How To Effectively Set Off Entitlements: IFAs, Common Law Set-Off and Annualised Wages

By Chao Ni, Principal and James Sanders, Senior Associate

The recent high-profile case involving underpayment of award entitlements by the Macquarie Bank gives a timely reminder of the importance (and legality) of written set-off clauses in common law contracts and other legitimate set-off options.

In December 2020, the Federal Court ordered Macquarie Bank to pay $1.3m in compensation and $330,000 in fines for failing to pay several of its employee wealth advisors:

  1. Annual leave loading under the Banking, Finance and Insurance Award; and
  2. Annual leave, personal leave, compassionate leave and public holiday pay entitlements under the National Employment Standards in the Fair Work Act 2009.

The hefty compensation and penalties were ordered despite the Court recognising that the employee wealth advisors had collected millions of dollars in commission while they were employed by Macquarie Bank.

Modern awards prescribe minimum wage and entitlement obligations for a vast number of Australian employers.  These employer obligations require payment of not only minimum “base rates of pay” but often payment of other monetary benefits such as penalty rates, overtime pay, situational allowances and annual leave loading.

An employer should not assume that payment of a flat rate, salary or commission that is higher than the award minimum base rate (i.e. an above-award rate) will automatically “set off” against other monetary entitlements in the award. 

By way of example, an employee was entitled to minimum weekly award payments of $800 in ordinary wage, $200 in overtime pay and $50 for an allowance.  The employer who elects to pay this employee an undissected amount of $1,500 for the week cannot assume that the entitlement to the $200 overtime pay and $50 allowance has been satisfied.  In the absence of a legitimate set off mechanism, the employee will likely be able to recover an extra $250 in addition to their $1,500 wage.

There are currently three legitimate options for employers to set-off award entitlements for workers who are paid an above-award rate:

  1. By entering into an award sanctioned Individual Flexibility Arrangement (IFA) with an employee.
  2. By entering into a written employment contract with the employee that contains a well drafted set-off clause (common law set-off).
  3. By complying with an Annualised Wage Arrangements clause within select modern awards.

This article explores all three options.

 

  1. Award “Individual Flexibility Arrangements” (IFAs)

Every modern award contains an IFA clause which typically provides as follows:

X.1 Despite anything else in this award, an employer and an individual employee may agree to vary the application of the terms of this award relating to any of the following in order to meet the genuine needs of both the employee and the employer:

(a) arrangements for when work is performed; or

(b) overtime rates; or

(c) penalty rates; or

(d) allowances; or

(e) annual leave loading.

X.2 An agreement must be one that is genuinely made by the employer and the individual employee without coercion or duress.

X.3 An agreement may only be made after the individual employee has commenced employment with the employer.

X.4 An employer who wishes to initiate the making of an agreement must:

(a) give the employee a written proposal; and

(b) if the employer is aware that the employee has, or should reasonably be aware that the employee may have, limited understanding of written English, take reasonable steps (including providing a translation in an appropriate language) to ensure that the employee understands the proposal.

X.5 An agreement must result in the employee being better off overall at the time the agreement is made than if the agreement had not been made.

X.6 An agreement must do all of the following:

(a) state the names of the employer and the employee; and

(b) identify the award term, or award terms, the application of which is to be varied; and

(c) set out how the application of the award term, or each award term, is varied; and

(d) set out how the agreement results in the employee being better off overall at the time the agreement is made than if the agreement had not been made; and

(e) state the date the agreement is to start.

X.7 An agreement must be:

(a) in writing; and

(b) signed by the employer and the employee and, if the employee is under 18 years of age, by the employee’s parent or guardian.

X.11 An agreement may be terminated:

(a) at any time, by written agreement between the employer and the employee; or

(b) by the employer or employee giving 13 weeks’ written notice to the other party (reduced to 4 weeks if the agreement was entered into before the first full pay period starting on or after 4 December 2013).

X.12 An agreement terminated as mentioned in clause X.11(b) ceases to have effect at the end of the period of notice required under that clause.

X.13 The right to make an agreement under clause X is additional to, and does not affect, any other term of this award that provides for an agreement between an employer and an individual employee.

 

The legal benefits of an IFA are obvious:

  1. IFAs are sanctioned directly by the source which imposes the legal obligation to pay employee entitlements; and
  2. IFAs expressly permit the varying of employer obligations relating to payment of overtime rates, penalty rates, allowances and annual leave loading (e.g. reducing the amounts payable to nil).

Though IFAs are conceptually straight forward, they can be challenging to properly draft and implement.  Employers should note the following:

  1. IFA should only be used for existing It is unlawful to present an IFA to prospective employee, particularly if the acceptance of the IFA is imposed as pre-condition for an offer of employment.
  2. Each IFA should expressly set out how the employee will be better off overall under the IFA (in both monetary and non-monetary terms). Case law tells us that employees are deemed to be better off overall when provided food, amenities or other non-monetary benefits instead of monetary entitlements in the award.
  3. No adverse action should be taken against any employee who either refuses to enter into an IFA or takes steps to terminate an IFA. Doing so will expose the employer to a potential General Protections claim for taking unlawful adverse action against an employee.
  4. Employees cannot be coerced or pressured into entering into an IFA. Both the employee and the employer must have a ‘genuine need’ for entering into an IFA.
  5. Reliance on an invalid IFA (e.g. one that does not result in the employee being better off overall) could be a costly exercise if an employer is required to retrospective back pay award entitlements to the affected employee.

