Fair Work Australia satisfied with use of set-off clauses

In a recent decision¹, the Full Bench of Fair Work Australia held that set-off clauses can be used in contracts underpinned by Modern Awards.  The decision provides that, if properly applied, set-off clauses may be employed to enable greater flexibility in the employment relationship.  A set-off clause is a clause whereby a person paid over the award rate has earnings set-off against specific award entitlements.

In order to be effectively utilised, set-off clauses must have two critical features:

• an express provision that the salary, or particular over-award payment, is to be paid in compensation of all, or a particular, award entitlement for which the employee is not explicitly remunerated; and
• the employee must be an over-award salaried earner.  If the employee is remunerated at, or below, the award rate, a set-off clause will be unenforceable.

The combination of these two elements permits a proposed set-off clause to be consistent with Modern Awards. 

Under this approach, a valid set-off clause could provide that an employee is paid an additional $40 per week above the award minimum in compensation for their entitlement to a meal allowance not expressly paid to that employee. 

Employers should note that if an obligation contained in a Modern Award is non-monetary, a set-off clause cannot be utilised to excuse the employer from its operation.  Only monetary entitlements can be set-off under the approach adopted by Fair Work Australia.  

An example of an invalid set-off clause would be one that provided a payment of $200 per annum to an employee in compensation for a meal break guaranteed to them under the Modern Award after five hours of continuous work, but not provided by the employer.

This decision brings some clarity to the legality of set-off clauses, and comes in spite of the availability of other flexibility arrangements already specifically provided for in most Modern Awards. 

The legitimacy of using set-off clauses under Modern Awards in this way has also been recognised in draft Guidance Note No 7 Transitional Arrangements in Modern Awards, prepared by the Fair Work Ombudsman and currently out for public consultation, which provides that, as a general principle, over-award payments can satisfy award entitlements to which the payment is directed.

However, employers must ensure they utilise the clauses carefully.  Failure to properly provide for, or set-off, employee Modern Award entitlements could expose an employer to prosecution by the Fair Work Ombudsman.  In addition, despite an apparent acceptance on the part of Fair Work Australia and the Fair Work Ombudsman of the legitimacy of such clauses, as yet, the use of set-off clauses under Modern Awards remains untested in the Federal Court.

We invite employers to seek advice from a member of the Employment Team on how to utilise set-off clauses legally and effectively or whether an alternative flexibility arrangement may be more suited to your business needs.

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