"Set-off" Principles – Litigation, Employment, Industrial, Commercial, Intellectual Property and Technology Lawyers
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“Set-off” Principles

28 Sep “Set-off” Principles

The law around “set-off” principles in employment relationships is reasonably well settled. Courts have applied contractual law principles to focus upon what the parties agreed and the common law regarding the designation of payments by a debtor. The following tests will generally be applied to determine whether an above-award payment can be used to satisfy outstanding award entitlements:

Contractual principles

  • Are there set-off provisions in the contract? If there is a valid contract specifying that an above-award rate is paid in satisfaction of particular award entitlements, a set-off will generally be permitted. This is subject to the employee earning more under the contract than the award;
  • Was there a contractual agreement about the purpose of the above-award payment? If the parties contractually agree that the above-award rate is paid for a particular purpose, an employer will not be permitted to subsequently use the payment to set-off different entitlements; and
  • Is there a close correlation between the subject matter of the contractual obligation and the obligation in the award? Set-off will generally only be permitted if there is a close correlation between the subject matter of the contractual obligation and the award obligation.

Debtor designation principles

  • When the employer paid the amount, what purpose did they designate it was being paid for? The common law generally allows a debtor who owes several obligations to select which obligation they are satisfying with a payment. The designation must be made at the time of the payment and cannot subsequently be altered.

The important historical precedents in relation to “set-off” are helpfully set out by Justice North and Justice Bromberg in Linkhill Pty Ltd v Director, Office of the Fair Work Building Industry Inspectorate [2015] FCAFC 99 from [40] to [67].

However, all three Justices in Linkhill expressed reservations about whether these precedents can be applied without amendment in sham contracting cases. Specifically, given the historical “set-off” cases have focused upon determining what the parties have agreed in their employment contract or the designation of payments by an employer, the precedents are difficult to apply in circumstances whereby the parties erroneously proceeded on the basis they were creating an independent contracting relationship. The parties are unlikely to have considered minimum employment conditions at all because they negotiated a contract for services.

Linkhill sought leave from the High Court to appeal the Full Federal Court’s Judgment but this was declined. It appears the High Court was happy to leave this complex issue for another day.

 


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