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Over-award payments – when will they discharge overtime liability?

31 August 2022

6 min read

#Workplace Relations & Safety

Published by:

Stefania Silvestro

Over-award payments – when will they discharge overtime liability?

In an employment context, the law of set-off stipulates that where an employment contract provides that the employer pays an employee a sum of money towards a specific purpose (e.g. wages), the employer cannot afterwards claim that the payments made satisfy other award entitlements (e.g. overtime). In other words, when there are outstanding award or enterprise agreement entitlements, a payment designated by the employer as being for a purpose other than to satisfy the award entitlement cannot be regarded as having discharged monetary obligations under an award or enterprise agreement.

Set-off disputes are usually resolved by characterising the payment on which the employer relies for the claimed set-off and the purpose (usually the agreed purpose) for which it was made. It’s not enough for the employer to simply say it intended an over-award payment of wages to discharge an award entitlement to overtime. The employer needs to convey that intention to the employee. Otherwise, the employee is free to apply the money, when received, as they choose. The intention can be inferred but ideally expressed in writing.

These issues were canvassed by the Federal Court of Australia in Australasian Meat Industry Employees Union v Dick Stone Pty Ltd [2022] FCA 512 (6 May 2022). In this case, the Court had to consider:

  1. whether or not the employer was able to set off payments made above the modern award to any under award payments?
  2. was the requirement to work 12 hours of overtime on a regular weekly basis, reasonable?

Background

The employer runs one of Sydney’s largest meat wholesale businesses. On the commencement of his employment, the employee signed an employment contract requiring him to work 50 ordinary hours each week. Any hours worked beyond that were paid at an overtime rate.

On weekdays, the employee worked from 2:00am-11:30pm and from 2:00am-7:00am on Saturdays, plus any other hours that were required of him. Relevantly, the employee was covered by the Meat Industry Award 2010 (Award), which provided for overtime rates in various circumstances, including where an employee worked beyond 38 ordinary hours each week.  

The employer argued that the employee’s ordinary rate of pay was a “blended rate”, incorporating a payment for overtime for each hour that he worked. This meant that the employee was paid more than the Award minimum rate of pay for the first 38 hours of work and for any overtime hours. The employer also argued that a 50-hour work week – 12 hours of overtime – was reasonable given the employee was paid for those hours and had agreed to them upon signing his contract.

Set-off payments – the need to inform your employees

The employee’s payslips did not record any payments for overtime. Despite that, the employer’s position was that the employee was paid, at all times, above the minimum Award rates. On a weekly basis, the employee was owed $1,111.04 under the Award. In contrast, the employer paid the employee $1,132.50 per week, amounting to $21.46 per week more than the Award.

Accordingly, the employer claimed that the amounts it paid the employee satisfied its overtime payment obligations under the Award. The employer also argued that the payments it made should be brought into account when determining whether those obligations were satisfied, particularly because it intended for the rate to meet its overtime obligations (i.e. to set-off the payments it had made).

On the other hand, the employee argued that it was not permissible to make any set-off. The work the employee performed outside a 38-hour week was not paid at overtime rates because there was no common understanding, let alone any agreement, that his blended rate included a payment for overtime. He also argued that the wages he received were never designated as payments for overtime hours.

In this case, the employee’s contract did not stipulate the purpose of the employee’s payment. Therefore, the Court held that, despite the employer’s intention to pay a blended rate in satisfaction of overtime payments, that intention was not conveyed to the employee. In light of this, the employer failed to set-off the over-award payments to meet the overtime liability and was required to make overtime payments in accordance with the rates under the Award, notwithstanding the amounts already paid to the employee.

Meaning of ‘reasonable overtime’

The Court also ruled that the requirement to work 12 overtime hours per week was unreasonable and therefore a breach of the National Employment Standards (NES) in the Fair Work Act 2009 (Cth) (FW Act).

What does the NES say about reasonable overtime?

The starting position (in section 62(1) of the FW Act) is that an employer cannot request or require a full-time employee to work more than 38 hours per week unless those hours are reasonable.

Section 62(3) of the FW Act then sets out the various factors that must be considered when determining whether the overtime is reasonable. Some of those factors include:

  • any risk to the employee’s health and safety in working the additional hours
  • the employee's personal circumstances, including family responsibilities
  • the needs of the workplace
  • whether the employee is entitled to receive overtime payments, penalty rates or other compensation for working additional hours
  • any notice given by the employer of any request or requirement to work the additional hours
  • any notice given by the employee of their intention to refuse to work the additional hours
  • the nature of the employee's role, and the employee's level of responsibility.

Resolution

The Court decided that a contractual term confirming the number of (overtime) hours to be worked amounted to at least, a request by the employer to work additional hours. In this case, the employer had breached the NES by imposing an unreasonable requirement, having regard to:

  • the impact on the employee’s health and safety – the work performed by the employee was physically demanding, required standing for 9.5 hours and was subject to the risk of injury given the requirement to work with knives
  • the needs of the workplace – the employer was unable to provide sufficient evidence supporting the need of its workplace to work 12 hours of overtime each week
  • the payments made in respect of the overtime – the employee was entitled to but did not receive overtime (or penalty) payments for the additional hours worked
  • the nature of the employee’s role – the employee did not hold a managerial or supervisory position and there was no evidence to support that he had additional responsibilities requiring him to work more than 38 hours per week.  

Key takeaways   

This case is a timely reminder for businesses to review their payment practices and ensure their employment agreements contain adequate and comprehensive contractual set-off provisions. Although the case law regarding set-off is complicated, there is a noticeable trend in employees litigating underpayment claims. Employers run the risk, should an underpayment claim be made against them, of making additional modern award or enterprise agreement payments despite any over-award or agreement payments.

It is also imperative that employers evaluate their overtime practices as a whole, but also in respect of their particular employees. Though an employment agreement may state that the employee agrees to work reasonable additional overtime, that is not always enough, and the courts will consider the circumstances of each particular case.

If you have any questions about your business’ employment contacts or award/payroll compliance, please contact us below or send in your enquiry here.

Authors: Charles Power & Stefania Silvestro

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Stefania Silvestro

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