It’s been now more than six months since the Federal Court of Australia handed down a landmark decision in the employment law space. This decision has significantly narrowed the circumstances in which employers can rely on contractual set-off clauses to meet modern award obligations. The practical impact of the ruling has implications for employers using salary arrangements for award-covered staff.
In summary, in the decision of Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd; Baker; Pabalan [2025] FCA 1092 (Decision), the Court made 3 key findings:
- Set-off clauses will only be effective to offset award entitlements within the same pay period in which they arise. In other words, overpayments in a certain pay period cannot be used to satisfy underpayments in another pay period.
- Record keeping: the Court found that employers are not exempt from keeping records of overtime hours actually worked, simply because the employee is paid an all-inclusive salary.
- For employer and employee agreements, where an employer seeks to rely on an agreement with an employee to waive an entitlement under an award, it must be objectively clear that the employee understood that they were aware of the specific entitlement they were giving up.
The Decision essentially became a test case to determine when and how employers can rely on paying annual salaries with the use of contractual set-off clauses to satisfy specific entitlements in the underpinning award.
The matters that arose from the Decision highlight compliance obligations for a wide range of employers, not only those in the retail sector, but other industries reliant on salaried, award-covered workforces, such as clerical employees and those operating in hospitality, healthcare, social community and disability services, etc.
We discuss the key findings of the Decision in further detail below.
Background
The Decision involved two regulatory proceedings brought by the Fair Work Ombudsman (FWO) and two class actions brought by employees, concerning alleged underpayments to 19,000 salaried managers at Woolworths and 8,700 salaried managers at Coles (the Supermarkets). The employees were paid an annual salary and were covered by the General Retail Industry Award 2010 (Award) as it applied at the time.1Note: the Decision refers to the 2010 version of the Award, and as such the clause numbers referred to in this article are different to the clause numbers in the current 2020 version of the Award
The underpayment claims largely arose from annual salaries which the FWO alleged were insufficient to cover the number of overtime hours worked by the employees. The Supermarkets did not keep track of the entitlements of their salaried employees under the Award, and therefore, in many cases, did not pay the correct entitlements.
The Supermarkets had already made significant remediation payments (over $300 million for Woolworths and over $7 million for Coles). However, the FWO and the applicants in the class actions considered further payments were due.
The Decision also examined a number of different provisions of the Fair Work Act 2009 (Cth) (FW Act) concerning employer obligations to pay employees and keep time and wage records, as well as obligations under the Award.
Key findings from the Decision
- Set-off clauses
The Supermarkets sought to rely on set-off clauses in the employment contracts that operated over extended periods – a period of 26 weeks for Woolworths and a 12 month period for Coles to justify their position that no underpayments existed.
A set-off clause is a common feature in employment contracts whereby it is agreed that the employee be paid an above-award salary in satisfaction of certain award entitlements (such as overtime, penalty rates, allowances, leave loading, etc).
The Supermarkets argued that the set-off clauses permitted over-Award payments in some pay periods to offset for potential shortfalls or underpayments of Award entitlements in other pay periods.
The Court rejected this approach and concluded that set-off clauses can only validly operate within the bounds of a single pay period.
The key reason for this is because of the requirements contained in section 323(1) of the FW Act which provides as follows:
Method and frequency of payment
An employer must pay an employee amounts payable to the employee in relation to the performance of work:
(a) in full (except as provided by section 324); and
(b) in money by one, or a combination, of the methods referred to in subsection (2); and
(c) at least monthly.
Note 1: This subsection is a civil remedy provision (see Part 4-1).
Note 2: Amounts referred to in this subsection include the following if they become payable during a relevant period:
(a) incentive – based payments and bonuses;
(b) loadings;
(c) monetary allowances;
(d) overtime or penalty rates;
(e) leave payments.
Additionally, clause 23.1 of the Award as it applied at the time only permitted payment cycles of weekly or fortnightly.
Taking the above into account, the Supermarkets were unable to persuade the Court that set-off could apply beyond a single pay period (which for the Award was either weekly or fortnightly) for a maximum period of one month.
The Court considered the concept of set-off across extended timeframes, and the pooling of overpayments, as an “accounting abstraction” which was not consistent with section 323 of the FW Act whereby an employee must be paid in full and at least monthly. Further, the Court indicated that it is unlikely that even with the careful redrafting of a set-off clause, pooling of entitlements over more than one pay period would not be permissible.
The Decision represents a strict and highly literal interpretation of how set-off clauses interact with award obligations. This means that employees who are award-covered (or covered by an enterprise agreement) must be paid at least their minimum entitlements under the award/enterprise agreement in the applicable pay period (whether this be the week, fortnight or month, depending on the terms of the relevant underpinning modern award or enterprise agreement) in which the entitlements accrue.
If an employee does not receive at least their minimum entitlements for each pay period through receipt of the wages associated with that particular pay period, the employer will be in breach of the FW Act, the applicable modern award/enterprise agreement.
