An ultimate guide to a set-off clause

HomeBlogAn ultimate guide to a set-off clause

A set-off clause is commonly included in employment contracts, however, many employers don’t understand it’s purpose. It’s imperative that all employers understand what a set-off clause is, how it works and why to use it. Continue reading as Business Kitz explains all the need-to-know information about this clause.

What are set-off clauses?

So, what exactly is a set-off clause? In the legal world the term set-off means to put something aside in exchange for something else. So as the name suggests, a set-off clause is essentially the employer putting the need to expressly pay monetary award entitlements aside, in exchange for a salary that is inclusive of these entitlements.

A set-off clause is an optional clause in an employment contract that allows an employer to pay their employees with a higher base pay rate to accommodate for the award entitlements that employee is entitled to receive.

In simpler terms, rather than an employer paying their employees the modern award base rate in addition to any award entitlements such as overtime, penalty rates, laundry allowances etc, the employer has the option to pay their employees one larger sum that includes all of these benefits.

How do set-off clauses work?

Each modern award states the minimum or base rate each employee must receive in that industry. These modern awards also state what extra monetary entitlements, or award entitlements these employees must receive. These entitlements include:

  • Overtime pay;
  • Allowances;
  • Penalty rates; and
  • Loading rates.

By law, each employer must pay their employees the base rate, plus these extra entitlements. However, if an employer wishes to pay their employees a salary without expressly paying these award entitlements, this salary must be large enough to compensate for these entitlements. If this is the case, an agreement between the employer and employee must exist.

Why use a set-off clause?

Set-off clauses can be exceptionally practical for employers, as it simplifies their payroll duties. It is much easier to keep track of an employee’s salary compared to a base rate plus all the extras that may need to be paid.

However, employers should be wary that it is possible to underpay an employee by using a set off clause. To avoid this, ensure that the set-off clause is drafted correctly, and the employees’ salary is not lower than the modern award plus extra entitlements.

Legal advice

If you need any assistance in drafting a set-off clause or simply want to know more, our sister company, Legal Kitz business specialists can assist with ensuring that your queries are addressed and can provide you with advice that is tailored to your situation. You can book a free 30-minute consultation with our experienced and highly qualified team via our website now.