Are You At Risk Of Underpayment Claims?

As part of the 4 yearly review of modern awards, last year the Full Bench of the Fair Work Commission considered the absorption clause contained in all modern awards

When modern awards were introduced in 2010, they all contained a provision that monetary obligations imposed on employers by this award may be absorbed into overaward payments. Nothing in this award requires an employer to maintain or increase any overaward payment.

The above clause has varying interpretations which has caused some uncertainty for employers. Some argue that the clause was intended to allow employers to set off any overaward payment against any employee entitlement in the award, such as overtime and penalty rates. Others argue that the clause is more limited in its application and was intended only to apply in the transitional period where monetary obligations may have increased as a result of the introduction of modern awards and that employers should be able to absorb those increases into existing overaward payments.


Whilst the Full Bench was ultimately not required to make a determination in relation to the absorption clause, as part of its decision, it stated that the function of modern awards was not to regulate the interaction between minimum award entitlements and overaward payments. Rather, such matters were adequately dealt with by the common law principles of set-off; that is, if an employer pays an employee an amount that is higher than the award rate and ‘sets-off’ the overaward rate against monetary obligations in the award, and should be left to individual employers and employees to determine.

Importantly, the Full Bench noted that they did not believe there were any barriers contained in modern awards to the operation of the common law principles of set-off.

It is therefore timely to consider in how organisations can set-off award obligations using common law principles without exposing themselves to an underpayment claim.

Set-off clauses in the common law

To have an effective set-off clause in a contract of employment, the following principles should be followed:

  • A contract of employment should specify that overaward remuneration is directed towards setting off the payment of specific award obligations, such as overtime, penalty rates or allowances;
  • However, if the contract of employment provides that the whole or part of the employee’s remuneration is appropriated to a particular incident of employment (such as ordinary hours), that same amount cannot be applied in satisfaction of another award obligation (such as overtime or penalty rates).

Lessons for employers

The use of set-off clauses in employment contracts is common. They are best suited for contracts for managers who are required to work additional hours and in smaller organisations because it allows the payroll function to be streamlined.

The Full Bench decision is a reminder to employers that the absorption clause contained in modern awards cannot be relied on and that employers should document any set-off arrangements in properly drafted contracts of employment.

Without clear documentation (in a contract of employment) that sets out what overaward payments are set-off against which award obligations, there is a risk that such an arrangement is not authorised and award entitlements may be owed to employees. This means that employers will be at risk of underpayment claims, prosecution by the Fair Work Ombudsman for breach of the award, penalties and possible industrial disputes or unrest.

The following points needs to be considered by employers in developing an enforceable set-off arrangement:

  • What award entitlements do you want to set-off against the overaward payments?
  • Ensure the contract of employment comprehensively lists the award entitlements to be set-off against the overaward remuneration (such as overtime, all penalty rates, and all allowances)
  • Ensure the overaward payments are sufficient to compensate the employee for the award entitlements that are being set-off (it is necessary to keep records of overtime worked or allowances an employee is entitled to, to ensure employees are adequately compensated).

For advice in relation to your contracts of employment, please contact Natasha Fletcher on (03) 9972 4950.

[1] 4 yearly review of modern awards [2015] FWCFB 6656

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