Don’t risk an underpayment claim – know your contracts

Read time: 2 mins

As part of its four-yearly review of modern awards, last year, the Full Bench of the Fair Work Commission considered the absorption clause contained in all modern awards.

This is the provision that monetary obligations imposed on employers by an award may be absorbed into over-award payments.

The status of payments covered by an absorption clause has caused uncertainty for some employers.

Under common law, set off is when the employer pays an employee an amount that is higher than the award rate and ‘sets-off’ the over-award rate against monetary obligations in the award.

Some employers say this allows them to “set off” any over-award payment against any employee entitlement in the award, such as overtime and penalty rates. Others say it was only intended to apply in the period of transitioning to a modern award, allowing employers to absorb resultant cost increases into existing over-award payments.

The Full Bench has ruled that the function of modern awards is not to regulate the interaction between minimum award entitlements and over-award payments.

It says these matters are dealt with by the common law principle of “set-off” – and should be left to individual employers and employees to determine.

Set-off clauses are common in employment contracts in smaller firms because they allow managers the flexibility to work additional hours without complicating payroll systems.

NatRoad’s advice is that Members should review their set-off award obligations using common law principles to ensure they are not exposing themselves to a claim for underpayment of wages and allowances.

The absorption clause contained in modern awards cannot be relied on, and any set-off arrangements need to be in properly drafted into employment contracts.

Generally speaking, a contract of employment should specify that over-award remuneration is directed towards setting off the payment of specific award obligations, such as overtime, penalty rates or allowances.

If the contract of employment provides that the whole or part of the employee’s remuneration is appropriated to a particular occurrence of employment (such as ordinary hours), that same amount cannot be applied in satisfaction of another award obligation (such as overtime or penalty rates).

As always, NatRoad Advisers are here to assist Members in navigating these issues.