Set Off Clauses In Employment Contracts

Paying a “loaded” or all‑inclusive rate can make payroll simpler and help you attract great talent. But if you’re relying on that higher rate to cover things like overtime, penalties or allowances under a modern award, the wording in your employment contract really matters.

This is where set off clauses come in. When drafted and used properly, a set off clause lets you count an agreed higher rate towards specific award entitlements. When drafted poorly, it can backfire - leaving you to pay those entitlements again on top of the higher rate.

In this guide, we break down how set off clauses work in Australia, when they’re lawful, the must‑have drafting features, common pitfalls and practical tips for payroll and record‑keeping. We’ll keep things plain‑English so you can feel confident your contracts and processes are on the right track.

What Is A Set Off Clause In An Employment Contract?

A set off clause is a term in an employee’s contract that allows the employer to “set off” (or count) a higher rate of pay against monetary entitlements the employee would otherwise receive under a modern award or enterprise agreement.

In other words, you pay a higher all‑in rate, and that higher rate is intended to cover identified entitlements such as overtime rates, penalty rates, allowances or loadings. If the employee’s award entitlements for a period are less than or equal to what you’ve already paid via the higher rate, there’s nothing further to pay. If the award entitlements exceed what the higher rate covers in a given period, you must top up the difference.

This approach can be legitimate, but it only works if both the contract and your payroll practices are carefully aligned with your modern award obligations and award compliance processes.

Set off is most commonly used with salaried or above‑award roles, but it can also appear in agreements for part‑time or casual staff (for example, where a casual loading is designed to cover certain award entitlements). The key is clarity and compliance.

When Can You Lawfully Use Set Off Clauses In Australia?

There’s no automatic right to set off - you need to meet several conditions for a set off clause to be relied upon. Here are the essentials.

1) There Must Be A Clear, Written Agreement

The set off must be clearly expressed in a written contract. The clause should explain that the employee is paid a higher rate intended to satisfy specific award entitlements. A vague reference to a “loaded rate” is rarely enough. It’s best practice to include an Employment Contract that identifies the role’s coverage under any applicable award and lists the entitlements the rate is intended to cover.

2) Identify The Award And The Covered Entitlements

To be effective, the clause should:

• Name the applicable modern award (if any).
• Specify which entitlements the higher rate is intended to cover (for example, overtime, penalty rates, annual leave loading, and certain allowances).
• Explain that if the amounts payable under the award exceed the payments made under the higher rate in a pay period or roster cycle, you will make a top‑up payment.

Set off works best when it is carefully targeted to identifiable entitlements. A blanket statement that “all entitlements are covered” can be risky and may not hold up if challenged.

3) The Employee Must Be Better Off Overall

Even where a set off clause is clear, you can’t use it to undercut award minimums. Employers must ensure that the all‑inclusive rate leaves the employee at least as well off as they would have been if paid strictly in accordance with the award. Regular reconciliations help you check this requirement is being met.

Paying above award wages can make set off more robust, but you still need to calculate what the employee would have earned under the award to be sure the higher rate actually covers it in practice.

4) You Can Only Set Off Monetary Entitlements

Set off is about money. It generally can’t be used to absorb non‑monetary rights. For example, you cannot “set off” statutory leave accruals or notice of termination obligations. Likewise, paying a higher rate doesn’t remove obligations to pay superannuation on ordinary time earnings (OTE) or to provide entitlements under the National Employment Standards (NES) - those still apply.

5) Check For Enterprise Agreements Or Specific Award Rules

If a role is covered by an enterprise agreement or an award with special provisions for annualised salaries or set off, those instrument‑specific rules will apply. Where an award has an annualised wage clause, you should follow its reconciliation and record‑keeping requirements closely.

How To Draft A Compliant Set Off Clause (And Common Pitfalls)

Getting the drafting right is half the battle. A well‑constructed clause, supported by strong payroll practices, significantly reduces your risk of underpayment claims.

