Can I still “set-off” award entitlements using a written contract after 1 January 2010?
You are here:We think employers will still be able to make over-award payments to employees to compensate them for various award entitlements, such as weekend penalty rates, despite the presence of model flexibility clauses in modern awards. But you should take extra steps to keep them safe...
Background - we posted an earlier article (updated 27/11/09 after Modern Clerical Award decision) about how we were worried Individual Flexibility Arrangements (IFAs) could create inflexibility, if they were interpreted to mean arrangements that didn't meet strict award requirements were ruled inoperative. We provide more information on our view, albeit a slightly less certain one, that overaward arrangements can still operate despite the IFA award provisions.
The Fair Work Act 2009 requires that all modern awards (which become operational on 1 January 2010) contain a model flexibility clause. The model flexibility clause allows an employer to come to an agreement with an employee on an IFA which amends the way in which the modern award operates in relation to that particular employee. For example, an employer may be able to come to an agreement with an employee to work a non-standard span of hours to meet the genuine needs of both parties. Once an individual flexibility arrangement comes into effect, it can be enforced as a provision of a modern award.
A number of procedural requirements must be met before a flexibility arrangement comes into operation. A failure to meet these requirements can result in a penalty of up to $33,000 per breach for an employer. Further, an individual flexibility arrangement can also be terminated by either party giving four weeks' notice. The procedural hurdles which an employer must overcome, as well as the lack of certainty which can result from an arrangement being terminated unilaterally, makes flexibility arrangements practically difficult for employers to use.
Use of "Offset" Clauses
The presence of a specific mechanism in modern awards to allow for deviation from strict compliance with its terms has caused many employers to question whether they will be still able to use “off-setting” clauses in their written contracts of employment. Many employers currently provide their employees with written contracts that contain a clause which states that an employee's “all-up” remuneration is intended to satisfy all entitlements under an award, such as weekend penalty and overtime rates.
Where the Courts have been asked to consider the validity of off-setting clauses, they have found that employers are only entitled to offset remuneration to satisfy award obligations where it is clear that these payments are referable to specific award obligations. It is crucial to avoid significant backpay exposures that an employee is being compensated correctly when an employee's total entitlement under an award is calculated and compared against the total remuneration received over that period.
The model flexibility arrangements have force under statute, where as off-setting clauses have operation through the private law of contract. We believe employers will still be able to continue to use off-setting clauses in their written contracts. However, it is important that employers make it clear that an off-setting clause in a contract is not intended to operate as a model flexibility clause to ensure that a distinction between the two is maintained.
ERS Recommendation
Employers should continue to ensure that written contracts of employment contain a well-drafted “off-setting” clause that clearly designates which modern award entitlements are being off-set. Our Online HR Resources Service includes sample employment contracts with wide-ranging clauses that should permit offsetting of overaward payments against award entitlements.
Please note that ER Strategies is unable to provide legal advice. However, we do offer practical, commercial employment solutions for employers.
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