Understanding Set-Off Clauses in Employment Contracts: Australian Employer’s Guide

If you’re hiring in Australia, you’re juggling a lot-minimum wages, rostering, safety, super and more. Your Employment Contract is a big part of staying compliant and protecting your business, and one clause that often causes confusion is the “set‑off” clause.

Used well, a set-off clause allows you to pay a higher, “all‑inclusive” rate and have that extra amount count toward certain award entitlements (like overtime, penalty rates and allowances). Used poorly, it can lead to underpayment risk, backpay and penalties.

In this guide, we’ll explain what a set-off clause is, when to consider it, how to draft one properly, key legal limits to keep in mind, and practical payroll tips to make sure you’re compliant and confident.

Our aim is to keep things clear and practical so you can focus on running your business-knowing your legals are covered.

What Is a Set-Off Clause in an Employment Contract?

A set-off clause is wording in an employment agreement that allows you to “set off” part of a higher salary or hourly rate against identified award entitlements. In other words, you pay above the base minimum, and that extra amount is used to satisfy specific monetary entitlements under the relevant modern award or enterprise agreement, such as overtime, penalty rates, loadings and allowances.

For example, if the award minimum is $25 per hour and you pay $35 per hour on an “all‑in” basis, a valid set-off clause lets you apply that extra $10 per hour to cover overtime or penalty rate obligations the employee would otherwise receive separately-provided the clause is clear and your records show that the total pay always meets (or exceeds) what the award requires overall.

Two important boundaries to understand:

• A set-off clause does not replace National Employment Standards (NES). NES entitlements (such as the minimum four weeks of paid annual leave, public holidays and personal/carer’s leave) must still be provided. A set-off clause can address monetary amounts, but it can’t contract out of the NES.
• Set-off is about avoiding “double paying” identified award monetary entitlements. It doesn’t excuse non‑payment. If the loaded rate isn’t high enough to cover what would have been earned under the award, you’ll owe a top‑up.

Because this is contract wording that affects compliance, many employers choose to have the clause prepared or reviewed by an employment lawyer before rolling it out.

When Should You Use a Set-Off Clause?

Set-off clauses are commonly used when you want to simplify payroll and your people regularly attract award extras (overtime, penalties, allowances). Common scenarios include:

• Paying an above‑award hourly rate or salary that is intended to include overtime, penalty rates, allowances and loadings.
• Roles with varying rosters or unsociable hours where calculating different rates each pay run creates heavy admin.
• Professional or white‑collar roles paid well above the award minimum, but still award‑covered.

When might you avoid set‑off? If you intend to pay strictly in line with the award (base rate plus all entitlements separated and itemised each pay), you may not need a set‑off clause at all. Also, some awards include specific annualised salary provisions with their own rules. If you use an annualised salary arrangement, you must follow those award rules-including written notification of outer limits and regular reconciliations-rather than relying only on general set‑off wording.

If you’re not sure whether a role is covered by an award, or which award applies, consider getting award compliance support up front. As a practical example, retailers often refer to the General Retail Industry Award-if you’re in that space, it’s worth checking your obligations under the General Retail Industry Award.

How Do You Draft a Compliant Set-Off Clause?

Your clause should be clear, specific and supported by your payroll practices. Courts look closely at the precise words used and the pay records. Here’s what to cover.

Key Elements To Include

• Identify the applicable industrial instrument: Name the modern award (or enterprise agreement) you’re setting off against.
• List the monetary entitlements covered: Overtime rates, penalty rates, allowances (specify which), loadings (for example, annual leave loading if applicable under the award), and any other identified monetary award entitlements that are intended to be covered by the higher rate.
• State the intention clearly: Make it explicit that the loaded rate is intended to fully satisfy obligations to pay the identified entitlements, to the extent permitted by law.
• Provide a top‑up mechanism: Confirm that if, in any pay period or reconciliation period, the loaded amount is insufficient to cover what the employee would have earned under the award for the same hours and circumstances, you will pay the difference.
• Keep it within legal limits: Confirm the clause does not exclude or reduce NES entitlements, and does not authorise unlawful deductions.
• Support with records: Make sure your time and wage records allow you to compare what was paid against what would have been payable under the award. Without good records, it’s difficult to prove set‑off is working as intended.

Example Set-Off Clause (Illustrative Only)

Every business and award is different, so treat the following as a plain‑English example you can discuss with your legal adviser:

“The Employee’s remuneration is a loaded that is intended to compensate the Employee for, and set off against, monetary entitlements under the including the following: overtime rates, penalty rates (including weekends and public holidays), applicable allowances , and loadings .

To the extent permitted by law, payments made at the loaded rate are taken to satisfy the Employer’s obligations to pay the identified entitlements. The Employer will not set off against any entitlements under the National Employment Standards.

The Employer will keep accurate time and wage records and, if in any pay period (or award‑required reconciliation period) the amounts paid are less than what the Employee would have received under the Award for the hours actually worked, the Employer will pay the difference.”

That “short list” approach is usually safer than a vague, catch‑all clause. Broad wording risks being read down or ignored. A well‑drafted clause works hand‑in‑hand with the rest of your Employment Contract and your payroll processes.

Annualised Salary Provisions vs Set-Off

Several awards include detailed annualised salary provisions. If you adopt one of these arrangements, the award may require written notification of what the salary covers, outer limits on hours that can be paid within the salary before overtime/penalties must be paid separately, and mandatory annual reconciliations with backpay if needed. In those cases, you must follow the award mechanism, not just general set‑off wording.