Core Elements To Include

• Definition of the higher rate: State the base salary or hourly rate and that it is “all‑inclusive” or “loaded” for the purposes of set off.
• Award coverage: Identify the applicable award (if any) and classification.
• Specific entitlements covered: List each entitlement the loaded rate is intended to satisfy (e.g. overtime, weekend penalties, shift penalties, annual leave loading, laundry allowance, meal allowance).
• Reconciliation and top‑ups: Explain that regular reconciliations will be performed and that you will top up any shortfall if award amounts exceed payments made under the higher rate in a period.
• No reduction of NES or super: Make it clear that statutory minimum entitlements (e.g. NES leave) and super obligations remain unaffected.
• Record‑keeping and timesheets: Require timesheets or reliable time records so reconciliations are accurate.

Drafting Pitfalls To Avoid

• Vagueness: Saying “this rate covers everything” without detailing which entitlements you mean can render the set off ineffective.
• No reconciliation process: If you don’t check actual hours and compare them to what the employee would have earned under the award, you can’t prove the employee was better off overall.
• Trying to absorb non‑monetary rights: You can’t set off leave accruals, notice, redundancy pay or other non‑monetary entitlements.
• Ignoring classification changes: If the role or duties change and the employee falls under a different classification, your clause and remuneration may need updating.
• Failing to update with award variations: Modern awards change. Review your clause and pay rates regularly to keep pace with award increases or structural changes.

If you’re refreshing your contracts, pairing a clear set off clause with a current Employment Contract template can help ensure the clause sits logically with your other terms (hours of work, overtime approval, allowances, and policies).

Annualised Salary Provisions vs Set Off

Some awards include annualised wage arrangements with specific rules about wage components, reconciliations and records. A set off clause can operate separately from those provisions, but if the award requires a particular method, follow it. In many cases, the safest approach is to mirror those requirements in your contract for consistency, even if you’re not strictly using the award’s annualised wage clause.

What About Contractors?

“Set off” can also appear in commercial contracts to deal with cross‑obligations between parties. While that’s a different context, the logic is similar: clear drafting and accurate reconciliation is critical. If you’re dealing with non‑employment contracts, see our guide to set off clauses in Australian contracts.

Examples: How Set Off Works In Practice

Let’s look at a few scenarios to make this concrete.

Example 1: Loaded Hourly Rate For A Retail Employee

You agree to pay a Level 3 retail employee a loaded hourly rate that is significantly above the award base rate, and the contract states it is intended to cover weekend penalties, evening penalties and overtime. Over a fortnight, the employee works varied hours including a Sunday shift and some overtime.

Your payroll compares what the employee earned under the loaded rate with what they would have earned under the award if paid strictly (base rate + penalties + overtime). If the award total is higher, you pay the difference. If the loaded rate exceeds the award total, no top‑up is needed.

Example 2: Salary Covering Allowances

A salaried warehouse supervisor’s contract states the salary is intended to cover overtime, a first aid allowance, and afternoon shift penalties. Your records show the employee used their first aid certification and worked the afternoon shift pattern. Each month, HR runs a reconciliation. In months where the award amounts would have exceeded the salary’s implied coverage, you pay the top‑up. In months where the salary already covers the award amounts, nothing further is due.

Example 3: When Set Off Fails

An employer pays a “good salary” but the contract has no set off clause and doesn’t mention the award. The employee later claims unpaid overtime and weekend penalties. Without a clear set off clause and reconciliation records, the employer may have to pay those amounts on top of the salary - even if the salary would have been enough had it been structured correctly.

Casuals And Loadings

For casuals, the 25% loading can legitimately cover certain entitlements (like paid leave) that casuals do not receive; however, where a casual is also paid a higher “loaded” casual rate intended to cover penalties or allowances, you still need clear contract wording and award‑compliant reconciliation to ensure the employee is better off overall.

Payroll, Record‑Keeping And Communication Tips

Even the best clause won’t protect you if your payroll practices don’t support it. Here’s how to put structure around your set off approach.

