The Federal Court’s recent decision in FWO v Woolworths Group Limited & Ors has placed renewed scrutiny on the widespread use of “set-off” or “absorption” clauses in employment contracts.
This case involved large scale underpayments by Woolworths and Coles and casts doubt on the legality of using annual salaries to satisfy award (or enterprise agreement) entitlements.
It is common practice for award covered employers and employees to agree an annual salary to cover all award entitlements, such as base rates of pay, penalties, overtime and allowances, to avoid paying a variable amount each pay period. These arrangements provide employees with certainty about the amount received each pay period, while allowing employers to avoid having to undertake separate calculations each pay period.
However, this decision effectively overturns this long-standing practice and limits the use of “set-off” or “absorption” clauses to each pay period.
Background
The case involved the underpayment of thousands of managerial and supervisory employees paid annual salaries while covered by the General Retail Industry Award 2010 (Retail Award). Woolworths and Coles paid these employees annual salaries and relied on contractual “set-off” clauses to assert that the employees had received all monetary payments under the Retail Award, including base rates of pay, penalties, overtime and allowances.
Woolworths and Coles argued that, as long as the salary paid was more than the employee’s entitlements under the Retail Award over 6 or 12 months, there was no underpayment.
The Court’s decision
The Court ruled that this long standing practice was inconsistent with the Fair Work Act 2009 (FW Act), because the “set off” clauses did not link the actual payments in each pay period to the specific obligations under the Retail Award and the FW Act, which provide that entitlements – for example, penalty rates for a public holiday shift – must be paid in the relevant pay period, i.e. not at an earlier or future date.
In other words, the Court held that Woolworths and Coles could not lawfully allocate salary payments above the Retail Award in one pay period to satisfy monetary entitlements in a different pay period under the Retail Award.
The Court also emphasised that paying an above award salary does not remove an employer’s record-keeping obligations under the FW Act. Employers must continue to retain (and if requested, produce) detailed records of specific entitlements accrued by the employee, as required by regulations 3.33 and 3.34 of the Fair Work Regulations (2009) (FW Regulations).
The Court held that reliance on generalised record-keeping data, such as roster records and clocking data, is insufficient as it requires further reconstruction and interpretation to determine an employee’s actual entitlements under an industrial instrument, because the records are not “readily accessible to an inspector”, as required by the FW Regulations.
Awards containing annualised salary provisions
Arising out of its 2018 Annualised Wage Arrangements decision, the Full Bench of the Fair Work Commission inserted annualised salary provisions into 19 modern awards to expressly facilitate the payment of annual salaries in satisfaction of award entitlements, such as base rates of pay, penalties, overtime and allowances, subject to strict conditions to ensure employees are not financially disadvantaged.
On our reading of FWO v Woolworths Group Limited & Ors, an employer paying an annual salary that complies with an annualised wage arrangement or annual salary provision in an award, can lawfully pay an annual salary, that would otherwise result in an underpayment in accordance with the Court’s reasons in FWO v Woolworths Group Limited & Ors.
Take-aways for employers
This decision is a warning to all employers currently paying above award annual salaries to satisfy all monetary entitlements, particularly where employees work overtime and variable shift patterns.
In the absence of an employer complying with an annualised wage arrangement or annual salary provision in an award, employers must ensure that if an employee paid an annual salary performs extra work that entitles them to a higher amount under an award than their salary in a pay period, is paid an additional amount to ensure the employee is not underpaid in that pay period.
An example:
- An employee is paid a salary of $100,000.00 in equal fortnightly instalments of $3,846.15, regardless of how many hours the employee works.
- In one fortnight, the employee works 150 hours.
- Under the award, the employee is entitled to a minimum payment of $30 per hour. Therefore, the employee would be entitled to $4,500.00 for that fortnight, under the award.
- As the employer’s payment of $3,846.15 is insufficient to discharge its obligations under the award, the employer should pay the employee a total of $4,500.00 for that fortnight to avoid an underpayment.
While Woolworths and Coles may appeal this decision, employers must take proactive steps to review their current salary arrangements and record-keeping practices, where award or agreement-covered employees are paid by annual salary. Failing to do so may expose employers to significant risks, including costly back-pay liabilities, civil penalties and reputational damage.