There has been a lot of media attention about the recent case involving contractual set-off clauses. That’s not surprising given it involves two of Australia’s biggest retailers, Woolworths and Coles, and underpayments that could exceed $1B.

The decision of the Federal Court of Australia (“FCA”) found that Woolworths and Coles could not rely on contractual set-off clauses to satisfy an employee’s modern award entitlements such as penalties, overtime and loadings between different pay periods. The FCA’s decision found that having a contractual set-off clause did not mean that an employee underpaid in one pay period could be compensated by an overpayment in another pay period.

The decision is significant not only for clarification regarding the interplay between set-off clauses, modern award entitlements and the Fair Work Act 2009 (Cth) (“FW Act”), but also for the FCA’s comments around record keeping.

Background

The Fair Work Ombudsman (“FWO”) commenced proceedings against Woolworths and Coles (along with employees forming part of a class action) in 2021. The claims related to the underpayment of salaried managers and team leaders, and reliance upon set-off clauses in employment contracts by Woolworths and Coles.

These set-off clauses essentially provided that Woolworths and Coles would pay their employees a higher salary to satisfy an employee’s modern award entitlements (such as hourly rates, penalties, overtime and allowances), calculated over a six or 12 month period. Because of this arrangement, individual entitlements under the modern award were not paid separately as the retailers were relying on underpayments in some periods to be compensated by overpayments in other periods. Further, records of an employees’ entitlements under the modern award were not kept.

Set-off clauses

In coming to its decision about the validity of the set-off clauses, the FCA relied on a section of the FW Act which says that amounts payable to an employee (including incentive-based payments and bonuses, loadings, overtime and penalty rates) have to be paid in full, in money and at least monthly.

The FCA found that this requirement under the FW Act overrode any contractual agreement to set-off payments over a longer period, stating that, “A payment under a contractual provision which purported to discharge the employer’s obligation to pay an employee’s entitlements under an industrial instrument but which was less than those entitlements would fall foul of [the relevant section of the FW Act]. It would result in the award entitlements being paid less than in full.”

The key takeout was that the attempts to use a longer period to set-off payments against entitlements was not valid and the FCA found that employers can only set-off payments made in one pay period against entitlements due within that pay period.

Record keeping obligations

The FCA found that the fact that there was a set-off clause in an employment contract to pay a higher salary to an employee did not obfuscate the requirement for employers to keep records as required by the Fair Work Regulations 2009 (Cth) (“Regulations”). The case highlights the importance of keeping detailed records for employees, even when those employees are paid a salary.

These record keeping obligations contained in the Regulations require, amongst other things, that records must be kept for seven years in relation to various employment details, including rates of remuneration, amounts paid to employees, deductions, periods of time worked, overtime and entitlements such loadings and penalty rates.

While some employers may think they are immune to record keeping obligations due to the nature of their workforce, this is an incorrect assumption. Record keeping obligations apply in respect to all employees, and employers should be aware that many employees in professional roles are covered by modern awards.

Where an employer has not kept appropriate records, it is on the employer to disprove a claim that they did not keep appropriate records. This is known as a “reverse onus” and it is a difficult hurdle for employers to jump, particularly where records have not been maintained.

Many employers would argue that the record keeping obligations under the Regulations are not reflective of the modern workplace where there is no longer a “clock on” “clock off” culture. Work practices are increasingly flexible, hybrid working and working from home have been embraced by many employers with a focus on building a culture of trust with employees to work in a way that fulfils their position while having flexibility.  But the position of the FWO is clear. Just last week the FWO announced investigations focusing on checking records and payslips.

Where to?

Many employers will be watching closely the development of this case as the use of set‑off clauses is a common practice. While it is important to be aware of the current limitations of a contractual set-off clause, it’s probably not over yet with an appeal of this decision likely.

The FWO’s position is clear though with a new information page being published last week: Offsetting and record-keeping for salaried employees – Fair Work Ombudsman. In this the FWO has said that “if an employer pays their employee more than the minimum amount required by the relevant instrument in one pay period, they can’t generally use this to satisfy a less than minimum amount paid in another pay period.”

We will continue to provide updates in relation to this decision and inform you of any developments.