Setting off contractual payments against award obligations

There are some circumstances in which an employer is entitled to set off contractual payments against award entitlements and here is an extract from an appeal decision of the Federal Court which explains some of the relevant legal principles.

“Ground 4 – set off

  1. If an employer pays amounts to an employee which are not expressly said to be in satisfaction of award entitlements, a question arises as to whether those amounts should nevertheless be appropriated to those entitlements so that they are taken to satisfy them, in whole or in part.  This is often loosely referred to as an issue of ‘set off’.  Ground of cross‑appeal 4 asserts error in the industrial magistrate’s application of the principle to the locum payments mentioned above.
  1. The relevant terms of Schedule 2 to Mr Enkel’s contract of employment with WRF and other evidence concerning the locum payments are described at [8] and [12] above.  After considering relevant authorities, at [94]‑[95] of the Liability Judgment the industrial magistrate concluded as follows:

Applied to the facts of this case, Schedule 2 of the Updated Employment Contract included reference to base remuneration and commission payments by the Company to Mr Enkel being in discharge of payments required by an award.  The locum payment was in reality a payment made to do the exact same job at a different car dealership and I do not accept that it was a separate payment in the manner suggested by Mr Enkel.  It was subject to superannuation and taxation, as indicated in the payslips.  This documentation is strongly suggestive that the locum payment was paid and received in discharge of any obligation to pay a wage, overtime or penalty rates.

Accordingly, I do not accept Mr Enkel’s submission with respect to the locum payment and I find that it is capable of setting off any award entitlements.

  1. The principles to be applied to cases of ‘set off’ are summarised in Poletti v Ecob (No 2) (1989) 91 ALR 381 at 393 (Keely, Gray and Ryan JJ):

It is to be noted that there are two separate situations dealt with in the passage from the judgment of Sheldon J [in Ray v Radano [1967] AR (NSW) 471] which has been quoted and in the reasoning of the Commission in Pacific Publications [v Cantlon (1983) 4 IR 415]. The first situation is that in which the parties to a contract of employment have agreed that a sum or sums of money will be paid and received for specific purposes, over and above or extraneous to award entitlements. In that situation, the contract between the parties prevents the employer afterwards claiming that payments made pursuant to the contractual obligation can be relied on in satisfaction of award entitlements arising outside the agreed purpose of the payments. The second situation is that in which there are outstanding award entitlements, and a sum of money is paid by the employer to the employee. If that sum is designated by the employer as being for a purpose other than the satisfaction of the award entitlements, the employer cannot afterwards claim to have satisfied the award entitlements by means of the payment. The former situation is a question of contract. The latter situation is an application of the common law rules governing payments by a debtor to a creditor. In the absence of a contractual obligation to pay and apply moneys to a particular obligation, where a debtor has more than one obligation to a creditor, it is open to the debtor, either before or at the time of making a payment, to appropriate it to a particular obligation. If no such appropriation is made, then the creditor may apply the payment to whichever obligation or obligations he or she wishes: see Halsbury’s Laws of England 4th ed, vol 9, paras 505 and 506.