Good practice: even where an award doesn’t mandate annualised salary provisions, consider an internal reconciliation (for example, quarterly) so you can identify and fix any shortfalls promptly.

Legal Limits and Risks To Watch

Set‑off clauses can be very useful, but there are limits and risks you should understand before relying on one.

You Can’t Contract Out of the NES

National Employment Standards apply to all employees. A set‑off clause cannot reduce or remove NES entitlements such as minimum paid annual leave, personal/carer’s leave, public holidays or notice of termination. You can set off monetary award-based amounts, but the underlying NES rights still apply.

Clarity Matters

Ambiguous wording is a common reason set‑off clauses fail. If you don’t identify the entitlements you’re setting off against, a court may refuse to apply the clause. Being specific is your best protection against “double dipping” claims where an employee seeks both the loaded rate and separate award extras.

Coverage and Classification

Make sure the correct award and classification level applies. If an employee performs duties across classifications or different awards, a generic clause may not be sufficient. You may need to review the arrangement or structure remuneration differently.

Record‑Keeping Is Essential

Even if you pay “all‑in”, you still need accurate time and wage records. This is vital for any reconciliation, audit or regulator inquiry. Without reliable records, it’s hard to prove the loaded pay was always at least equal to what the award requires. For checking penalty rates and overtime scenarios, many employers use the Fair Work Pay Calculator as a sense‑check; you can also see Sprintlaw’s guide to the pay calculator and weekend penalty rates.

Underpayment and Backpay Risk

If your loaded rate doesn’t cover what would have been earned under the award for the hours worked, you’ll owe the difference. Wage underpayment issues are generally investigated by the Fair Work Ombudsman and enforced through the courts-not the Fair Work Commission. Avoiding shortfalls is much easier than fixing them.

Deductions and Overpayments

Set‑off and deductions are different concepts. You can only deduct from wages where the law permits it. Review the rules in section 324 of the Fair Work Act and your state laws before making any deduction. If you do face a genuine overpayment situation, follow fair process-our guide on withholding pay explains the risks and the limits, and there’s more detail in our overview of section 324.

Changes in Awards

Awards are regularly updated. A clause that worked last year may need an update this year. Build in a cadence to review contracts and pay settings, especially when award rates or rules change. If you need to adjust contract wording, make sure you follow a proper process to vary a contract with employee agreement.

Superannuation on Loaded Pay

Your super obligations are based on Ordinary Time Earnings (OTE). If you pay a loaded hourly rate or salary, consider which components form OTE and ensure super is calculated correctly. You can read our plain‑English overview of Ordinary Time Earnings to sense‑check your approach.

Practical Payroll Tips for Set-Off Clauses

Once your clause is in place, payroll discipline keeps you compliant and reduces risk.

• Reference the correct award and classification in the contract and in your HRIS/payroll system.
• List the specific award monetary entitlements covered by the loaded rate. Avoid vague “all entitlements” wording.
• Record hours worked (including overtime, weekends and public holidays) even for salaried staff, so you can reconcile against award requirements.
• Set an internal reconciliation cycle (for example, quarterly) to compare what was paid against what would have been payable strictly under the award, and top‑up if needed.
• If an award has an annualised salary clause, follow its written notice and reconciliation requirements precisely.
• Keep payslips clear. If appropriate, show the loaded rate and note that it includes identified award entitlements.
• Train managers so rostering decisions don’t inadvertently push hours beyond what the loaded rate was designed to cover.
• Sense‑check complex rosters using the Fair Work pay tools, especially where overtime and penalties are frequent.

If your business is growing or your rostering patterns change, refresh your assumptions. The loaded rate that worked for a small team might not fit once you introduce extended trading hours or frequent late finishes.

What Legal Documents Should You Have In Place?

Set‑off clauses sit inside your overall employment and HR framework. At a minimum, consider having the following in place:

• Employment Contract: The foundation for each hire. It should set out the role, classification, remuneration (including any set‑off wording), hours, leave and termination terms. Start with a robust Employment Contract tailored to your award coverage.
• Workplace Policies: Policies around leave, code of conduct, WHS, bullying and harassment, and IT/mobile phone use help set expectations and support compliance.
• Award Reference and Pay Guides: Keep a copy of the relevant award and your internal pay guide so payroll staff know exactly which entitlements the loaded rate is designed to cover.
• Record‑Keeping Processes: Accurate time and wages records are non‑negotiable. Make sure your system can capture hours, penalties and allowances for reconciliation purposes.
• Variation Process: If you need to change remuneration structures, make sure you have a documented, lawful process to consult and agree changes-particularly helpful when you need to vary a contract.

If you’re unsure whether set‑off is right for certain roles or awards, a short chat with an employment lawyer can save a lot of time and help you implement the right structure from day one.

Key Takeaways

• A set‑off clause lets you pay a higher, “all‑inclusive” rate and apply the extra amount to identified award monetary entitlements like overtime, penalties, allowances and loadings.
• Set‑off cannot reduce or remove National Employment Standards, and it doesn’t excuse underpayment-if the loaded rate isn’t enough for the hours and conditions worked, you must top up.
• The clause must be clear and specific: identify the award and list the entitlements being set off, include a top‑up mechanism, and avoid vague “covers everything” wording.
• Good records are essential. Track hours, reconcile regularly, and follow any award‑specific annualised salary rules where they apply.
• Review your contracts and payroll settings when awards change or your rostering patterns shift; use tools like the pay calculator as a sense‑check.
• Build your HR framework around solid documents and processes, starting with a tailored Employment Contract and clear award compliance practices.

If you’d like a consultation on setting up or reviewing set‑off clauses in your employment contracts, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.