Lawful deductions and set-off - When can your employer deduct money from your pay? Can an amount an employer owes you be set-off against an amount an employer has already paid?

Human resources teams are humans too. Sometimes they overpay an employee. Sometimes they underpay an employee. Sometimes they forget to pay employees award entitlements like overtime. In this blog post I investigate the situations where an employer can deduct money from your pay and the situations where an employer can off-set an amount they owe you from an amount they have already paid.   

Relevant provisions of the Fair Work Act 2009

Section 323 of the Fair Work Act 2009 describes the method and frequency that an employer must pay an employee amounts payable to the employee, such as wages, bonuses and loadings. An employer must pay amounts payable in full, in money, at least monthly. The money can be paid in cash, by cheque, electronic funds transfer or a method authorised under an award or enterprise agreement (s.232(2)). Section 324 permits an employer to make deductions from an amount payable to an employee if one of four situations exist:

a. the deduction is authorised in writing by the employee and is principally for the employee's benefit; or

b.  the deduction is authorised by the employee in accordance with an enterprise agreement; or

c.  the deduction is authorised by or under a modern award or an FWC order; or

d. the deduction is authorised by or under a law of the Commonwealth, a State or a Territory, or an order of a court.

Many employees are not aware that where the deduction is not authorised by an award, enterprise agreement, FWC or court order or another law, the employee’s written permission is required and the ‘principally for the employees benefit’ test must be satisfied before an employer can deduct an amount from an employee’s pay. The employee may withdraw their permission for the deduction at any time (s.324(b)). If the employer wishes to vary the amount deducted, this variation must also be agreed to in writing by the employee (s.324(3)).

Section 326 supports the application of s.324, providing that a term of a modern award, enterprise agreement or contract of employment that permits an employer to deduct an amount from an amount that is payable to an employee or requires an employee to make a payment to the employer or another person is invalid to the extent the deduction or payment is:

(i)                 directly or indirectly for the benefit of the employer, or a party related           to the employer; and

(ii)                unreasonable in the circumstances.

Can an employer set-off an amount it owes you against another amount it has already paid you?

A common situation arises where an employer has been paying the employee more than the applicable award rate for wages and when the employer is then found to owe the employee an award entitlement such as penalty rates, the employer sets off the amount owed with the excess amount already paid to the employee. This practice is called a set-off and is only permitted in certain situations.

Set-off at common law

At common law, whether a set-off is permitted will depend on the purpose for which the sum already paid was made and the nature of the amount the employer owes the employer. The principles of set-off in the employment law context are as follows:

·   Where there is a contractual arrangement the employer will pay the employee sums over and above or extraneous to award entitlements, the contract prevents the employer from relying on these additional payments to satisfy award entitlements outside the agreed purpose of the payments - Poletti v Ecob (No 2) (1989) 91 ALR 381 per Keely, Gray and Ryan JJ.

·   Where there are outstanding award entitlements, a sum that had already been paid to the employee designated for a purpose other than the satisfaction of the award entitlement cannot afterwards be said to have satisfied the award entitlement - Poletti v Ecob (No 2) (1989) 91 ALR 381 per Keely, Gray and Ryan JJ.

·   The critical question is whether the relevant award entitlements arose outside the contractually agreed purpose. While there must be a close correlation between the nature of the contractual obligation and the nature of the award obligations, it is not necessary that the same label be used - Australian & New Zealand Banking Group Limited v Finance Sector Union of Australia (2001) 111 IR 227.

·   An excess payment must be specifically designated at the time of payment, for example, for overtime or call-back, if it is then later to be used by the employer to set-off overtime or call-back entitlements under an award. Timely designation is important - Logan v Otis Elevator Company Pty Limited (1999) 94 IR 218.

·  In James Turner Roofing v Peters (2003) 132 IR 122, Anderson J distilled the authorities into five key principles:

1. If no more appears than that (a) work was done; (b) the work was covered by an award; (c) a wage was paid for that work; then the whole of the amount paid can be credited against the award entitlement for the work whether it arises as ordinary time, overtime, weekend penalty rates or any other monetary entitlement under the award.

