A ‘pay when paid’ clause prevents someone from receiving their earnings until payment has been given by another party. You may be thinking, Hang on, this doesn’t sound right? That’s because pay when paid clauses are technically illegal

These clauses are typically found in construction contracts, where subcontractors are utilised. However, some employers have also attempted to use pay when paid clauses in their employment agreements.

Paying your workers is one of the main obligations you have towards your hardworking staff. As a result, there’s a number of strict regulations around payment that have been put in place for their overall protection. It’s your duty to make sure you adhere to these strict regulations and ensure that your Contracts aren’t in breach of any Australian regulations. 

Keep reading to know more about pay when paid clauses and how you can avoid using them.  

What Is Pay When Paid Clause In Australia?  

As we noted, pay when paid clauses determines that a person is to be paid when the business hiring them receives payment from another contract. Generally, pay when paid clauses have been seen in construction contracts, although this doesn’t mean other industries don’t try and utilise them.

Let’s take a look at this in more detail. 

When a business signs a contract to do a particular job, they may hire contractors to help complete that task. In this context, they’ll agree on an amount the worker is to be paid for their labour. However, instead of giving a date for payment, the contract will state the worker will only be paid when they client they are doing the job for, has paid.

Are Pay When Paid Clauses Legal?

No, pay when paid clauses are strictly illegal. If these clauses are found to be in a contract, they will be considered void. That means, the pay when paid clause will not apply at all. Additionally, most states have a Security of Payment (ASOP) Act, which protects the rights of contractors in certain industries and covers things like pay when paid clauses- talk to a Regulatory Compliance Expert to see if an ASOP act applies to your business. 

As a business owner, you can not withhold payment and wait for someone else to pay you. Rather, your contracts with any workers should clearly state how much they will be paid and when.

On top of this, any employment contracts are required to cover other matters such as superannuation, overtime pay and award entitlements. If you’re an employer, it’s imperative you take a look at your employment contracts to make sure they are covering everything necessary. If you’re not sure what to look out for, our legal experts would be happy to help.  

Maxcon Constructions Pty Ltd v Vadasz 

In 2018, Maxcon Construction sought a review of a decision by the Australian High Court. Maxcon Construction was the head contractor in a project where their subcontractor, Vadasz had asked for the release of a security payment. Maxcon Constructions refused to do this and wanted to wait for the completion of a task, however Vasasz argued this was an unlawful practice. 

The adjudicator presiding over the matter agreed with Vadasz and noted the clause was illegal and Maxcon Construction could not withhold the payment from Vadasz. 

When Maxcon Construction challenged the decision in the High Court, The Australian High Court upheld the original decision which favoured Vadasz. This case strongly reaffirmed the illegality of pay when paid clauses and anything similar to it. 

What If My Contract Says Pay When Paid? 

If your contracts say pay when paid, you need to get this fixed immediately. Having an illegal clause in your contracts is an open invitation for trouble. 

Your employment contracts need to clearly follow Australian Fair Work practices. Remember, a signed contract isn’t necessarily legally enforceable under all circumstances. Australian legal principles still apply and contractual clauses cannot override them. So, a contract that is based on something unlawful such as a pay when paid clause will likely not be upheld, as the law comes before the contract.   

Ensuring your contracts are legally compliant with Fair Work Australia and other relevant regulations is the best way to ensure they are enforceable. As such, it’s important to assess your employment contracts for other clauses that may not be in line with the law. Just like pay when paid clauses, having illegal clauses in your contracts can make those clauses void or lead to harsher legal consequences- not to mention a loss of reputation for your business. It’s best to have your Contracts Reviewed by a legal expert

When Does A Final Pay Have To Be Paid?

A question we get asked often when it comes to paying employees, is their final pay. When you’re an employer, you need to be prepared in case your employees decide to leave your business. This means, tying up a work matters and ensuring they have received everything they are entitled to in a timely manner. 

The final pay of employees is usually paid within 7 days of the employees last day at work. This timeframe can differ based on any awards and entitlements the employee may be under, so it’s best to check with a legal expert to ensure you’re doing your best to be legally compliant towards your employees. 

Modern awards and entitlements are another factor that have a high impact on what you pay your employees, when and how. Check out our article, Is Your Business Compliant With Your Modern Award? To learn more. 

Next Steps 

Pay when paid clauses are strictly illegal. It’s important to have your Contracts Reviewed by a legal expert to ensure they don’t contain any clauses that resemble pay when paid clauses. Additionally, it’s crucial that your contracts are legally compliant in all ways, so you can avoid legal troubles down the line. To summarise what we’ve discussed: 

  • Pay when paid clauses delay pay checks until payment is received from a client
  • These clauses are illegal and void in Australia
  • Business owners must adhere to strict regulations for paying employees
  • Pay when paid clauses are often seen in construction contracts
  • Contracts should specify the payment amount and date without relying on client payments
  • A case involving Maxcon Construction in 2018 reaffirmed the illegality of pay when paid clauses
  • If your contract contains a pay when paid clause, you should rectify it immediately 
  • Employment contracts must follow Australian Fair Work practices 
  • Legal principles take precedence over contractual clauses 
  • Reviewing contracts with a legal expert is recommended 
  • Final pay for employees is typically due within 7 days of their last working day 
  • Timelines may vary depending on awards and entitlements 
  • Modern awards and entitlements impact employee payment practices 
  • Ensure your contracts are legally compliant to avoid legal issues and maintain your reputation
  • Consult a legal expert for a thorough contract review and compliance check

If you would like a consultation on pay when paid clauses, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

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