Offset Clauses in Employment Contracts

Employment contracts are essential agreements that outline the terms and conditions of the relationship between employers and employees. One of the most critical aspects of any employment contract is the inclusion of an offset clause. An offset clause is a provision that allows an employer to pay an employee above the minimum standards set by any relevant Awards or industrial laws to cover their obligation to pay for certain entitlements such as overtime, penalty rates, and annual leave loading.

Having an offset clause in an employment contract provides employers with greater flexibility in how they manage paying their staff. It enables the employer to decide which entitlements they want to offset and can make the process for payroll simpler by not having to identify payments for entitlements such as allowances and leave loading. By paying above Award rates, employers can attract and retain talented employees while also remaining competitive within their industry.

In addition, the inclusion of an offset clause can also benefit employees. It provides them with greater transparency about their entitlements and allows them to negotiate a fair and reasonable salary that takes into account the benefits they will receive. It also provides them with a predictable and stable wage. This can lead to a more positive and productive working relationship between the employer and employee.

However, it's important to note that employers must ensure that their hourly rate or salary they offer their employee is sufficiently high enough above the Award that it covers all possible entitlements. For example, if an employee on a salary works a large number of overtime hours, their wage must be high enough that they are compensated for the extra overtime worked. We recommend conducting a reconciliation of your employees’ wages every few months to ensure you are meeting your obligations.

It is crucial that the inclusion of an offset clause must comply with the relevant Awards, employment laws and regulations. If an employer pays above Award rates but does not have an offset clause in their contracts and fails to outline the payment of specific entitlements on their payslips such as allowances, they are under significant risk of breaching the Award and receiving an underpayment claim and facing potential fines.

A key example of this in the motor industry is vehicle salespeople. A salesperson’s base retainer must be high enough that it covers all their basic entitlements, allowances and penalty rates. The payment of commission can only offset the payment for hours worked beyond 38 hours and nothing else. For example, an employer cannot state that their employee’s commission covers the need to pay them for annual leave loading when they take leave. An employer also cannot claim their employee’s base retainer is high enough to cover this entitlement, unless they have an offset clause in their contract that states their salary takes annual leave loading into account.

A recent case example from the banking industry in Arundell & Ors v Macquarie Bank Ltd [2020] FCCA 2720 (2 October 2020) provides a clear warning to employers of the importance of an offset clause, particularly where commission is involved.

Macquarie Bank was found to have underpaid 16 of its employees and was ordered to repay each employee the amounts owed from the breach amounting to over $500,000. The bank’s wealth advisors received a base salary but earned significant commissions, some earning up to $1 million annually. The Respondent argued their contracts made it clear that the fixed salary was intended to set off the Award salary. However, the court found they failed to prove that the payment of other entitlements had been met in relation to leave loading, public holidays, annual leave, personal leave and compassionate leave. It was not accepted that their commission payments could offset these entitlements and they had no clear terms in the contract that demonstrated the base salary intended to offset these entitlements. The Respondent also failed to demonstrate on their payslips that these specific types of leave had been paid. The court distinguished the difference between the payment of a salary for an ordinary day versus payment for leave. Thus despite still receiving payment when the employees took leave, it was held the payment for leave was still owing because their payslips did not state that a particular type of leave had been paid, rather just their normal wage was paid.

This case highlights the importance of having clear, explicit terms in your employment contracts about which entitlements you intend to offset, but also to ensure your payslips clearly identify when you are making payments for a certain type of leave.

In conclusion, having an offset clause in an employment contract can be beneficial for both employers and employees. However, it is essential to use this clause responsibly and in compliance with the relevant Awards and legislation. It is particularly crucial in our industry where most workers are paid above the Award and many workers earn commission. Employers should always seek professional advice to ensure that their employment contracts are fair, reasonable, and legally compliant. If you need assistance, please contact the MTA on 8291 2000, or at wr@mtasant.com.au.