Set-off on Award entitlements: The Federal Court has spoken

The Federal Court of Australia has today struck down the use of contractual annualised salary arrangements, which are used to "set-off" or absorb entitlements owing under an industrial instrument greater than the pay period itself, and which would otherwise result in underpayments. This is an important decision on the permissibility of set-off arrangements, and employers should take steps to review their use, including to ensure that salaries adequately remunerate employees for entitlements owing under industrial instruments in each pay period.

The payment of salaries and set-off arrangements: background

Today's decision of Justice Perram was in respect of a proceeding brought by the Fair Work Ombudsman (FWO) against Coles and three related proceedings. In the Coles matter, the Federal Court was asked to consider whether an employer who has an annualised salary arrangement and set-off clause in a contract of employment for an Award covered employee is still obliged to pay all Award entitlements each pay period, or whether it was permissible to off-set Award entitlements in one pay period by over Award payments in another pay period. Such set-off arrangements are used by many employers under the belief that as long as the total annual pay under the contract is more than the total Award entitlements for the annual period, the set-off is permissible.

In the case of Coles, the employer paid certain management staff, who were covered by the General Retail Industry Award 2010, an annual salary, which Coles argued was in satisfaction of all entitlements owed under that Award for that year. The FWO argued that Coles was obliged to pay each employee any amounts they were entitled to under the Award in full in each pay period and that Coles could not set-off above Award payments in one pay period against underpayments in another pay period, even if those pay periods were in the same year.

Decision: why absorbing entitlements under the Award was not lawful

Justice Perram conducted an in-depth analysis of a range of authorities on set-off and annualised salary provisions and eventually found in favour of the FWO's position. The Court found that, when having regard to the set-off terms in the employees' contracts, Coles' payment of an annual salary could not permissibly absorb entitlements under the Award over an annual period. In upholding the FWO's position, the Court found that Coles could only set-off contractual payments within each individual pay period, as payment under the Award and the Fair Work Act 2009 (Cth) was required in each pay period in full.

Key takeaways

Justice Perram's decision (and any orders that follow) will be interlocutory in nature and may be open to appeal with leave of the Court. Absent an appeal, employers who use annualised salary set-off arrangements should ensure that the amounts paid to employees in each pay period fully satisfy any entitlements under the Award for that pay period. This may require top-up payments being made in the pay period, to ensure that no underpayment occurs.

Employers who use annualised salary set-off arrangements should review any such arrangements to ensure that they are compliant with the requirements for them to be permissible. Clayton Utz has extensive expertise in these arrangements and can assist employers in ensuring that their annualised salary set-off arrangements are compliant and permissible.