Don’t ‘Set and Forget’ Your Set-Off Clauses
2 July 2020
IN BRIEF: In the wake of several high-profile underpayment scandals in Australia, modern award entitlements have been under serious scrutiny. Here, we highlight the do’s and don’ts when dealing with ‘over-award’ payments and set-off clauses in employment contacts.
Do you have set-off clauses in your employment contracts with full-time and part-time employees? Do you know which payments are covered under the set-off clause? What are your obligations once a set-off arrangement is in place?
Please note, while the following information refers to setting off award entitlements, similar arrangements can be put in place for employees covered by enterprise agreements.
What are Set-Off Clauses?
A set-off clause in an employment contract is a clause that offsets other monetary entitlements such as leave loading, shift and penalty rates, and overtime. It allows an employer and an employee to lawfully agree that the employee will be paid an ‘over-award’ rate of pay – typically a higher or annualised salary, which is more than the applicable minimum rate.
Set-off clauses offer an easier alternative to calculating various entitlements each pay period. For employees, a set off clause can provide a consistent income, smoothing the variability they may experience if they work overtime, weekend or different shifts in each pay period.
Remember, a set-off clause does not extinguish monetary entitlements under the award as the entitlements continue in force and remain payable. A higher or annualised salary pays for that award entitlement.
Here are some Do’s and Don’ts when dealing with these clauses:
Get the Drafting Right
- A well drafted set-off clause clearly identifies the particular award obligations (and uses similar language) that the payment will cover, so there is no doubt as to what the higher or annualised salary is being paid for.
- The higher rate of pay can only set-off those award provisions specified in the contract and cannot be used later to set-off a different award obligation. For example, if the set-off clause only specifies that it covers overtime, but an employee is entitled to be paid a higher duties allowance under the award, then the employer cannot offset the additional salary against the higher duties allowance.
Pay Minimum Entitlements Each Pay Period
- Awards typically require certain payments to be made within the relevant pay period or roster. This means that the employee’s payment for the pay period must adequately compensate them for minimum award obligations for that pay period.
- If there are significant fluctuations in shift or weekend work, the payment made to an employee in that pay period must be sufficient to cover the award obligations for that pay period. This will ensure that an employee is not being underpaid their award obligations in a given pay period.
Keep Accurate Time and Wage Records
- The Fair Work Act 2009 and Fair Work Regulations oblige employers to keep various time and wage records. This includes, for example, the rate of remuneration, loadings, penalties, allowances, and the number of hours of overtime worked each day (including the start and finish times of that overtime).
- Keeping accurate time and wage records will meet legislative requirements, and ensure an employer can ascertain that an employee has been paid their minimum award entitlements for time worked.
‘Set and Forget’ your Set-Off Arrangements
- It’s important not to take a ‘set and forget’ approach to any set-off arrangements once they are in place. Monitor them regularly to ensure employees are not being underpaid award entitlements.
- Employers should regularly check whether the employee was paid at least as much as the award would require and if necessary, make additional payments for those award obligations not covered by the set-off arrangements.
Forget to Check for Any Award Changes
- Employers should stay updated on any changes to the relevant award provisions and any minimum wage increases to award rates of pay. This should trigger reviews of existing set-off arrangements.
- The Fair Work Commission’s 4-Yearly Review of Modern Awards has resulted in a range of changes to award conditions that can impact on set-off arrangements within employment contracts.
Underpay by Mistake
- Employers can avoid inadvertently underpaying employees by undertaking periodic reconciliations to compare the salary paid against award entitlements over a specified period.
- If necessary, employers can consider offering pay increases or seek an affected employee’s written agreement to vary existing contractual set-off terms.
Annualised Wage Arrangements in Modern Awards
Some awards contain specific provisions for an annualised wage arrangement, which allow an employer to annualise an employee’s wages over a 12 month period to pay a set amount in satisfaction of the award requirements. CCER has previously advised members of the detailed requirements to comply with these clauses in applicable awards, which took effect from 1 March 2020.
Choosing What’s Best for Your Organisation
With the above steps in place, including a set-off clause in an employment contract can be an attractive tool for employers. However, for some employers the best option may be to pay the entitlements in accordance with award conditions, for example, paying overtime and penalty rates as and when they arise.
How CCER Can Help
CCER can provide advice on how to draft a suitable set-off clause in your contracts and how to comply with any applicable award obligations or time and wages record keeping.
If you have any questions, please feel free to get in touch and speak with any of our Employment Relations Specialists at (02) 9390 5255 or email us at firstname.lastname@example.org.
Disclaimer: CCER does not give legal advice and this information should not be taken as such.
Author: Brooke Scarfe is an Employment Relations Specialist at CCER.