2. However, if the whole or any part of the payment is appropriated by the employer to a particular incident of employment the employer cannot later claim to have that payment applied in satisfaction of his obligation arising under some other incident of the 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.

3. Appropriation of a money payment to a particular incident of employment may be express or implied and may be by unilateral act of the employer debtor or by agreement express or implied.

4. A periodic sum paid to an employee as wages is prima facie an appropriation by the employer to all of the wages due for the period whether for ordinary time, overtime, weekend penalty rates or any other monetary entitlement in respect of the time worked. The sum is not deemed to be referable only to ordinary time worked unless specifically allocated to other obligations arising within the employer/employee relationship.

5. Each case depends on its own facts and is to be resolved according to general principles relating to contracts and to debtors and creditors.

In Linkhill, the Federal Court indicated these principles are consistent with Poletti and other authorities, and that in principle 1, such payment should be designated as “all-in” or all inclusive. 

·         While it is not yet settled, there have been suggestions by the Federal Court that the above principles may not apply to situations where parties did not intend to provide for award entitlements at all. For example, in situations where the employer believed the employee to be an independent contractor, and a court later determines that an employment relationship existed - Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate [2015] FCAFC 99.

Key Case - Poletti v Ecob (No 2) (1989) 91 ALR 381

The key Federal Court case for set-off in the employment law context is the decision of Poletti v Ecob (No 2) (1989) 91 ALR 381. Poletti ran a horse training business and employed Mr Hunt as a foreman to train horses. The applicable award was the Horse Training Industry Award 1976–1982 (the Award). Prior to commencement Poletti and Mr Hunt came to an agreement that Mr Hunt would be paid $50 more a week than his previous job. Mr Hunt and his family lived in accommodation above the stables. Mr Hunt was paid weekly in cash, and was paid an additional amount to that which was agreed (additional cash payments). Except for two days in 1986, Mr Hunt took no annual leave and was paid extra in lieu of annual leave at his request. He was also paid extra in lieu of public holidays on which he worked. At first instance before the Chief Industrial Magistrate, Mr Hunt successfully argued he was entitled to be paid annual leave, wage, public holiday and overtime entitlements under the Award.

In their joint judgment, Justices Keely, Gray and Ryan outlined two key principles (at 393):

·   where there is a contractual arrangement the employer will pay the employee sums over and above or extraneous to award entitlements, the contract prevents the employer from relying on these additional payments to satisfy award entitlements outside the agreed purpose of the payments; and

·   where there are outstanding award entitlements, a sum that had already been paid to the employee designated for a purpose other than the satisfaction of the award entitlement cannot afterwards be said to have satisfied the award entitlement.

In applying these principles to Mr Hunt’s case, the Full Court found the intention of Poletti and Mr Hunt in their contractual arrangement was to come fix remuneration for the total number of hours to be worked by Mr Hunt each week. The additional cash payments could therefore be treated as satisfying the employer’s obligations in outstanding payment of wages for ordinary time worked. Mr Hunt was also given additional payments for annual leave, so the outstanding annual leave owed by the employer under the Award could be set-off against this amount. There was no evidence of additional payments being made for the specific purpose of public holidays, so the employer still owed this amount to the employer under the Award. The employer could not offset money owed under the Award for overtime, as the additional cash payments had not been made for this purpose.

In Poletti, the Full Court applied two earlier cases:

11. Decision of the NSW Industrial Relations Commission in Ray v Radano [1967] AR(NSW) 471 (Ray v Radano)

In Ray v Radano, a chef claimed he was owed overtime payments under the applicable award, and that weekly payments made by the employer (which were in excess of the award rate), were only in respect of ordinary time. The NSW Industrial Relations Commission held that to the extent the amount paid each week exceeded the rate prescribed by the award, this could be treated as a payment in respect of overtime. While all judgments reached the same outcome, Justices Richards and Sheehy in their joint judgment took a different view on the applicable principles to Sheldon J, but Sheldon J’s judgment has been preferred in subsequent cases, including in Poletti.

