When can an employer set off payments against amounts owing to an employee?

The principles concerning the entitlement of an employer to ‘set off’ over-Award payments against a sum of money owed to an employee were confirmed by the Federal Court of Australia earlier this year in WorkPac Pty Ltd v Rossato [2020] FCAFC 84 (Rossato) (summarised here).

Following Rossato, set off principles have again been the subject of consideration by the Federal Circuit Court of Australia (Court) in Bodycoat v It Blows Air Con Pty Ltd trading as IBAC Plumbing [2020] FCCA 3033 (the Decision).

The Decision concerned an application by Mr Bodycoat to the Fair Work Small Claims Division of the Court pursuant to section 548 of the Fair Work Act 2009 (Cth) (the FW Act).

Mr Bodycoat sought payment from his employer in the sum of $20,000, being the maximum amount that can be awarded by the Court in the Fair Work Small Claims Division. Mr Bodycoat was successful in his claim and the Court determined that the employer was not entitled to set off any amounts to satisfy Mr Bodycoat’s claim.

Facts

Mr Bodycoat was employed as a plumber on a full-time basis by It Blows Air Con Pty Ltd trading as IBAC Plumbing (the Employer).

Mr Bodycoat’s position was that:

• on or around 13 May 2019, he advised his Employer that he might relocate to Perth in December 2019, but he would give him a date when he had a date;
• his Employer asked him to take time off work on 7 and 8 August 2019 because there was no work;
• he told his Employer that he could not afford to take time off work;
  
• on 12 August 2019, his Employer advised him that ‘he was being made redundant’;
  
• when he collected the redundancy letter on 12 August 2019, it stated that Mr Bodycoat provided his notice on 13 May 2019 that he was moving away to Perth, he had fulfilled his notice period and that Mr Bodycoat’s end date was 7 August 2019.
  

The Employer did not provide any notice or redundancy pay and Mr Bodycoat denies that he resigned from his employment on 13 May 2019.

Mr Bodycoat claimed he was entitled to notice of termination pursuant to section 117 of the FW Act and clause 17.1 of the Plumbing and Fire Sprinklers Award 2010 (the Award), in addition to redundancy pay pursuant to clause 18 of the Award.

The Employer’s position was that:

• Mr Bodycoat negotiated an ‘extremely high hourly rate in exchange for no annual leave, sick pay, redundancy pay or public holiday pay’;
• he gave notice on 13 May 2019 that he would be following his family to Perth at the end of 2019; and
• it was agreed that Mr Bodycoat would work to 7 August 2019.
  

The Employer also attempted to argue that because Mr Bodycoat was paid above Award rates, the amount he claimed in the proceeding should be set off.

Decision

In relation to the claim for redundancy payment, the Court clarified that section 119 of the FW Act did not apply to Mr Bodycoat’s employment because of an exclusion clause in the Award. The Award also contains a somewhat unconventional redundancy provision which stated that:

“…redundancy means a situation where an employee ceases to be employed by an employer other than for reasons of misconduct or refusal of duty…”

In considering the history of that Award provision, the Court held that even if it accepted the Employer’s position that Mr Bodycoat resigned from his employment, the Employer was still obliged to pay Mr Bodycoat redundancy pay. That is because employee resignation falls within the extended meaning of ‘redundancy’ pursuant to the Award.

In relation to the notice of termination claim, the key issue for the Court to determine was whether Mr Bodycoat resigned from his employment or whether his employment was terminated at the initiative of the employer. The Court was satisfied that Mr Bodycoat did not indicate an intention to resign, but he merely indicated a possibility of resigning, if and when he had more details. As such, it was held that Mr Bodycoat’s employment was terminated by the Employer and he was therefore entitled to payment in lieu of notice.

The Court considered the principles in Rossato regarding the entitlement of an employer to set off amounts owing to employees. The key principle is that an employer cannot later reallocate an amount agreed to be paid to an employee in respect of an entitlement (such as ordinary hours of work) to meet a claim in respect of a different entitlement (such as overtime). In other words, if the purpose of the payment arises out of the same purpose of the award obligation, it can be set off.

In this case, the Employer attempted to set off the above Award rate payments Mr Bodycoat received during his employment against the redundancy payment owed under the Award and the payment in lieu of notice. However, having regard to the principles in Rossato, the Court rejected the Employer’s set off claim on the basis that Mr Bodycoat’s above Award rate was paid purely to satisfy any overtime work (i.e. it was not agreed that the above Award payments were to satisfy redundancy and notice entitlements).

The Court held that the Employer was liable to pay the full sum owing to Mr Bodycoat ($20,000) and it could not reallocate payments to satisfy the amount claimed.

Take Home Messages

The Decision and the underlying principles in Rossato are a reminder to employers that over Award payments can only be set off against amounts owing to employees in certain circumstances. Specifically, contracts of employment must clearly set out the purpose of the over Award payments.

For more information please contact Sathish Dasan on +61 8 8210 1253 or sdasan@normans.com.au, Ganesh Krishnan on +61 8 8217 1395 or gkrishnan@normans.com.au or Anastasia Gravas on +61 8 8217 1331 or agravas@normans.com.au.