What are Set-Off Clauses in Employment Contracts?
A set-off clause is an optional clause in an employment contract that allows employers to pay their employees a rate of pay that is higher than award minimum rates in order to accommodate other entitlements that employees would be entitled to receive.
In Australia, each modern award states the minimum rate an employee must receive for work in that industry. Modern awards also indicate what extra entitlements these employees must receive, including penalty rates, overtime, allowance and loading rates.
Legally, employers must pay their employees the base rate plus these extra monetary entitlements. However, to keep payroll duties simple, some employers may choose to pay their employees a salary large enough to compensate for or include the payment of these entitlements.
A set-off clause forms an agreement between employee and employer that the employee will receive a larger salary (or base rate) in compensation for not receiving the explicit payment of award entitlements, such as weekend penalty rates or leave loading. When drafting such a clause, ensure you’re specific about which award entitlements you are setting off.
Some modern awards allow the payment of an annualised salary in place of an obligation to pay certain entitlements, such as overtime rates. Generally, these agreements must be in writing and state which relevant award provisions, of those permitted, are satisfied by the annualised wage.
The employee must be better off because of any annualised wage arrangement; they cannot be left worse off than the minimum entitlements provided by the award.
When calculating the above-award component of the remuneration, employers must ensure it is high enough to fully meet the award obligations, and this should be regularly reviewed to account for any changes to the award or the employee’s duties or hours of work.
Be aware of the risks
There is the risk of accidentally underpaying employees when using set-off clauses. They need to be carefully drafted and follow a thorough review of legislation, the applicable modern award, or any enterprise agreement to ensure they are lawful.
Mistaken attempts to set off can occur when an employer relies upon paying an employee an hourly lump sum above the minimum rate, in the relevant modern award, to set-off against other entitlements that may be found to be owing to the employee later (such as overtime or penalty rate).
The consequences of incorrect set-off can result in employers being required to pay the outstanding entitlements on the agreed above-award lump sum rate (not the minimum) plus any interest. The employer might also have contravened provisions of the relevant modern award and the Fair Work Act, including civil remedy provisions, which may give rise to civil penalties.
While set-off clauses can be very useful from a practical sense (if drafted correctly), they can also be complex. The complexities in using a contract to set off lawful entitlements with over-Award payments were explored in WorkPac Pty Ltd v Rossato  FCAFC 84 (a case which was later overturned on a different matter). It’s worth seeking independent legal advice if you’d like to confirm that you’ve drafted yours correctly.