Note these findings do not relate to salaries paid in accordance with annualised salary provisions contained in certain modern awards.
- Record keeping
The Court found that the Supermarkets had not kept records of the hours worked by salaried employees to the level required under the Fair Work Regulations 2009 (Cth) (Regulations).
Regulations 3.33 and 3.34 require employers to:
-
- keep accurate records specifying an employee’s rate of remuneration, gross and net pay, deductions, and hours worked for casual or irregular part-time employees.
- also keep records “if the employee is entitled to be paid” for any entitlement to incentive-based payments, bonuses, loadings, penalty rates, or other monetary allowance or separately identifiable entitlement; and
- if a penalty rate or loading must be paid for overtime hours actually worked by an employee, make and keep a record that specifies:
- the number of overtime hours worked by the employee during each day; or
- when the employee started and ceased working overtime hours.
The Decision emphasised that simply because an employee does not receive a separate payment for any overtime hours worked (such as because they receive a salary for all hours worked) employers are not exempt from keeping records of those overtime hours actually worked, as employees still have an underlying entitlement to overtime for these hours under the Award.
Employee records must be in a form “that is readily accessible” to a Fair Work Inspector and “available” to an employee upon request. ‘Clock in’ and ‘clock out’ data is not sufficient to discharge an employer’s obligations to keep overtime records under the Regulations, as the number of overtime hours worked by an employee may not be deduced from this data, and the data was not “readily accessible”.
Further, as the Supermarkets did not have adequate records, a reverse onus of proof applies meaning that the Supermarkets have the obligation to prove that the employees did not work each of the hours they claim they worked (rather than the employees having to prove that they had worked the hours).
- Employer and employee agreements
Where an employer seeks to rely on an agreement with their employee to waive an entitlement under an award (such as an agreement for an employee to take time off in lieu instead of receiving a separate payment for overtime), the Court confirmed that it must be objectively clear that the employee understood at the time that they were aware of the specific entitlement they were giving up and agreed to waive it.
Employers can no longer simply provide an agreement to an employee in which they give up an entitlement. Rather, the Court found that for an employee to forgo an entitlement, the objective circumstances must indicate that the employee was aware that the entitlement existed. The Court provided the example of an employee agreeing to a roster with a 10 hour break between shifts, forgoing an entitlement to a break of 12 hours between shifts. For such an agreement, it would be necessary for the objective circumstances to show that the employee was aware that they had an entitlement and were agreeing to forego it.
- Required to work – authorised overtime
The Court considered when overtime is “required” to be worked under the Award such that overtime rates are triggered.
It found that overtime is not triggered where employees choose to adjust their hours for personal convenience (for example, leaving early and working later by choice). These are not additional hours required by the employer.
However, overtime can arise where additional hours are required under the employment contract – such as a requirement to work reasonable additional hours to complete duties. In this case, even if the employer had not explicitly directed an employee to work overtime, but this was an implied requirement under their contract, then overtime rates may still be applicable.
- Leave and rostered public holidays
The Decision clarified a longstanding ambiguity in relation to leave and rostered public holidays.
It determined that where authorised leave and public holidays are rostered but not worked by an employee, these non-worked periods constitute ‘hours worked’ for the purposes of roster and overtime provisions in the Award.
The rationale includes that if this were not the case, the non-worked periods must be made up elsewhere inside the roster, which is problematic.
This finding likely extends to other modern awards, although the Court noted that their findings that this aspect was dependent on the actual wording of the Award.
Looking ahead
This Decision resonates far beyond the retail sector, extending to employers who engage award-covered (and enterprise agreement covered) employees on salary arrangements, particularly those who work overtime and/or irregular hours. It is no longer the case that contractual set-off clauses provide undeniable protection from an underpayment claim. Rather, regular auditing is required to ensure that payments made in each pay cycle meet or exceed the minimum award/enterprise agreement entitlements, otherwise an underpayment risk may arise.
Given the doubt cast upon whether contractual set-off mechanisms are sufficient to absorb those entitlements, employers wish to consider returning to paying strictly in accordance with the applicable modern award to avoid a potential liability. Alternatively, some employers may consider whether top up payments are required for each individual pay period to ensure compliance, which would come at a commercial cost.
Questions may also arise around historical underpayments and the extent to which employers have adequate records to support their position. In some cases, employers may be exposed to backpay liabilities if entitlements have not been satisfied on a pay-period basis.
While it is likely that the Decision will be appealed, employers should review their contractual terms, payroll processes, and time-keeping systems to ensure that they align with the current legal position as per the Decision. This is particularly relevant in cases where employees are expected to work outside of standard hours, such as salaried managers.
HR Legal can assist employers seeking guidance on how the Decision may impact their contracts, payroll practices and record-keeping obligations.
- (Note: the Decision refers to the 2010 version of the Award, and as such the clause numbers referred to in this article are different to the clause numbers in the current 2020 version of the Award).
