The Federal Court’s recent decision in the long-running Coles and Woolworths underpayment litigation has some clear warning for employers
The Federal Court’s recent decision in the long-running Coles and Woolworths underpayment litigation, is a clear warning to employers in relation to how they are using and relying on common law ‘set-off’ clauses, as well as the importance of complying with statutory record-keeping obligations.
While the decision may be appealed, it is likely to have significant, immediate implications for the many Australian employers who use annualised salaries and common law set-off clauses, particularly for Award-covered staff. Businesses should revisit their current payroll and record keeping practices in light of the decision, and ensure they are compliant.
What was the decision about?
The decision in Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092 involved the consideration of common issues in underpayment proceedings commenced by the FWO against Coles and Woolworths, as well as class actions concerning similar allegations.
What were the clauses in the contract?
A key question in the FWO proceedings arose with respect to a number of contractual set-off clauses, and whether they could be applied to satisfy entitlements under the General Retail Industry Award. The set-off clauses were broadly drafted, using language that is commonly found in many precedent employment contracts.
The Woolworths set-off clause provided that ‘as far as possible’, the employee’s remuneration and other benefits under the contract would satisfy the employee’s minimum entitlements over a 26 week period, including any amounts arising under the NES or an industrial instrument.
Among the five different Coles set-off clauses considered, two made reference to the employee’s salary as being compensation for or satisfying, “all entitlements” that were payable under an industrial instrument.
What did the Court say about contractual set-off?
The Court recognised established principles with respect to common law set-off, including that employers are able to make contractual payments to also discharge their Award obligations. However, Justice Perram stated that the relevant Award provisions require employers to ‘pay’ the specified entitlements and accordingly, can only be discharged by payment.
His Honour was not satisfied that the set-off clauses in question identified any relevant payments for this purpose. Rather, they sought to satisfy these obligations by reference to a notional ‘pool’ of excess entitlements, which could be drawn on in the event of any shortfall between pay periods. Justice Perram expressed doubt that such a clause could be redrafted to allow past or future payments under a contract to be characterised as a payment under an Award.
Ultimately, the Woolworths clause was interpreted to allow the set-off in part, against the Award obligations arising on a fortnightly basis (i.e., in each pay period). In light of concessions made by the FWO, Coles was also able to set off the Award obligations in part. However, Justice Perram observed that the lack of similar words of limitation (i.e. ‘as far as possible’), may evidence an intention that a set-off clause can only operate if it wholly satisfies all relevant Award entitlements.
Record-keeping obligations
Another key lesson from the decision relates to employer record-keeping obligations under section 535 of the Fair Work Act 2009, and Regulations 3.33 and 3.34.
The Court affirmed that these obligations apply to employees who are paid by way of an annualised salary. Further, the Regulations require that a record must be in a form that is readily accessible to an inspector, capable of being copied and made available to an employee. This meant that roster records (e.g. contained in the Kronos system) and clocking data, were insufficient to satisfy these requirements, nor did directions to employees to clock in and out, comprise ‘records’.
Importantly, section 557C also provides that, in circumstances where records are not provided and an allegation is made about the contravention of a civil remedy provision, the employer has the burden of disproving the allegation. However, the provision had limited application to Woolworths in the circumstances, given the number of key facts that had already been agreed with the FWO.
Key takeaways
In essence, the decision provides that:
- An Award entitlement can only be satisfied by way of an identifiable payment.
- Any set-off can only operate within the payment period specified in an applicable Award. Employers are unlikely to be able to rely on a pool of notional over-Award salary payments occurring in other periods, to remedy any shortfall.
- An annualised salary does not displace the obligation to keep clear records of all hours worked (including any overtime), and any other prescribed amounts that are due in each pay period.
Employers should review their pay and record-keeping practices, particularly for any Award-covered employees who are remunerated by way of an annualised salary. A ‘set and forget’ approach, even for highly paid employees, is problematic.
Employers may also wish to explore alternative options, such as utilising Award-based annualised wage provisions (where available), seeking to enter into individual flexibility arrangements, or negotiating an enterprise agreement. None of these options are straightforward, and their suitability should be carefully considered in the context of the business and composition of the workforce.
Gella Rips is a Director and Principal at Workdynamic Australia. She has more than 14 years of experience in employment law and industrial relations, and advises on Award and payroll compliance, transfer of business, contract and policy development, restraint of trade, enterprise bargaining, restructures, managing ill and injured workers, workplace investigations and executive terminations. Gella has acted for clients in various state and federal courts and tribunals, and regularly conducts workplace training on discrimination, bullying, sexual harassment and effective grievance resolution.
