A recent Federal Circuit Court decision which awarded compensation and penalties to wealth advisors earning millions of dollars, but who claimed Modern Award entitlements arising from their employment with Macquarie Bank, should send alarm bells ringing for companies.

The wealth advisors earned millions in commissions from Macquarie Bank and were still able to establish that they were owed specific NES and Modern Award entitlements.  The entitlements which were found to be owing included pay for annual leave, personal leave, compassionate leave, and public holidays, as well as annual leave loading and annual leave loading on termination.

The advisors were paid a fixed remuneration of approximately $60,000 a year, which was paid in equally monthly instalments. In addition, they received large commission payments on work they brought into the practice. The overall remuneration of some of the advisors was close to $1million annually. The first important issue to note is that the advisors despite the quantum of their overall remuneration were still covered by the Banking, Finance and Insurance Award 2010 (Award) (as it was then known) and thus Macquarie Bank was required to ensure it met its Award obligations to these employees.

Macquarie Bank argued that the remuneration paid to the advisors, set off any modern award or other legislative entitlements and as such the employees were not entitled to the amounts claimed. The court in its decision in Arundell & Ors v Macquarie Bank [2020] FCCA 2720 and Arundell & Ord v Macquarie Bank (No.2) [2020] FCCA 3313, agreed that the contractual terms of the employees’ contracts of employment made it clear that the $60,000 fixed salary was intended to set off the Award salary. However, the court’s approach to the National Employment Standard’s leave and public holiday entitlements is worth noting, as it drew a clear distinction between payment of salary for an ordinary day, and the payment of leave or public holidays, for that particular date. The court held that there was nothing in the contracts that identified the salary paid to the advisors as intending to set-off these other entitlements.

It is illustrative to note that despite the fact that the advisors actually received payment when they were on annual leave, because the leave was not specifically identified as being paid by the remuneration received, it was held that the payment did not relate to that leave and as such payment for leave was still owing. This finding illustrates not only the need for clear set-off wording in the contract of employment but also the importance of ensuring that payslip information records correctly when particular entitlements are being paid, particularly in relation to leave and Public Holidays.

The case highlights the importance of ensuring that employment contract terms sufficiently detail the extent to which particular payments made to an employee are intended to satisfy statutory obligations.

The Judge made the following finding in relation to the relevant Pay Advice for public holidays as follows:

“The express notation on the Pay Advice for the first applicant pay date 14/12/2015 as to Public Holidays with a number of units but zero amount and the asterisk reference “earnings do not add to gross pay” supports the conclusion that the Salaries Normal payment cannot be applied to or set-off against the s 116 of the Act holiday pay obligation.”

It would be a common view that a contracted salary amount which is much higher than the Award minimum salary would generally be provided in satisfaction of all other potential Award or legislative minimum entitlements.  However, the courts are taking a very strict approach to when and how the Contracted salary can be “set-off” against various Award entitlements beyond the Award minimum salary.  A range of factors will be taken into account by the court.

The factors that are relevant to determining the objective purpose of payments may include:

  1. The way any “set-off” arrangements are defined in the contract of employment;
  2. The way payments are reflected or not reflected in payslips;
  3. The statutory framework, including Award provisions, which may be relevant;
  4. Any agreements of the parties, or from the employer’s conduct;
  5. The closeness of the “correlation between the nature of the contractual obligation and the nature of the award obligation”; and
  6. Any other matters or context of the circumstances known to the parties.

The “set-off” arrangements stem from principles established by courts in decisions relating to creditors and debtors.  The basic principle being, if a debtor has more than one debt with a creditor, they may dictate to which debts a payment is to be appropriated to either before making the payment, or at the time of making the payment. If the debtor does not make any appropriation, then the creditor may apply the payment to whichever debt or debts that they wish.  Applying this general principle to employment arrangements, if a contract of employment specifies that an amount will be for a salary, then it may be difficult for an employer to, subsequently, and after having paid those amounts, try to appropriate that amount to other Award or legislative minimum entitlements beyond the Award minimum salary arrangements.

In determining penalties for the Award breaches, Judge Street remarked on the work of Macquarie Bank’s human resources department:

The contraventions in the present case arose from a defective and deficient system designed by human resources department without proper attention to the terms of the Act and the Award.”

We would recommend that clients, particularly those in the Banking, Finance or Insurance sector or in other sectors where modern awards provide for a “Salary” rather than weekly wages review their arrangements to ensure that their intended contractual “set-off” arrangements take into account the recent approach of the courts.

The particular features of the modern award in which an employee is employed, may also give rise to questions surrounding the efficacy of contractual “set-off” clauses as compared to arrangements entered into under a modern award “annualised salary arrangement.”  There’s no “one size fits all” and some clients may be more suited to arrangements drafted as an award annualised salary arrangement, while others may be more suited to contractual set-off arrangements.

We regularly advise clients on their award obligations and the most effective contractual terms to ensure compliance. We have created appropriate and comprehensive template contractual terms providing the necessary set-off provisions to give our clients comfort they are compliant if they provide employees with annual salaries. We also provide implementation advice regarding these matters.

This article should not be treated as, and is not intended to, constitute legal advice.

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This article is for general information purposes only and does not constitute legal or professional advice.  It should not be used as a substitute for legal advice relating to your particular circumstances.  Please also note that the law may have changed since the date of this article.