 

  1. Common Law “Set-Off” Clauses

It is well established at law that contracts can allow for one payment (or type of payment) to set-off against another type of payment which his required to be made. 

A contractual set-off clause can be used in an employment contract where:

  1. The employee is covered by an award and is therefore entitled to receive minimum entitlements under the award including minimum rates, penalty rates, overtime pay, allowances and annual leave loading.
  2. The employee is paid a remuneration package (typically expressed as a flat hourly rate, salary and/or commissions) that is higher than the base rate required by the relevant award.
  3. The set-off clause provides that that the above-award component of the employee’s remuneration is intended to satisfy the employer’s obligations to pay penalty rates, overtime pay, allowances and allowance leave loading under the award and specifying the relevant award clauses.

The lawfulness of common law set off clauses was re-affirmed by the Full Court of the Federal Court in Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate (2015) FCA FC 99.

There are a range of common pitfalls that employers should try and avoid when drafting and implementing a common law set off clause.  Employers should note the following:

  1. A common law set-off clause should be in writing and ideally within an employment contract. An employer could fail to enforce the set-off simply from not being able to demonstrate a written agreement.
  2. A well drafted set-off clause should make specific references to the award clauses that house the entitlement. Relevantly:
    1. A generic description of the entitlement may not achieve the set-off result.
    2. Once a set-off clause identifies which entitlements are intended to be set-off, the employer will unlikely be unable to later attempt to set-off a different entitlement.
  3. A well drafted set-off clause should state that for the purpose of calculating the set-off amount, the applicable minimum wage rate under the award should be used instead of the employee’s actual rate of pay.
  4. The above-award component of the remuneration must be high enough to fully meet the employer’s award obligations. The employee’s remuneration should be reviewed regularly to account for any changes to the award (e.g. increase of minimum rates) or the employee’s circumstances (e.g. changes to the employee’s hours of work or duties).

 

  1. Modern award “annualised wage arrangements”

The following modern awards contains a specific “annualised wage arrangements” clause.

  • Banking, Finance and Insurance Award
  • Broadcasting, Recorded Entertainment and Cinemas Award
  • Clerks—Private Sector Award
  • Contract Call Centres Award
  • Horticulture Award
  • Hospitality Industry (General) Award
  • Hydrocarbons Industry (Upstream) Award
  • Legal Services Award
  • Local Government Industry Award
  • Manufacturing and Associated Industries and Occupations Award
  • Marine Towage Award
  • Mining Industry Award
  • Oil Refining and Manufacturing Award
  • Pastoral Award
  • Pharmacy Industry Award
  • Rail Industry Award
  • Restaurant Industry Award
  • Salt Industry Award
  • Telecommunications Services Award
  • Water Industry Award
  • Wool Storage, Sampling and Testing Award

Full time employees who are covered by one of the abovementioned modern awards can be paid an annualised wage in satisfaction of award entitlements that are listed in the annualised wage arrangements clause.

It is important to note that each annualised wage arrangements clause is different and may require an employer to meet the following obligations:

  1. List the specific award entitlements (including the corresponding award clause number) that are intended to be satisfied by the annualised wage.
  2. Ensure that the annualised wage will meet a specified minimum threshold.
  3. Ensure that the method of working out the annualised wage (including specification of each separate component of the annualised wage and any overtime or penalty assumptions used in the calculation) is recorded in writing and shared with the employee.
  4. Keep weekly written records of the employee’s start/finish times and breaks taken each week signed by the employee.
  5. Provide employees at least 8 days off duty during each 4-week cycle of work.
  6. Reach agreement with the employee on ‘outer limits’ for:
    1. The number of ordinary hours that can be worked each week before penalty rates will be paid to the employee in addition to their annualised wage; and
    2. The number of overtime hours that can be worked each week before overtime rates will be paid to the employee in addition to their annualised wage.
  1. Conduct a periodic wage reconciliation and ensure that the employee is paid no less than what they would have received if they had not been paid an annualised wage and instead paid the minimum award rate and any other amounts satisfied by the salary.

Though this article is framed with award-covered employees in mind, the same legal principles extend to employees who may be covered by an enterprise agreement.  After all, an enterprise agreement:

  1. Must have an individual flexible arrangements clause;
  2. Could feature an annualised wage arrangements clause by negotiation; and
  3. Can be referenced by in a common law set off clause.

The Employment Law team at MST Lawyers can advise and assist employers with each of the abovementioned legal set-off options.  Please feel free to contact the MST Employment Team by email or by phone +61 3 8540 0200.