Deeds of Release for Wage Claims: What’s the Point?

Deeds of Release for wage claims. What are they? Why use a deed of release to settle pay disputes? Are they effective?

In February 2019 it was announced that the company which owns Rebel Sport, Supercheap Auto and BCF had underpaid staff by approximately $32 million. The underpayments were discovered following an organisational audit that was initiated by the company. The audit found the company had either not applied or incorrectly applied penalty and overtime rates in relevant industrial instruments. This comes on the back of the 7-Eleven litigation that involved the underpayments of vulnerable workers – something which has contributed to the introduction of greater protections under the Fair Work Act 2009 (Cth).

Australia’s industrial relations framework was simplified considerably following the introduction of the Fair Work Act. Nonetheless, the system is still complex. It also frequently changes. Risks for non-compliance by employers can be significant. These include exposure under the civil penalty provisions under the Act, reputational damage, decreased productivity and profits through staff turnover, or exposure to penalty interest for any unpaid payroll tax. From a legal perspective, it therefore pays to be proactive rather than reactive.

While organisational reviews like the one performed by Rebel Sport and Supercheap are to be encouraged, the outcome may result in some difficulty between employers and employees which create the potential for dispute. It is not uncommon for parties to resolve these issues by attempting to mitigate their risk through a simple deed of release. These deeds are usually proforma documents that allow for a lump sum payment as full and final settlement, and which offer further protection by binding the parties to an obligation of confidence with respect to the dispute.

How effective are these deeds and can they be challenged? According to the Federal Court of Australia in Atkins Freight Services Pty Ltd v Fair Work Ombudsman, unless the deed is properly drafted and includes the right content, the short answer is a deed of release might be limited in its effectiveness and may be easily disregarded by courts.

In the above matter, the employer relied on a collective agreement to pay its employees even though they were bound by a more favourable industry award. That resulted in the underpayment of meal allowances, overnight allowances, shift allowances, overtime, public holiday and holiday rates, personal leave and superannuation. The employer attempted to resolve things by entering into a deed of release with two of its employees which provided compensation in exchange for the employees providing an irrevocable release and undertaking for the pursuit of any wage claims. Was the deed binding?

Our starting point is that the Fair Work Act and any instruments passed under it will prevail over any contract that seeks to negatively contract out of minimum standards and entitlements. In short, if a deed of release is found to be unfavourably inconsistent with minimum entitlements then courts not only have power to set the deeds aside, they have been known to do so.

Considering the above, there are also circumstances where courts may decide not to displace the terms of a settlement deed that is entered into between employers and employees. This requires the parties to be involved in a bona fide dispute and the settlement deed being prepared either with litigation being on foot or in contemplation of litigation. In these circumstances, the court’s powers to make a pecuniary order or an award for compensation are discretionary.

However, the terms of the deed might also influence whether this discretion is exercised or disregard. For example, courts might be reluctant exercise their discretion so as to displace a deed of release when the deed:

is entered into in good faith;
states that it was prepared to settle a bona fide dispute resulting in litigation or for which litigation is contemplated or likely;
lists the industrial instruments giving rise to the dispute;
itemises or attempts to itemise the underpaid entitlements to which the dispute relates and the time frames for underpayment;
for calculations of compensation, states that it is a genuine estimate of loss; and
states the employee was given the opportunity to obtain legal advice.

Courts might be more likely to use their discretion if the deed of release does not include all or most of these features.

We strongly recommend that parties obtain independent legal advice if they intend to use a deed of release to settle wage claims.