Federal Court Tightens Rules on Salary Set-Offs Under Awards
Key Takeaways
- The Federal Court has confirmed that set-off clauses cannot operate across multiple pay periods - salary payments must meet Award entitlements within each pay cycle.
- Broad contractual set-off clauses are not sufficient to offset underpayments under modern awards.
- Accurate record-keeping of hours, overtime, and penalty rates remains mandatory even where employees are paid salaries.
- Employers should review contracts, payroll practices, and record-keeping systems to ensure compliance and avoid substantial penalties.
Overview
The recent decision of the Federal Court of Australia in Fair Work Ombudsman v Woolworths; Fair Work Ombudsman v Coles; Baker; Pabalan [2025] FCA 1092 has significant implications for employers, particularly those with salaried employees covered by a modern Award. This landmark ruling clarifies how contractual salary arrangements interact with Award obligations and reinforces that employers cannot use broad set-off clauses. Key changes and considerations for employers are discussed below.
Background
The judgment involved four connected proceedings brought by the Fair Work Ombudsman (FWO) and affected employees against Woolworths and Coles, alleging systemic underpayment of employees.
Both Woolworths and Coles paid certain managers annual salaries intended to compensate for all entitlements under the General Retail Industry Award 2010 (Retail Award), including overtime, penalty rates, and public holiday loadings.
The FWO and employee class actions alleged that these salary arrangements resulted in substantial underpayments in circumstances where the salaries did not cover Award entitlements in the pay period in which the entitlement/s were accrued.
The Court examined how key provisions of the Retail Award and the Fair Work Act 2009 (Cth) (FWA), including those dealing with ordinary hours, overtime, and penalty rates, should properly be interpreted to determine whether the employees had been underpaid as alleged.
Set-off Clauses and Annualised Wages
One of the most significant aspects of the decision is the Court’s confirmation that entitlements under the Retail Award accrued in a pay period must be discharged within that same pay period.
The FWA requires that employees are paid in money, in full, and at least monthly. Under the Retail Award, employers are required to pay employees on a weekly or fortnightly basis. The Court found that proper interpretation of these requirements indicates that clauses in employment contracts that purport to “set-off” Award entitlements by payment of a salary must operate only within a single pay period – payments or entitlements cannot be averaged or carried over.
This means under the Retail Award and similar awards:
1. entitlements cannot be pooled and paid across multiple pay periods;
2. set-off cannot be averaged across multiple pay periods;
3. salary payments must be sufficient to meet Award entitlements for that specific period; and
4. entitlements including payment for overtime and penalties must be calculated and discharged each pay period.
Depending on the industry in which they operate, employers may be able to utilise an annualised salary provision within a modern Award, an individual flexibility agreement, or a guarantee of annual earnings. However, as this case demonstrates it is subject to strict requirements and you do not want to make a mistake. We strongly recommend that legal advice is sought beforehand.
Record-Keeping Obligations
Another significant aspect of the decision was the Court’s emphasis on the importance of accurate record-keeping.
Employers are required by the Fair Work Regulations to maintain detailed records of employee entitlements, including:
- loadings;
- penalty rates; and
- overtime hours.
The Court found that set-off clauses do not relieve employers of these obligations. Accordingly, both Woolworths and Coles were found to be in breach of the Regulations and the Award.
Actions for Employers
In light of this decision, employers should:
- Review employment contracts and awards. Ensure that set-off clauses are legally compliant and do not contravene the Award.
- Review record-keeping practices. Employers must maintain detailed records of all employee entitlements and ensure compliance with Awards and the FWA. This includes keeping records of hours worked, rosters, and any variations to them.
- Review accounting processes. Ensure accounting processes best support compliance and keep in mind that annualised salaries are not ’set and forget.’ Consider whether hourly pay rates may be easier for ensuring compliance. Regular audits and updates are essential.
- Proactively rectify non-compliance. Where underpayments or other non-compliance is identified, act swiftly to remediate and communicate transparently with affected employees.
- Seek legal advice. The decision highlights the complexities of Australia’s industrial laws. If you are unsure of your obligations please contact Robert Lamb or John Davies on (07) 3220 1144.
Disclaimer – Legal Advice
Liability is limited by a scheme approved under professional standards legislation. The information in this article is general guidance only, correct at the time of publication, and does not constitute legal advice. You should consult your lawyer for advice specific to your circumstances.
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