Build A Reconciliation Routine

• Choose your cycle: Reconcile each pay cycle or roster cycle (monthly reconciliations can work if your award permits, but many employers reconcile each pay period for accuracy).
• Compare “apples with apples”: Calculate what the employee would have earned under the award for the exact hours worked, then compare it to the pay you actually made under the loaded rate.
• Top up promptly: If the award amount is higher, pay the difference in the next pay run and keep a record.

Keep Robust Time And Pay Records

• Timesheets or reliable time data: Without good time records, you can’t prove the set off leaves the employee better off overall.
• Itemised payslips: While you may pay a single loaded rate, itemised payslips and internal notes should make it easy to show what the rate is intended to cover and how reconciliations were performed.
• Update classifications: If duties or classifications change, update the contract and the rate (and your set off clause wording) accordingly.

Explain The Arrangement To Staff

Transparency helps. When employees understand that a higher rate is intended to cover specific entitlements - and that you reconcile and top up if needed - it builds trust and reduces confusion when rosters vary.

Don’t Forget Super And Leave

Set off does not remove your obligation to pay superannuation on ordinary time earnings or to provide NES entitlements like annual leave (for non‑casual employees), personal leave, notice of termination and other statutory minimums. A set off clause should state this explicitly.

Review Against Awards And Policies

As awards change, review your rates and clauses to stay compliant. This is a good time to also review your broader workplace policies and training. If you’re unsure about the current obligations under your award, our team can help with award compliance and contract updates.

Use The Right Contract For The Role

Different contract templates exist for casuals, part‑timers and full‑timers. Ensure your set off clause is consistent with the rest of the document (hours of work clause, overtime approval process, allowances policy). If you’re putting roles on new templates, consider adopting a fresh Employment Contract with a carefully drafted set off clause, or speak with an employment lawyer about tailoring your documents.

Frequently Asked Questions

Can A Set Off Clause Cover Everything In An Award?

No. A set off clause can only cover monetary entitlements and should identify them specifically (like overtime, penalties and certain allowances). It cannot absorb non‑monetary rights or statutory minimums like leave accruals or notice. You also need to ensure the employee is better off overall.

Do I Have To Reconcile Every Pay Cycle?

Regular reconciliations are a best‑practice way to ensure compliance and demonstrate that your set off clause works in the real world. The frequency can depend on your award and payroll systems, but frequent and accurate checks reduce risk. Many employers reconcile each pay or roster cycle to be safe.

What If My Employee Isn’t Award‑Covered?

If there is genuinely no applicable modern award, your contract still benefits from clarity about what your remuneration covers and the hours or patterns of work it’s based on. Where you do rely on set off, link the clause to identifiable monetary entitlements and maintain solid time and pay records.

Is A Loaded Rate The Same As An Annualised Salary?

Not necessarily. A “loaded rate” is often an above‑award hourly or annual figure intended to cover certain entitlements via set off. Some awards include annualised wage provisions with strict rules about coverage, record‑keeping and reconciliations. If your award has such a clause, follow those requirements closely in addition to your contract wording.

Where Can I Learn More?

For a deeper dive, you can read our dedicated guide to set off clauses in employment contracts, or discuss how set off interacts with above award wages for your workforce.

Key Takeaways

• A set off clause lets you count a higher “loaded” rate towards specific monetary entitlements under an award, provided the clause is clear and the employee is better off overall.
• To be effective, the clause should identify the applicable award, list the entitlements covered, and include a reconciliation and top‑up mechanism.
• Set off cannot absorb non‑monetary rights (like leave accruals or notice), and it does not remove super or NES obligations.
• Strong payroll practices - accurate time records, regular reconciliations and prompt top‑ups - are essential to make set off work in practice.
• Review clauses whenever awards change, classifications shift or roles evolve, and ensure your Employment Contract templates match your award and policy settings.
• When in doubt, get tailored advice from an employment lawyer so your set off approach is robust and compliant.

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