We pay over the Award, so it doesn’t apply’ is probably the most common mistake in employment law.
Award entitlements, over-Award payments and set-off clauses can all collide when well-paid employees turn the focus on whether they have actually been paid the right entitlements. Even at the highest levels of remuneration, an Award may still apply, even with a valid and carefully-worded set-off clause (or, where appropriate, a Guarantee of Annual Earnings).
The importance of contractual set-off clauses to defend wage underpayment claims was clearly demonstrated in the recent Federal Court of Australia Full Court decision in Wardman v Macquarie Bank Limited  FCAFC 13 (Wardman).
In Wardman, the employer Macquarie successfully argued that substantial Commission payments to financial advisors, totalling more than $50 million over six years, met all wage obligations under the relevant Award. This was due to terms specified in contracts that included set-offs. In this update, we briefly recap what a contractual set-off clause is, how it helped Macquarie, and what employers can do to best position themselves to defend underpayment claims where above-Award wages are paid.
What is a contractual set-off?
Employers of employees who are covered by an enterprise agreement or Modern Award (collectively, statutory instruments) can, in certain circumstances, absorb certain individual pay entitlements arising under the statutory instrument, such as overtime pay or penalties, into ‘over-Award’ payments they make under an employment contract.
This arrangement is often implemented by paying an annual salary which is set at a higher rate than the sum of the minimum wages set by the statutory instrument and all other monetary benefits the statutory instrument requires. The clause of the employment contract that governs this arrangement is known as a ‘contractual set-off’.
A contractual set-off specifies that various entitlements under a statutory instrument such as wages, overtime and penalty rates are absorbed within the remuneration paid to the employee. The extent to which a contractual set-off can be applied will depend upon:
What about ‘annualised salaries’ under Modern Awards?
Several Modern Awards now include ‘annualised wage’ provisions which permit employers and employees to agree that the pay will be at a rate above the relevant Award minimum entitlements for anticipated hours of work in the relevant period, instead of the employee being paid those entitlements on a line-by-line basis.
These Award provisions are based in legislation (rather than contract law) and are not the same as a contractual set-off. The Award provisions require very detailed compliance steps to be taken, including in relation to timesheets and periodic reconciliations.
What happened in Wardman?
The appellants were 48 former Macquarie Bank financial advisors. They sued Macquarie, alleging that they had not been paid certain monetary, wage-based entitlements owed to them under the Banking, Finance and Insurance Industry Award 2010. They argued that the regular Commission payments made to them in accordance with their employment contracts were not ‘wages’. They claimed that Macquarie breached the Award as they were not paid wages, certain paid leave entitlements and annual leave loading specified under the Award.
Macquarie argued that the set-offs in their employment contracts, and the overall amounts paid, and covered by the set-offs, were sufficient to meet Award obligations.
The appellants initially won before a single judge, with orders that Macquarie pay compensation and substantial penalties totalling over $1.6 million.
On appeal, the Full Court unanimously upheld Macquarie’s submissions, rejecting the appellants’ claims. In doing so, the Court was not overly-technical in its approach to applying the set-off.
The Court found that the purpose of the fixed Commission payments under the contracts was to compensate employees for working (just like a wage), and therefore those payments could be applied in satisfaction of the Bank’s obligation under the Award to pay:
The Full Court made this finding even though the labels used to describe the payments under the contract (‘Commission’) were different from the ‘wages’ language used in the Award.
The decision in Wardman reinforces that:
What should employers do?
Employers who pay statutory instrument-covered employee wages which are above minimum statutory entitlements, should consider how to best protect themselves from wage underpayment claims.
Contractual set-offs are commonly used, either alone, or in combination with a range of potential other measures as a fall-back, and we recommend that you work with your employment lawyers to ensure that those provisions are clearly drafted so as to provide the best protection for employers.
Please contact a member of the Thomson Geer Employment & Safety team to discuss your circumstances.