On 5 September 2025, the Federal Court of Australia delivered its long-awaited decision in FWO v Woolworths Group Limited; FWO v Coles Supermarkets Australia Pty Ltd1, which provides critical clarification on the operation of set-off clauses in employment contracts. Employers relying on annualised salary arrangements must now ensure that Award entitlements are met within each pay period, not retrospectively or prospectively.
In his judgement, Justice Perram found that the relevant set-off clauses could not be used to discharge obligations under the General Retail Industry Award (the Award) across different pay periods and can only lawfully operate to offset any obligations falling due in one pay period. This decision has significant implications for employers seeking to rely on set-off clauses in employment agreements with annualised salary arrangements to meet their obligations under the relevant award.
Whilst the Court considered other several issues, of most significance is the Court’s decision on set-off clauses, annualised salaries, and record keeping obligations.
Background
This judgement concerned four separate causes of action, including proceedings brought by the Fair Work Ombudsman and class action suits against Woolworths and Coles. All four causes of action concerned alleged underpayments of employees in store-based management positions, employed under written contracts providing for an annual salary.
The relevant clauses contemplated that the annualised salary would satisfy all obligations under the Award. Employees were paid on a fortnightly basis in accordance with the Award.
Woolworths and Coles had not kept track of these employee’s entitlements under the Award, and therefore, in many cases, the employees did not receive payment for these entitlements. While both Woolworths and Coles had previously made remediation payments to affected employees, the applicants considered these payments were insufficient to discharge the relevant obligations.
The decision
Set-off clauses and annualised salaries
The Federal Court rejected Woolworths and Coles argument that the relevant set-off clauses effectively enabled an employee’s entitlements to be set-off, or ‘pooled’ across different pay periods, finding that the relevant set-off clauses could only lawfully operate within a pay period.
Section 323(1) of the Fair Work Act 2009 (Cth) (the FW Act) requires that an employer must pay an employee the amounts payable for the performance of work in full. The Court observed that Woolworths had two sets of payment obligations: one being its obligation to pay a fortnightly instalment of the annualised salary under the employment agreement, and the second being its obligation to pay amounts due under the Award.
The Court found that these obligations under the Award – such as overtime, penalty rates, and allowances – must be discharged by actual payments within the same pay period by virtue of section 323(1), rejecting the use of accounting abstractions or pooled overpayments across multiple periods.
In coming to this decision, the Court observed it is unlikely payments that have occurred in the past, or payments in the future, could be characterised as payments for the purposes of the Award, and stated more generally that “If this is to be correct, then a six monthly pooling operation for cl 6 cannot be resurrected by careful drafting”.
Record keeping obligations
Section 535(1) of the FW Act requires that an employer document and maintain certain employee records, in accordance with the Fair Work Regulations 2009 (Cth) (the FW Regulations). For the purpose of these proceedings, the Court focussed on an employer’s obligations as set out in regulations 3.31, 3.33 and 3.34 of the FW Regulations. These regulations require that an employer must maintain records in a form that is readily accessible to an inspector demonstrating, among other things:
- the details of an employee’s pay, including, the details of any incentive-based payment, bonus, loading, penalty rate or other monetary allowance if the employee is so entitled; and
- the details of any overtime worked.
Neither Woolworths nor Coles had kept track of the affected group of employees’ entitlements under the Award. For example, Woolworths did not keep records of any separately identifiable amounts of loadings or penalty rates, or of the number of overtime hours for the concerned employees. Woolworths and Coles argued that these record keeping obligations were not engaged for employees on annualised salary arrangements, as they were not entitled to additional payment (i.e. for overtime).
The Court rejected this argument, finding that record-keeping obligations under the FW Regulations apply even where employees are paid annualised salaries, and set-off clauses did not relieve either party of these obligations. It follows, that employers must record entitlements such as overtime and penalty rates, even where those entitlements are notionally absorbed into a salary.
The Court further held that Woolworths’ ‘clock-in, clock-out’ system, was not sufficient to discharge its obligation to keep a record specifying overtime hours worked in accordance with regulation 3.34. Although the Court acknowledged that information might be deduced from rosters and clocking data, it did not accept that this met the requirement for records to readily accessible and available under the FW Regulations.
The Court went on to apply section 557(C) of the FW Act, which reverses the burden of proof in proceedings where an employer has failed to keep the required records. This means Woolworths and Coles were required to disprove allegations of underpayment where records were missing or complete.
Key takeaways
- ‘Set-off’ clauses, must operate within a set pay period – while an employer can off-set the relevant obligations under an Award, a contractual provision that purports to discharge those obligations across previous or future pay periods is not legally compliant.
- Employers must maintain comprehensive and accessible records of all entitlements, including for salaried employees.
- A ‘clock-in, clock-out’ system combined with an employee’s rosters, is not sufficient for the purposes of the FW Regulations.
- Where an employer fails to maintain the required records, it will have the burden of disproving any underpayment allegations.
Implications and further class action
The representatives for the applicants in the class action suits against Woolworths and Coles have signalled that similar class action will be taken against the Super Retail Group in the coming weeks. It is alleged that the Super Retail Group, owner of Supercheap Auto, Rebel, BCF, and Macpac, paid retail managers an annualised salary insufficient to meet weekly entitlements, such as overtime, under the Award.
This follows proceedings filed by the Fair Work Ombudsman against the group in 2023 over self-reported underpayments, which were stayed until the judgement in the Woolworths and Coles proceedings were handed down. Alongside that order, Justice Katzmann ordered that the parties confer within four weeks of the delivery of the Woolworths and Coles judgement, with respect to case management steps.
While a class action suit is yet to be filed, and the outcome of the Fair Work Ombudsman’s proceedings are yet to be seen, proceedings against other employers appear to be likely.
While it is important to note that the decision and potential action against the Super Retail Group is in relation to entitlements under the General Retail Industry Award 2010, the decision could have wider implications for employers operating similar arrangements under other Awards. Whether that is the case is yet to be seen, but it will be essential for employers to carefully consider whether they are compliant with the relevant award.
Things employers need to do now
- Assess whether any annualised salary and set-off arrangements are sufficient to meet an employee’s entitlements under the relevant award in each pay period. Employers should consider any busy periods where it might expect employees to work additional overtime hours.
- Consider the benefit of moving to a longer pay cycle (i.e. monthly instead of fortnightly pay) as far as is permitted by the relevant Award.
- Review their record-keeping systems to assess whether they are sufficient to satisfy their obligations. We note that just relying on log-in and log-out data that may not be accurate may not be sufficient, and employers may need to consult with staff and see to implement better systems.
- Consider directing employees not to work more than specified maximum hours or their contracted hours, and seek prior written approval for any additional hours worked.
How we can help
Our Workplace Relations team can review your employment contracts, payroll and record-keeping systems to ensure compliance with the latest Fair Work requirements. We provide practical advice on managing annualised salaries, set-off clauses and Award entitlements, helping organisations reduce risk and avoid costly disputes.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.