What happens when an employer, who has been paying a worker above award rates in the belief that the worker was a casual employee, or because it believed that the worker was an independent contractor, and it is subsequently discovered that the employee was neither of those things? Can the employer set off the above award payments against amounts that may be found to be owing to the employee due to his or her newly determined status?

The answer would seem to be: “In most cases probably not”.  At least, that seems to be the trend of court and commission cases in this area.

Frequently, the putative employer will object and say, “But we had a contractual provision”. On closer examination, the contract will often say something like:

If, to the astonishment of all of us, you are found to be an employee instead of an independent contractor (or non-casual instead of casual) then the flat rate amounts we have paid you will be set off against your employment entitlements including, but not limited to, paid leave, redundancy pay, long service leave and paid public holidays.

Many workplace contracts do contain provisions like that. Frequently, they are inserted for the sake of giving the putative employer something to argue about if push ever comes to shove. I will resist the temptation to comment on whether that is a sufficient basis for including a provision in the contract – other than to observe that it would be a specious argument at best!

Whilst it seems possible, in theory, to draft a provision that has the desired effect, it is much more difficult to do it in practice; and it is even more difficult to prove that employers have actually done what an effective contractual provision would require them to do. That is because a contractual entitlement cannot usually be set off against a statutory or award entitlement in the absence of an expressly agreed designated payment that is allocated to an expressly identified entitlement that is to be satisfied by the payment.

Strictly speaking, it is not a “set off” at all because there is no mutuality of obligation. At best, it may be effective as an agreed means of satisfying a statutory or award entitlements; or it may adjust purely contractual rights between the parties. In either case, it must be done with sufficient certainty and it must be done in a way that does not result in any contracting out of the statutory or award entitlement.

Common mistakes often made by employers include:

  • relying upon contractual provisions that are attempts to contract out of statutory entitlements or awards. Such provisions are of no effect and therefore cannot be relied upon;
  • relying upon clauses that are not specific as to the manner in which any overpayment is likely to be allocated or applied. They lack the certainty required for enforceability;
  • making gifts of sums of money, where there was no contractual obligation to do so and then hoping to set off the gift against a statutory or award entitlement. A gift is a gift and cannot be set of against anything;
  • claiming to set off excess payments without the consent or agreement of the employee;
  • attempting to raise various forms of equitable estoppel against a statutory entitlement, where the estoppel cannot prevail against the statute;
  • attempting to rely upon the doctrine of mistake, where no mistake of fact or law is established in evidence.

The issue was recently considered by the Federal Circuit Court in Predl v DMC Plastering Pty Ltd & Anor [2014] FCCA 1066.

In that case, questions arose about whether the worker was a subcontractor or an employee; and if an employee, whether he was casual or permanent. Once his entitlements had been worked out on the basis of his correct status, a further question arose about whether the employer had a right to set off “overpayments” of wages against other outstanding entitlements. Of course, they were only “overpayments” if assessed against the minimum award entitlements. There was no suggestion that the employer had not agreed to pay what he did in fact pay or that the agreement was vitiated by any mistake.

The set off argument was dispatched in several short paragraphs. which explain the relevant principles and highlight the nature of the drafting and H.R. management challenges that attend any attempt to raise a “set off” in these circumstances.

[73] …Relying upon James Turner Roofing Pty Ltd v Peters [2003] WASCA 28  the First Respondent contends that it was entitled to set off overpayments made in the course of the term of employment against the unpaid accrued employment benefits due to the Applicant. However the operation of that principle is confined to very limited circumstances. In essence there may only be a set off if the other payment is expressly:

“[21] … appropriated by the employer to a particular incident of employment … So a payment made specifically for ordinary time worked cannot be applied in satisfaction of an obligation to make a payment in respect to some other incident of employment such as overtime, holiday pay, clothing or the like even if the payment made for ordinary time was more than the amount due under the award in respect of that ordinary time.”

[74] This principle has been echoed in other decisions. For instance, in Poletti v Ecob (No 2) (1989) 91 ALR 381 at 393 the Full Court of the Federal Court stated:

“… The second situation is that in which there are outstanding award entitlements, and a sum of money is paid by the employer to the employee. If that sum is designated by the employer as being for a purpose other than the satisfaction of the award entitlements, the employer cannot afterwards claim to have satisfied the award entitlements by means of the payment … [That] situation is an application of the common law rules governing payments by a debtor to a creditor. In the absence of a contractual obligation to pay and apply moneys to a particular obligation, where a debtor has more than one obligation to a creditor, it is open to the debtor, either before or at the time of making a payment, to appropriate it to a particular obligation. If no such appropriation is made, then the creditor may apply the payment to whichever obligation or obligations he or she wishes.”

[75] Similarly, in Textile, Clothing and Footwear Union of Australia v Givoni Pty Ltd [2002] FCA 1406(2002) 121 IR 250, Goldberg J, after examining a number of authorities dealing with the point including Poletti v Ecob (No 2), neatly enunciated the principle at [61]:

“[61] Put shortly, where there is a payment made for, or in respect of, ordinary hours of work which is in excess of the award obligation, the excess cannot be set-off against a claim for underpayment of overtime unless at the time of the payment of the excess, the employer designates that that excess over the amount of the award obligation is paid for the purpose of satisfying any entitlement to [the other award benefits].”

[76] Here the hourly rate was not expressed to be payable in respect of any obligation but the regular obligation to pay the Applicant for an hour of his labour. The sums paid insofar as they exceed the award rate were not expressly designated to be payable in respect of other entitlements including the Applicant’s leave entitlements. It follows that in my view the over award payments were not designated for that award or statutory benefit, and accordingly a set off is not permissible. That situation prevails irrespective of whether the Applicant’s entitlements were statutory or award based. In the event that the Applicant’s entitlements were founded in statutory minima there is no logical reason why the principle applicable to overpayments of entitlements due under awards ought not apply to the safety net arrangements put in place by the various statutory instruments extant through the course of the employer/employee relationship.

[77] It follows that I do not consider [the employer] to have any entitlement to set off overpayments against the other employee entitlement liabilities.

A similar result was reached by the Federal Court in New Image Photographic’s Pty Ltd  v. Fair Work Ombudsman [2013] FCA 1385. At paragraph [44] Collier J emphasised:

…for a “set off” payments to take effect, there must be mutuality in respect of the overpayment and underpayment, designation by the employer of the overpayment as being referable to the underpayment, and consent by the employee to receive the overpayment as setting off such underpayment.

To incorporate those elements into a contractual provision that it is sufficiently certain as to the designations, the accounts to be taken and the adjustments to be made in the event of a change in worker status (and to ensure that the putative employer has done all that is necessary to be done to comply with the contract – making the agreed designation before or at the time of payment) is no easy task!