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 award.

Prior to the decision, there had been some uncertainty about whether set-off clauses can be used to satisfy modern award entitlements.

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 employee.

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.

The decision

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 award.”

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 award”.

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

In summary:

  • 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 applicable award.

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 breach.

We recommend that employers obtain advice about using set-off clauses, particularly in relation to appropriate drafting.