Richards and Sheehy JJ were of the view “if the moneys received by him were not received for wages but for some other purpose, for example, for fares or as a uniform allowance, he would have to provide this fact in order to establish that such moneys were not to be taken into account in determining the correct balance due to him for wages”.

Sheldon J (whose judgment was favoured in Poletti and other subsequent Federal Court cases) disagreed with this principle: “I can see no difference in principle between an amount promised in excess of the award requirement whether the promise is for, say, a uniform allowance or for a payment confined to ordinary time only. In each case, the employee works on the basis that he will receive an extra-award payment and, in my opinion, it is not to the point that in one case its subject matter is clothing and in the other additional remuneration for a nominated period of work. If one cannot be set-off, neither can the other because their essential character is identical, i.e., both are payments in fulfilment of a promise extraneous to the award obligation”.

22.Decision of the NSW Industrial Relations Commission in court session in Pacific Publications Pty Ltd v Cantlon (1983) 4 IR 416 (Pacific Publications)

Mr Clarkson was employed as an A grade journalist by Pacific Publications. He was retrenched and was entitled to $6,203.20, being 16 week’s pay in lieu of notice under the applicable award. Mr Clarkson received a number of payments from Pacific Publications including a $4,000 “Special Gratuity” payment. Pacific Publications later agreed to pay the 16 weeks, but only forwarded a cheque for $2,203.20 and claimed the $4,000 “Special Gratuity” payment constituted the remainder of the 16 week’s pay in lieu of notice.

The NSW Industrial Relations Commission preferred the judgment of Sheldon J to the majority in Ray v Radano and held that the “special gratuity” payment was not intended to be a payment in lieu of award notice on termination, as the company clearly appropriated the payment as a “special gratuity” extra-award payment at the time it was made. The $4,000 could not be set-off against the payment in lieu of notice Pacific Publications owed to Mr Clarkson.

Set-off and sections 323 and 324 of the Fair Work Act 2009?

Sections 323 and 324 are only engaged where amounts are payable in a relevant period in relation to the performance of work including incentive based payments and bonuses, loadings, monetary allowances, overtime or penalty rates, and leave payments. The sections only apply to an amount payable. If the amount owed to an employee is not an amount payable, sections 323 and 324 will not disrupt the operation of the principles of set-off described above.

The Federal Circuit Court case of Palmer v DDR Plumbing & Gas Fitting Pty Ltd [2015] FCCA 2086 is illustrative of a situation where a deduction made was not an amount payable under s.323 and therefore did not breach s.324.

In Palmer v DDR Plumbing, DDR Plumbing was seeking to set-off overtime payments owed to an apprentice plumber under the award with payments made in excess of award rate. Judge Smith found the amounts could be set off as there was a close correlation between the amounts paid under the contract for time worked up to 7pm and the award obligation to pay overtime rates.

There was a further issue in that tools owned by DDR had been stolen while the tools were in the possession of the apprentice plumber. The tools were worth $5,000. DDR had deducted the cost of replacing these tools from the apprentice’s annual leave entitlements. Amounts compensating for stolen goods are not an allowable deduction under s.324. DDR would be required to pay the annual leave under s.323 if it was “amounts payable to the employee” at the time they were deducted. Judge Smith found there was no obligation on DDR to pay the applicant annual leave at the time the deduction was made and therefore the deduction did not breach obligations under s.90 (payment of annual leave) or s.323. 

Summary

Whether a set-off is permitted is dependent on:

·        1.Statutory considerations

Whether the amount in question is an “amount payable to the employee” under s.323. If the amount is an amount payable to the employee, s.323 and s.324 must be complied with where the set-off involves a deduction.

·        2.Principles of set-off at common law

The first step is to identify:

o   the purpose for which the additional payments were made to the employee; and

o   the purpose of the amount the employer owes the employee.

The second step is to consider the principles of set-off at common law (discussed above) to see if the set-off is permitted. and apply the principles discussed above.

·        3.Terms in awards, enterprise agreements and employment contracts

In particular, look out for annualised salary provisions in awards and set-off clauses in employment contracts.