What are the implications of paying your employees above the award rate?

The issue – how much is enough?

 
There are 122 modern awards which apply across Australian workplaces. While deliberate ignorance or wilful neglect of award obligations is unlawful and unacceptable, employers can struggle to have a detailed understanding of every aspect of their obligations to their employees under the relevant awards.

These employment award conditions are often poorly drafted and difficult to navigate. Further, it seems unfair that employers who pay their employees weekly sums well above the award should be penalised, merely because the split of that payment does not neatly match the award.
 
Fortunately, the Full Federal Court in the recent decision of Wardman v Macquarie Bank Limited [2023] FCAFC 13 affirmed that employers who pay their employees over and above entitlements provided in the award or enterprise agreement (industrial instrument) can be protected from breach. However, this does not apply in all circumstances. Depending on how the contract of employment is drafted, the over award payments may not automatically discharge the employer from all their obligations under the relevant industrial instrument.

Contracts matter

Clauses in employment contracts purporting to pay the employees an all-encompassing rate above the relevant industrial instrument with the intention of discharging the employer’s obligations under that instrument are often referred to as set-off clauses.^[1] For example, a set-off clause may fix an employee’s rate of pay significantly above the industrial instrument rate, with the intention of discharging employer obligations such as weekend penalty rates, overtime rates and public holidays rates.
 
The court strongly emphasised that the objective intention will be a critical factor when deciding what employee entitlements a set-off clause encompasses.^[2] This intention will override the labels written in an employee’s contract, making it crucial for employers to have a well drafted set-off clause.^[3]

So how detailed does a set-off clause have to be to discharge an employer from all their obligations under the relevant industrial instrument?

A detailed set-off clause should expressly outline all the employee entitlements under the relevant industrial instrument (e.g. overtime rates, public holiday rates etc.) and state that it is the parties’ intention that the payment covers every such entitlement under the industrial instrument.^[4]

The court foreshadows that a provision of this detail will make it sufficiently clear that the set-off payment encompasses:

•  All the employee entitlements under the relevant industrial instrument; and
• The parties’ intention that the set-off payment discharges all employer obligations under that industrial instrument.

A detailed set-off clause will require legal drafting specific to each employee and the industrial instrument they are covered by (this is not always the same for all employees even in the same business). The court stated that the specific industrial instrument does not need to be named in the set-off payment^[5], however, the decision emphasised that the nature of contractual obligations should be similar to the nature of each entitlement under the industrial instrument, in order to discharge the obligations.

If the set-off payment does not expressly address each entitlement, it is less likely the court will find that a particular entitlement was covered.^[6]

A simpler alternative

The Federal Court also highlighted an alternative method to a detailed set-off clause.
That is, a very simplistic set-off payment clause. This simplified clause only details the employee’s rate of pay and does not expressly refer to any employee entitlements or the intentions of the parties’ regarding the payment.^[7] Provided the rate of pay is significantly above the award rate, the courts have indicated that a substantially high rate on its own, without reference to employee entitlements or other context,^[8] provisions or documents, may be sufficient to discharge employer obligations.

For example, a successful argument could be posed that work was done, the work was covered by an award and a wage was paid. Then the whole of that wage can be set-off against the award entitlement for the work whether it arises as ordinary time, overtime, weekend penalty rates, or any other monetary right under the award.

What if not enough attention is paid to the drafting?

Each set-off clause is dependent on the entitlements under the industrial instrument, how the clause is drafted, and the parties’ intention of the payment.^[9] A poorly drafted set-off clause could result in employers being required to pay employees a lump sum with interest for unpaid entitlements.

Employers may also be found to have contravened provisions of the relevant industrial instrument and the Fair Work Act which may give rise to civil penalties. 

Where to from here?

The main takeaway for employers is if you wish to pay an employee above the award rate to discharge your obligations under the relevant industrial instrument you have two options:

1. A detailed set-off clause in the employment contract that:

• Outlines the industrial instrument the employee is covered by;
• Expressly lists each employee entitlement under that industrial instrument; and
• Clearly outlines that the employee’s rate of pay is above the industrial instrument and encompasses all their employee entitlements.

OR

2. A broad set-off clause that:

• Outlines the employee’s rate of pay (this rate must be significantly higher than the award); and
• Does not detail any employee entitlements or the industrial instrument they are covered by.

Hicksons specialist Workplace Relations lawyers have extensive experience in assisting employers and businesses navigate the complexity of changing employment laws and are available to assist you with drafting employment contracts and set off clauses.

Blog written by Hicksons’ Partner, Warwick Ryan.