The Federal Court has handed down a significant and long-awaited decision which has wide reaching ramifications for businesses with award covered employees receiving an annual salary with an “offsetting” mechanism (of which there are many).

In joining four separate proceedings involving significant underpayment claims brought by the Fair Work Ombudsman (FWO) and class actions against supermarket powerhouses Coles and Woolworths, Justice Perram has found that for set-off arrangements to be used lawfully, employers must ensure that payments in each pay period satisfy the payment obligations under the relevant modern award (such as overtime and penalty rates) for that period. In effect, reliance on overpayments in earlier pay cycles to ensure compliance in a later pay cycle is not permissible under the Fair Work Act 2009 (Cth) (FW Act).

Background

While both Coles and Woolworths had already made significant remediation payments of A$7 million and A$300 million respectively after conducting their own internal reviews, the FWO and class action applicants argued that more was owing. In 2021, proceedings were commenced by the regulator against Woolworths and separately Coles, in the Federal Court alleging underpayment of salaried employees covered by the General Retail Industry Award 2020 (Award). Similar underpayments claims had also been made against the supermarkets in class action proceedings.

While Justice Perram of the Federal Court was tasked with addressing a long list of complex legal questions in these cases, two central issues were:

1. the correct implementation – and limits – of set-off clauses in employment contracts; and
2. the scope of employers’ record keeping obligations raised under the FW Act and the Fair Work Regulations 2009 (Cth) (Regulations).

The FWO asserted that the contractual annualised salary arrangements used by the supermarkets were not capable of satisfying the actual overtime hours worked. Further, the FWO said that Award entitlements had to be satisfied in each pay period such that overpayments in one pay period could not be used and “off-set” against underpayments in another pay period.

The set-off clause relied upon by Woolworths, which garnished the most attention from His Honour, purported to satisfy all entitlements (including under the Award) arising over the course of a 26-week period. The effect of this was to enable Woolworths to “pool” any excess payments that were above the Award across six months and use that pool to offset any shortfalls in certain pay periods. A similar logic was relied upon by Coles with respect to their set-off clauses.

In relation to record keeping, the supermarkets broadly argued that such stringent records (with respect to overtime and allowances for instance) were not required for these types of employees because they were paid on an “all-inclusive” basis and therefore not entitled to those additional Award amounts. 

Key findings

In deciding against Coles and Woolworths in a lengthy decision, Justice Perram (amongst other things):

Off-setting arrangements

1. found that the set-off clauses in the supermarkets’ employment contracts were unable to operate as drafted and could only discharge obligations under the Award within a single pay period, and not across pay periods within the 26-week period. At the core of the decision was the determination that the set-off could not be effected between pay periods; and

2. held that for that set-off clause to be implemented legally, it had to be put into action in a way that ensured each fortnightly payment would discharge the obligations under the Award due in that fortnight, as opposed to across pay periods within the 26-week period.

Record keeping

3. determined that Coles and Woolworths were in breach of their record keeping obligations given that records of all overtime hours under the Award or hours that otherwise attracted separate loadings / penalties were not maintained; and

4. was critical of the supermarkets’ reliance on rosters and employees clocking “in and out”, in finding that this was not enough to satisfy their record keeping obligations under the FW Act; and

5. made plain that the record keeping obligation vests with the employer - not the employee. His Honour provided a timely reminder that in accordance with the FW Act / Regulations, the record must be in a form that is readily accessible to a FWO inspector or current / former employee (if requested) and is capable of being copied.

Implications for businesses

The implications of the decision are hard to understate. Most annual salary arrangements will need to be reviewed through the lens of this case. While set-off clauses for annualised salaries in employment contracts can still be used, caution must be exercised in drafting and implementation. While the window remains open for the decision to be appealed, businesses should carefully consider whether:

1. its annualised and award-covered employees are being paid adequately for all hours worked during any given pay period. Overpayments in one pay period cannot be carried across for use during a shortfall in another pay period. Where a shortfall is identified, steps for remediation are to be taken as soon as possible;
2. any off-set clause in your employment contract for award-covered employees should be revisited;
3. your businesses record keeping practices are complaint with the FW Act and Regulations. With respect to salaried employees, simply monitoring start and finish times and rostering will not be enough; and
4. your payroll function / practices are compliant with the FW Act, noting the introduction of wage theft laws at the start of this year and significant penalties now available to made against businesses for intentional underpayments.

Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd; Baker v Woolworths Group Limited; Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092.