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Australia: Setoffs in Defence of Underpayment Claims – Latest Full Federal Court Decision

Key Facts

Authors: Greg Robertson, Benjamin Niciak and Hannah Nesbitt

During the claim period, all of the relevant employees were covered by the Banking, Finance and Insurance Award 2010.

Each of the employees was also party to a contract of employment. While the written terms took several different forms, all of the contracts provided for the employees to be remunerated in accordance with a package that included a commission structure, and a component that was referred to as “Basic Cost Responsibility”, or “BCR”. Each employee received a fixed component (referred to by the Bank as the “salary component”) of the BCR paid by 12 equal payments in the middle of each month, half in advance and half in arrears.

The employees claimed that the fixed monthly salary payment was actually an advance on their commission, and that the second payment was the rest of their commission. Accordingly, the employees argued that the payments of the commissions were incapable of discharging any concurrent Modern Award obligation to pay the employees the wages they were owed. The employees also claimed that they had not been paid payments on account of leave entitlements and leave loadings.

In response, the Bank claimed that the employees had been paid amounts that were in excess of the ordinary hourly rates of pay prescribed by the Award, and that the salary component of the BCR that was paid to the employees was in satisfaction of any wages that may otherwise have been payable to them under the Award.

The fundamental issue in this matter was the characterisation of the monthly payments from the Bank to the employees.

The Appeal

The primary judge held that in several respects the payments made to the employees were ineffective to discharge the Bank’s statutory obligations, and made orders for payment to a number of the employees, and orders imposing civil penalties upon the Bank. In other respects, the primary judge rejected claims of non-payment of Award-based wages. Those findings were challenged by the employees, and the Bank challenged the primary judge’s findings of non-payment of statutory entitlements relating to leave, public holidays, and loadings that were adverse to the Bank.

The various appeals gave rise to two major issues relevant to offsetting entitlements, which were as follows:

  1. Did the primary judge err, in treating the payments made by the Bank to the employees as salary, thereby discharging its liability to pay wages under the Modern  Award?
  2. Did the Bank discharge its obligations under the Award and the FW Act to pay wages or salary, and to make payments on account of leave, annual leave loading, and public holidays?

The primary judgment in the appeal was delivered by Wheelahan J (other members of the Bench largely agreeing). Wheelahan J found that the Bank’s salary payments were sufficient to discharge its obligations to pay leave entitlements. His Honour commented at [175]:

The regular payments of monthly salary pursuant to the employment agreements, without deduction on account of any leave taken or public holidays, were directed to the same purpose as the statutory obligations to pay the employees for their ordinary hours of work during any periods of leave, or for absences on public holidays. At the very least, there was a sufficient correlation between the payment of monthly salary without any deduction for leave or public holidays and the statutory obligation to maintain the employees’ base rate of pay during periods of leave or in respect of public holidays such that the payment of monthly salary was effective to discharge the statutory obligations.

His Honour made the following general comments about the issue of payments offsetting entitlements:

  1. It was important not to let labels distract from the underlying principles that are to apply;
  2. The principles of objective contractual intent involve “an inquiry that must look to the objective purpose of the payments under the express or implied terms of the contract of employment set against the circumstances known to both parties, and the surrounding statutory framework, which amounts to determining what a reasonable person would have understood by the terms”;
  3. Once the purpose of the payment had been ascertained, the question was whether “there is a coincidence of purpose, or at least a close correlation between the nature of the particular award obligation and the nature of the contractual obligation”. If that is the case, the payment will discharge the award obligation; and
  4. The more specific the purpose of a contractual obligation, the less scope there might be to find that a payment under a contractual obligation operates to discharge a differently expressed statutory or award obligation.


Overall, where there is ambiguity over whether a payment under a contract offsets entitlements, there needs to be a determination of the objective intent of the payments under the contract, and then a secondary determination of whether that intent is sufficiently similar to the entitlements under the Award or statute. The question then becomes, whether there is a coincidence in purpose, or close correlation in purpose, between the payments under the contract, and the entitlements under the Award or statute. Where the entitlement under the Award or statute is specific, and distinct from the entitlement to receive an ordinary wage, (such as overtime or loading entitlements), the contract must specifically address how payment satisfies or covers that entitlement.

Key Action Points for Human Resources and In-house Counsel

For employers, it is important that their contracts are drafted clearly with respect to the entitlements that are relevant under any Award. One way such clarity could be achieved, is that the contracts explicitly state which entitlements the relevant payments offset. This could be achieved by a “set off” clause

Key issues

  • Employers award obligations to pay minimum rates of pay and the Fair Work Act 2009 (Cth) obligation to maintain an employee’s base rate of pay during periods of annual leave and public holidays. Offsetting of contractual entitlements against statutory entitlements.