Case study we were recently involved in

Properly drafted employment agreements can mitigate subsequent claims for underpayment; where the allocation of wages is expressly documented and agreed in an employment agreement, employers can offset over-award payments against other obligations in addition to ordinary wages.

The problem

The employer owns a café in Melbourne and its employees are covered under the Restaurant Industry Award 2010 (“the Award”). The employer received a a claim from a previous employee alleging that they were not paid at the correct hourly rate for their level under the Award and that they were not paid any penalty rates for the time they worked on the weekend.

The employer was very stressed about how this would affect the business including its current employees. We were engaged to advise the employer of their obligations under the Fair Work Act 2009 (“the Act”) and the Award and to assist the employer move forward without damaging their business.

How we helped

The previous employee was entitled to the underpayment sought so we negotiated a manageable payment plan for our client to pay this back. We also negotiated terms of settlement which included release terms, confidentiality terms and non-disparagement terms.

In the meantime, it was crucial for us to assess how the employer’s current employees were paid to try and mitigate any further risk for the employer. During this process, it became apparent that the employer was in fact paying their employees above the minimum Award rates. This was not, however, documented in any employment agreement and it was not clear whether any over award payments were used to offset or absorb other entitlements under the Award (e.g. penalty rates, overtime rates and leave loading etc.). Generally speaking, unless the allocation of wages is expressly documented and agreed, employers cannot later claim that an overaward payment covers other obligations in addition to ordinary wages. Failing to appropriately calibrate set off clauses can put employers at risk of an underpayment claim.

In order to document the absorption of award monetary obligations and other employment conditions (as the employer did not have any employment agreements in place), we drafted employment agreements for the employer to put in place. We also assisted the employer with the discussions with their employees to ensure both parties understood the relevance and importance of the agreement. In this instance, a set off provision was an appropriate solution for the employer, however, it should be noted that there are other mechanisms that may be utilised by employers to address award obligations (i.e. Individual Flexibility Agreements and Enterprise Agreements).

The hindsight

First and foremost, it is important that employers understand what (if any) modern award applies to their business and their employees. Modern awards are to be read in conjunction with the Act and set out specific industry based rates and entitlements. Secondly, it is important that employers review their employment agreements to ensure that the agreement accurately documents the employment arrangement. If no agreement is in place, employers should consider engaging an employment law specialist to assist in drafting tailored agreements. Paying above award rates and correctly documenting this can protect your business from underpayment claims in certain circumstances.

Rachel Derrico, Senior Associate, Rankin & Co.