“Set-off” Regulation fails to prevent casual employee from receiving casual loading and leave entitlements

Introduction

The Full Court of the Federal Court of Australia handed down its long-awaited decision in WorkPac Pty Ltd v Rossato [2020] FCAFC 84 (Rossato) on 20 May 2020 that has ramifications for all employers who use casual labour.

The Court held that a casual employee who was engaged on a regular, systemic and predictable basis was entitled to annual leave, personal/carer’s leave, compassionate leave and public holidays as set out in the National Employment Standards (NES) of the Fair Work Act 2009 (Cth) (FW Act) even if they have been paid a casual loading.

This decision affirms the approach adopted in the decision of WorkPac Pty Ltd v Skene [2018] FCAFC 131 (Skene) (considered in our earlier blog). In Skene, the Court held that an employee was not a “casual employee” for the purpose of the annual leave provisions set out in the NES despite being designated as a casual under the applicable enterprise agreement.

Following Skene, the Fair Work Regulations 2009 were amended to include a new Regulation 2.03A which enabled an employer, who was faced with a claim from a casual employee for one or more NES entitlements, to set off a clearly identifiable casual loading paid to that employee against any amount payable to that employee for one or more NES entitlements.

The purpose of the regulation was to prevent “double dipping” so that casual employees could not claim both the casual loading and the NES entitlements. In Rossato, the Court held that Regulation 2.03A could not be relied on by the employer in seeking to prevent the employee from claiming these entitlements.

Background facts

WorkPac, a labour hire company, engaged Mr Rossato as a production worker in the open cut black coal mining industry on six consecutive employment contracts over three and a half years. All of the employment contracts referred to him as a casual employee and he was paid a casual loading.

In October 2018, Mr Rossato wrote to WorkPac relying on the decision in Skene, and claimed outstanding paid annual leave, paid personal/carer’s leave, paid compassionate leave and public holiday pay under the FW Act and his enterprise agreement on the basis that he had not been engaged as a “true casual” employee.

In response, WorkPac commenced proceedings seeking declarations that:

1. Mr Rossato was a casual employee within the meaning of the FW Act and a “Casual Field Team Member” for the purposes of the enterprise agreement and was therefore not entitled to paid leave or public holidays;
2. if Mr Rossato was found to be an ongoing employee, that Mr Rossato’s pay incorporated a casual loading which was paid partly in lieu of Mr Rossato’s entitlements under the FW Act and enterprise agreement and WorkPac was entitled to set-off any amount owed to Mr Rossato for those entitlements;
3. alternatively, WorkPac was entitled to restitution by reason of a total failure of consideration or mistake.

Was Mr Rossato a casual employee?

Given the decision in Skene, the parties agreed that a casual employee is one who has no firm advance commitment from their employer to continuing and indefinite work according to an agreed pattern of work.

WorkPac argued that the existence of a firm commitment should be determined solely by reference to an express term providing for that commitment (that is, if there was no express term, there was no firm commitment).

The Court held that the absence or presence of a firm advance commitment should be assessed more broadly with regard to the employment contract as a whole, including:

1. whether it provided for the employment to be regular or intermittent;
2. whether it permitted the employer to elect whether to offer employment on a particular day;
3. whether it permitted the employee to elect whether to work; and
4. the duration of the employment.

It was held that the parties had agreed on an employment of indefinite duration which was stable, regular and predictable such that a firm advance commitment was evident in each of the six contracts. As Mr Rossato engaged in work that was “regular, certain, continuing, constant and predictable” he was not a true casual employee.

Consideration of set-off

WorkPac argued that because it had, during each of Mr Rossato’s six periods of employment, paid him more than the minimum rate under the enterprise agreement because he was not entitled to annual leave, personal/carer’s leave, compassionate leave or public holidays, it was entitled to “set-off” the amount of the overpayment against any entitlement which Mr Rossato may have to those entitlements.

The decision in Poletti v Ecob (No 2) (1989) 31 IR 321 (Poletti) sets out the principles, that if applicable, prevent the set off of a payment made to discharge another entitlement:

1. where the parties agree that a payment is made for a non‑award entitlement or as an addition to an award entitlement, the employer is not able to later rely on the payment as discharging some other liability; and
2. it is the employer’s own conduct as debtor in designating the payment as discharging one debt to the employee, rather than discharging the award obligation, which prevents the payment being regarded as discharging the award obligation.

WorkPac submitted that the principles in Poletti did not apply to Mr Rossato because:

1. Payments were made in circumstances where the parties were mistaken about the nature of the employment they had created;
2. There was a “close correlation” between the contractually agreed purpose or subject matter of the payments which it paid to Mr Rossato and Mr Rossato’s NES entitlements; and
3. The weekly payments to Mr Rossato were appropriated to the debts owed to Mr Rossato in respect of his entitlements under the NES.

