On 5 September 2025, the Federal Court of Australia delivered a significant decision in proceedings against Coles and Woolworths concerning alleged underpayments of over 27,000 salaried store managers. The judgment provides important clarification on key employer obligations under the Fair Work Act 2009 (FW Act) and the Fair Work Regulations 2009 (FW Regulations).
The Court ruled that contractual salary ‘set-off’ arrangements can only discharge minimum payment obligations within a single pay period — not between pay periods. This has major implications for employers who rely on annualised salary arrangements to meet minimum award or enterprise agreement entitlements.
Background
The decision arose from four consolidated proceedings: two regulatory actions brought by the Fair Work Ombudsman, and two class actions by affected employees. All four cases centred on the same issue: Coles and Woolworths had engaged employees under annualised salary contracts without accurately tracking entitlements under the General Retail Industry Award 2010 (GRI Award).
Although both Coles and Woolworths conceded they had not paid employees in accordance with the minimum entitlements under the GRI Award, they disputed the interpretation of the GRI Award and employment contracts, and, consequently, the amount of compensation owed.
Set off clauses
Set-off clauses are a common drafting technique used in employment contracts where the employer and employee agree that an annual salary which exceeds the minimum payment entitlements compensates the employee for all entitlements under the applicable award or enterprise agreement.
Coles and Woolworths both had contractual set-off provisions which were intended to allow them to ‘bank’ overpayments in one pay period to cover any shortfall in the employer’s minimum payment obligations in a different pay period. The central issue was whether Coles and Woolworths could rely on these clauses.
The Court found that this approach was inconsistent with section 323(1) of the FW Act, which requires employees to be paid the full amount owed for work performed on at least a monthly basis. The Court held that only actual payments made within the relevant pay period can discharge the obligation under section 323(1) to pay employees in full.
The Court held that neither payments which have occurred in past pay periods, nor future payments, could be characterised as payments for a present pay period. That means a salary payment in excess of minimum payment obligations for one pay period cannot ‘pool over’ to satisfy an underpayment in later pay periods. The Court concluded that Coles and Woolworths’ set-off clauses were only effective to offset payment obligations within a single pay period.
Record Keeping
The Court also considered whether Coles and Woolworths breached record-keeping obligations under the FW Regulations:
- Regulation 3.33(3) requires that employers record any incentive-based payment, bonus, loading, penalty rate or other monetary allowance an employee is entitled to be paid (Pay Records).
- Regulation 3.34 requires that employers record the total number of overtime hours worked by an employee (Overtime Records).
Coles and Woolworths argued that Pay Records were not required to be kept because the all-inclusive nature of the wage and the set-off clauses meant that employees were never entitled to be paid any incentive-based payment, bonus, loading, penalty rate or other allowance. In the alternative, they argued that Pay Records were impossible to be kept under annualised salary arrangements because the relevant payments were not capable of being separately identified from the total salary.
The Court rejected both arguments, clarifying that the obligation to keep Pay Records is based on employee entitlements and not employer payment obligations. While set-off clauses operate to discharge an employer’s minimum payment obligations, they do not prevent the recording of employee entitlements.
The Court also determined that the Overtime Records requirement requires the records to be readily accessible to an inspector, capable of being copied and made available for inspection upon request. As such, while Coles and Woolworths argued that the overtime hours could be deduced from rosters and clocking systems, the Court found this to be inadequate.
Key Takeaways for employers
The Federal Court’s decision is likely to cause considerable disruption to employers relying on contractual set-off clauses and annualised salary arrangements to meet minimum payment obligations. Employers are on notice to review their employment contracts and their pay practices, to ensure that employees are paid their full entitlements for work performed in each and individual pay period.
The decision also reinforces the critical importance of strict compliance with record-keeping requirements under the FW Regulations. Employers must maintain readily accessible records of employees’ overtime hours and pay entitlements. Annualised salary arrangements will not exempt an employer of these requirements. We strongly recommend that employers review their current record-keeping practices.
We anticipate that there will be additional clarification from the courts following decision, and it is possible that on appeal the position of the Federal Court will be overturned or qualified. We encourage employers to monitor this space for future developments to ensure continued compliance with their payment obligations.
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