  1. Mr Enkel relied on his contract with WRF as giving rise to the first kind of situation, so that the parties agreed that the locum payments were for specific purposes, over and above or extraneous to award entitlements, as they were for the inconvenience of having to attend a dealership other than Westside Auto in order to fill in for other personnel.
  1. I have described Mr Enkel’s evidence about what the locum payments were for at [12] above. However as Poletti makes clear, ascertaining the purpose of the payment is a question of contract, that is, the ascertainment from an objective point of view of the parties’ mutual intention:  see Workpac Pty Ltd v Rossato [2020] FCAFC 84; (2020) 378 ALR 585 at [234] (Bromberg J). So Mr Enkel’s subjective view about what the payment was for is not relevant, except to the extent that it may provide support for a finding of fact that the parties’ words and conduct objectively manifested that intention.
  1. There is no need to rely Mr Enkel’s subjective view in that way here.  The purpose of the locum payments is clear enough from the terms of the updated written contract which the parties executed in September 2017 and the manner in which the parties conducted themselves prior to signing.  The relevant item (in ‘Schedule 2 – Remuneration’) says ‘Locum Days $150 INC Superannuation for relief cover’.  It is specified in item 5, separately to item 4, the base remuneration, and item 6, the commission.  So it is paid expressly for ‘relief cover’, and it is implied from its context that it is over and above the base remuneration and commission which is paid for the work that Mr Enkel was doing when he was at the workplace, whether that was Westside Auto or the other locations where he provided relief cover.  It can be inferred from the term that it was to be a lump sum paid for each day where Mr Enkel had to work at different premises (and the evidence shows that is the basis on which it was in fact paid).
  1. However, some locum payments were made prior to the signing of the updated contract in September 2017.  These payments were not required under the version of the contract that was signed in March 2017.  It is therefore arguable that those payments do not fall under the first situation referred to in Poletti.  Neither party took this point on appeal, and the ground of appeal concerns the purpose of the payments and the contract of employment without being specific about when and how the contractual obligation arose.  In my view the earlier payments were made on the same contractual terms as the later payments.  Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,118 affirms that in a commercial relationship new terms will often be added or will supersede older terms without being immediately committed to a formal contract. Accordingly, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. The same can be said of an employment relationship. A contract may be inferred from the acts and conduct of the parties as well as or in the absence of their words: Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 528.
  1. The payslips in evidence show that from 16 August 2017 Mr Enkel was receiving a payment designated ‘Locum $150 per day plus super’.  The designation ‘locum’ indicates that it was a payment for filling in for someone else when they cannot perform their duties.  In other words it was ‘for relief’, as the varied written contract subsequently confirmed.  In this case, I infer that Mr Enkel had already begun working at different premises ‘for relief’ prior to signing the version of the contract that was signed in September 2017 and became contractually entitled to those locum payments pursuant to an informal agreement between himself and WRF, which was subsequently formalised in the written contract.  Therefore, the earlier locum payments were for the same contractual purpose as those made after the contract was signed.  Accordingly, they all fall to be considered under the first situation referred to in Poletti.
  1. All this means that, viewed objectively, the parties intended that the locum payments were to be paid and received for a specific purpose, over and above award entitlements. The purpose was ‘for relief’. Given that, and given that it was specified in addition to base remuneration and commission, it can be inferred that it was indeed paid as compensation for having to work other than at Mr Enkel’s usual workplace. Subject to one point which WRF raised, there is no entitlement for payments for that purpose in the Award. The fact that it is extraneous to the Award finds further support in the express clause I have set out at [8] above, which only applies base remuneration and commission to award entitlements, not the locum payments found in a separate item in the contract.
  1. The point which WRF raised is that a term of the Award (at the time of the contraventions, cl 18.4(b)) provided for payment of reasonable expenses actually incurred when the employee is required in the course of their duty to go to any place away from their usual place of employment.  But even assuming that there is a close correlation between the purpose of that entitlement and the objective purpose of the locum payments, Mr Enkel made no claim for payment of those expenses and no entitlement to them was included in the industrial magistrate’s calculations.  His claim, and the amounts which the industrial magistrate found WRF was obliged to pay under the Award, were for ordinary pay, overtime and penalty payments and annual leave.  The locum payments cannot be set off against them.  For the point WRF makes to have any effect on the judgment, WRF would have to acknowledge an additional entitlement to travelling expenses beyond the Award entitlements which Mr Enkel claimed, that additional entitlement would have to be quantified, and then the locum payments would have to be set off against that additional entitlement.  Assuming, as is likely, that the travelling expenses were less than $150 per day, this would increase Mr Enkel’s total entitlements before set off by a certain amount.  Applying the set off would then reduce those entitlements by the same amount.  So the net effect would be nil.  This argument does not avail WRF.
  1. The conclusions I have reached mean, with respect, that the industrial magistrate erred in her treatment of the locum payments.  They were not payments for doing ‘the exact same job at a different car dealership’; the base remuneration and commission were for doing the job, and the locum payments were additional, to reflect the fact that Mr Enkel had to work at a different location.  That it was a payment separate to those amounts appears on the face of the contract.  And her Honour’s emphasis on the fact that the locum payments were subject to superannuation and taxation was misplaced; that the legislative regimes for taxation and superannuation were engaged by the payments says nothing about the mutual intention of the parties as to what the payments were for.
  1. Ground 4 is upheld.  The industrial magistrate’s order that WRF pay Mr Enkel $14,326.11 plus pre‑judgment interest of $1,537.80 will be set aside.  I will direct the parties to confer as to the amounts which will be the subject of the orders to be made in place of her Honour’s orders.”

Enkel v We R Finance Pty Ltd [2020] FCA 1668 delivered 18 November 2020 per Jackson J