The Court found that WorkPac was not entitled to offset any higher amount paid to Mr Rossato and rejected WorkPac’s arguments because:

1. in relation to the first argument, “the parties in this case did succeed in establishing the kind of relationship which they intended” and “it would not be reasonable in this circumstance to suppose that WorkPac’s failure to appreciate its true liabilities meant that its intention with respect to the payments became irrelevant”; and
2. in relation to the second and third ground, the Court held that the payments were made to Mr Rossato in respect of the hours he worked rather than for any entitlement to leave. It found that WorkPac had a statutory obligation to provide Mr Rossato with his entitlements under the FW Act and the enterprise agreement and that obligation could not be discharged by the payment of casual loading.

Consideration of Regulation 2.03A

WorkPac also sought to rely on Regulation 2.03A to enable set-off of the casual loading amount against entitlements owed under the NES.

The Court found that for Regulation 2.03A to apply, the four conditions contained in 2.03A(1) must exist, the fourth condition being that a person makes a claim to be paid an amount “in lieu of” one or more of the relevant NES entitlements.

In considering Mr Rossato’s initial letter of demand, the Court found that in this case, the fourth condition did not exist because Mr Rossato was not claiming to be paid an amount “in lieu of” an NES entitlement but was seeking payment of the various entitlements under the NES. As such, Regulation 2.03A had no effect.

On the basis of comments made in the decision, while Regulation 2.03A allows an employer to claim that the casual loading should be taken in to account in determining any amount payable to a casual employee who is not a “true casual”, it “does not purport to alter the substantive law that is applicable to the determination of such a claim”.

Regulation 2.03A does not alter the common law principles of Poletti and it appears that, even if all of the conditions of Regulation 2.03A were satisfied, a set-off argument would not necessarily be successful.

Consideration of restitution

In the alternative to its set-off claim, WorkPac sought a declaration that it was entitled to restitution, of that part of the remuneration paid to Mr Rossato, by reason of a total failure of consideration or mistake, being:

1. the difference between the flat rate paid to a “Permanent Field Team Member” and the flat rate paid to a “Casual Field Team Member” under the enterprise agreement; or
2. the casual loading incorporated into the flat rate of pay for a “Casual Field Team Member” under the enterprise agreement.

The Court held that WorkPac was not entitled to restitution on either ground.

In relation to failure of consideration, WorkPac argued that the amount paid to Mr Rossato, as a casual loading was severable, and that on the assumption that Mr Rossato was not a casual employee, the basis for that severable part of the consideration paid to him wholly failed.

Justice Wheelahan found that “the payments were made pursuant to a contractual obligation to do so that arose upon the performance of work by Mr Rossato” and “[t]he remuneration was not divisible merely because an assumption which may have formed part of the calculation of the agreed flat hourly rates did not exist”. To accept WorkPac’s submission Justice Wheelahan said “would cut across the parties’ contractual rights and obligations”.

In relation to mistake, WorkPac argued that the casual loading was paid by mistake.

Justice Wheelahan held that there was no mistake in relation to WorkPac’s contractual obligation to pay Mr Rossato his hourly rate. If there was a mistake on WorkPac’s part, it was held this was “in framing its offers of employment as being premised on casual employment in circumstances where… Mr Rossato was not a casual employee for the purpose of relevant provisions of the Fair Work Act”. 

He found “that mistake did not affect its contractual obligations, and could not afford any ground for recovery of remuneration paid to Mr Rossato as money had and received unless the contractual obligations to pay the remuneration could be avoided”. These contractual obligations could not be avoided because there was “no term purporting to provide for the adjustment of agreed remuneration paid under the contracts of employment should any assumptions underlying the contractual obligations prove to be incorrect”.

Implications for employers

Industrial Relations Minister, Christian Porter intervened in this case to support of WorkPac’s submissions, with the Federal Government well aware of the costs that “double dipping” poses to those employers who use long term casuals.

Until such time as the FW Act is potentially amended, which is likely some time off, this decision leaves employers at risk of facing claims for substantial leave payments and penalties for failing to provide entitlements to casual employees who engage in regular and predictable work over a sustained period.

Employers should act promptly now to:

1. review the use of all existing casual employees, taking into account both the written employment terms that apply to them and the practical arrangements in relation to their work;
2. if practical, offer those casual employees who have been engaged on a predictable and continuous basis for more than 6 months, part time or full time employment;
3. review the written terms offered to casual employees, particularly in relation to the identification of the casual loading; and
4. review existing rosters and working arrangements for existing and future casual employees so that the pattern of work cannot be construed as regular, predictable and continuous.

If you need any assistance in undertaking these steps, please do not hesitate to contact us.