statutory obligations to pay for time worked (e.g. ordinary time, overtime penalty rates), that payment may be applied to the satisfaction of those various obligations….However, if such an undifferentiated payment does not equal or exceed the totality of the employer’s statutory obligations, the employee is free to appropriate it to the discharge of whichever obligation or obligations he or she wishes….Implicitly, in that case one or more particular liabilities is not discharged fully or at all.
From the above observations, it would appear the effect of a salary which is insufficient to cover off on award entitlements means it also becomes open for an employee to determine which award entitlements are satisfied. They may, for example, argue their overtime entitlements have not been satisfied and then make a claim for those entitlements, relying on provisions featured in some awards which contain a minimum payment for overtime if it is required to be worked. This could ultimately result in a large underpayment liability for an employer.
What can Employers and HR do to minimise risks?
The most recent decisions considered in this article make it clear that employers continue to rely on offset clauses to set off above award payments against minimum entitlements. Nonetheless, the ability to rely on such clauses will come down to whether they have been drafted correctly, and whether the salary arrangements have been correctly calculated. We suggest the following tips:
- Consider whether the offset clause (if any) reflects reality
If there is no offset clause (or for that matter, no employment contract), but there are arrangements in place to pay above the award, the answer is quite obvious. An employment contract with a properly drafted offset clause needs to be implemented as soon as practicable, otherwise money might be paid in exchange for no protection.
If there is an offset clause however, it is necessary to review whether it reflects the reality of the arrangements with employees. For example, if it is intended that annual leave loading is absorbed into the wages paid to employees over the year (such that it is not paid when employees take annual leave), the offset clause should make this plainly clear. If there is no “close correlation” between its terms and annual leave loading, this might make it difficult for an employer to argue that the annual leave loading has already been paid.
2. Consider whether the salary arrangements reflect award entitlements
Where a salary is being paid to an employee and an offset clause is in place, it might be necessary to have a system where that salary is periodically reviewed to ensure it satisfies the award entitlements. A simple (albeit time intensive) method to check this is to calculate what an employee would have received if they were paid strictly under their award. This amount is then compared with what the employee has actually been paid. Shortfalls are then rectified as soon as practicable. If there is a possibility of an ongoing dispute with an employee, then an employer may wish to consider entering into a Deed of Settlement to extinguish any further claims (or complaints) by an employee.
There are several key events which might result in a salary being inadequate. The usual one is that an employer does not account for changes to award rates, which usually come into effect each financial year following reviews by the Fair Work Commission. Other events include periods of high operational demand, which might result in employees working significant amounts of overtime. Other circumstances may include an employee performing higher level duties, entitling them to higher rates of pay under an award.
3. Consider whether the record keeping is adequate
As noted earlier in this article, there is an obligation to keep records of overtime worked if an employee is entitled to receive penalty rates, irrespective of whether overtime is being paid separately (they may well be absorbed into a salary). Some employers make the assumption that because an employee is on a salary, there is no obligation to keep records of overtime hours being worked. Lax approaches to overtime may well result in improper record keeping, or employees working overtime hours that are not actually required by the business. An employer may wish to consider implementing (and actively enforcing) a system where overtime is required to be approved, before it is worked.
Of course, putting aside salary arrangements, keeping track of overtime worked by staff is an important measure in respect of managing health and safety risks. This is particularly so, given the recent introduction of legislation imposing obligations in respect of managing psychosocial hazards at work. Excessive hours being worked by employees without intervention not only increases risks of underpayment, but may also make it difficult for an employer to demonstrate they have managed their health and safety obligations.
4. Individual Flexibility Agreements might be needed
Depending on the circumstances, it may also be appropriate for some employers to consider implementing Individual Flexibility Agreements with employees in recognition of the genuine needs of their business. An Individual Flexibility Agreement may deal with matters such as pay, but could also extend to how the work is actually performed. They provide a more formal approach to recording an employee’s terms of remuneration, and therefore an additional layer of protection on top of offset clauses in employment contracts. It can also take into account non-financial benefit received by the employee. There are restrictions and limitations to an individual flexibility agreement but worth considering.
If you are an employer interested in reviewing these clauses reach out to NB Employment Law we offer an obligation-free consultation and are happy to help. Reach out via [email protected] or +61 (07) 3876 5111 to book an appointment.
If you got value out of this article email [email protected] or click on this link to subscribe to our value added newsletter.
Written By
Director
Assisted By
Associate
About the Authors
Jonathan Mamaril leads a team of handpicked experts in the area of employment law who focus on educating clients to avoid headaches, provide advice on issues before they fester and when action needs to be taken and there is a problem mitigate risk and liability. With a core value of helping first and providing practical advice, Jonathan is a sought after advisor to a number of Employers and as a speaker for forums and seminars where his expertise is invaluable as a leader in this area as a lawyer for employers.
Jonathan Bio Page
[email protected]
+61 (07) 3876 5111
Dan Chen is an Associate and trusted expert in employment law. Dan is passionate about assisting business owners, small and large understand their obligations under Australia’s complex workplace relations system.
[1] [2018] FWCFB 154 at paragraph 102.
[2] [2002] FCA 1406.
[3] [2001] FCA 1785
[4] [2018] FCCA 3218.
[5] [2022] FedCFamC2G 813.