Records and remuneration: the compliance duo that employers can’t ignore
On 5 September 2025, the Federal Court of Australia handed down an important decision in relation to alleged systemic underpayments of salaried managers at Woolworths and Coles.[1] The decision involved four separate proceedings which were heard in parallel: two enforcement actions by the Fair Work Ombudsman (FWO) and two class actions brought on behalf of affected employees.
The managers were covered by the General Retail Industry Award 2010 (Award) but paid annual salaries under individual employment contracts containing common law set-off clauses. A key issue was whether the annual salary met all minimum Award entitlements.
The Court determined that Woolworths and Coles cannot use their contractual annualised salary arrangements as a mechanism to offset Award entitlements, other than within a specific pay period. The decision is a timely reminder for employers to review the use of annual salaries and set off arrangements and to ensure that records are correctly maintained.
Set-off and contractual construction
A well-drafted set-off clause in a contract of employment allows an employer to make a payment to an employee that is higher than the applicable minimum rate of pay in satisfaction of the different payment obligations that arise under a modern award or enterprise agreement. Employers regularly use set-off clauses and annual salaries to discharge their obligations to pay an employee their entitlements under an industrial instrument.
In this case, a central question for the Court was whether these contractual terms permitted the employers to off-set an underpayment in Award entitlements in one pay period against an overpayment in Award entitlements in another pay period. Both Woolworths and Coles claimed that this arrangement was acceptable under the terms of their employment contracts. Woolworths’ set off clause claimed to permit off-setting over a 26-week period, where Coles’ set-off clause provided that the annual salary was in satisfaction for all Award entitlements payable that year. The FWO, on the other hand, argued these set-off clauses were contrary to the Fair Work Act 2009 (Cth) (FW Act) and the Award.
The Court held that the relevant set-off clauses could not lawfully operate across multiple pay periods, and that such clauses could only satisfy Award obligations within the same pay period in which the salary is paid. The Court relied on section 323(1) of the FW Act in support of this position, which requires employers to pay employees in full (except as allowed under section 324) for work performed, and to do so at least monthly.
The practical effect of the decision is that paying an annual salary is not a free pass to cover all Award entitlements unless the requirements in each pay period are fully met. While the decision is confined to the particular set-off clauses considered in the proceedings, the Court observed that it was doubtful that a set-off clause could ever be drafted in a way that would allow an employer to off-set shortfalls over a longer period.[2]
Employers should review their existing contracts to consider the operation any set-off clause. Employers should adopt a prudent approach to ensure that Award requirements are met every pay cycle to avoid underpayments.
Record keeping and section 557C of the Fair Work Act
The Court confirmed that paying an ‘all-inclusive’ salary does not waive the legal requirement to keep proper employee records under section 535(1) of the FW Act.
Woolworths and Coles were required to record the details of any loadings, penalties or allowances the managers were entitled to, as well as the overtime hours they worked, even though those entitlements were absorbed into an annual salary.
Neither company kept such detailed records and instead, in the case of overtime hours, relied on roster records or informal clocking data. The Court held that roster and clocking data are not records for the purposes of reg 3.33 and reg 3.34 of the Fair Work Regulations 2009 (Cth) (FW Regulations) and there was a breach of section 535(1) of the FW Act.
For allegations of underpayment from 15 September 2017 onward, the employer bears the burden of disproving each claim if the relevant records are missing or inadequate.[3] Since the Court found that the required records were not kept, the burden of proof shifted to the employer under section 557C of the FW Act . As a result, Coles and Woolworths are required to disprove the FWO’s underpayment claims for periods where proper records were missing.[4]
Agreements to vary Award entitlements
Many industrial instruments contain provisions which allow for the employer and employee (or a majority of employees) to vary the terms of an entitlement under the applicable industrial instrument by ‘agreement’.
In this case the Court examined whether employees had genuinely agreed to modify certain Award entitlements, and who bears the onus of proving any such agreements. Woolworths and Coles asserted that managers implicitly agreed to waive some Award conditions (ie by starting early, working through breaks or taking time off instead of overtime pay). The FWO argued there was no clear, informed consent from the employees.
The Court set a high bar for proving an employee agreed to forego an Award right. In general, an employee can only give up an Award entitlement through clear and mutual agreement, with the employee being aware that the entitlement existed and understanding the specific right being forfeited. The employer bears the burden of proving such an agreement was made. Without a proven agreement, the default Award provisions remain applicable, and any shortfall must be paid to the employee.[5]
In practice, employers should obtain explicit, informed consent from an employee (ideally in writing) if they wish to vary any entitlement under an industrial instrument (where such variation may be agreed upon). A blanket policy or an implied understanding is not enough.
Award entitlements and overtime calculations
The Court clarified several technical points about how specific provisions under the Award operate, particularly in determining when overtime or penalties are payable. Notably, the Court confirmed that:
- If an employee was rostered to work certain hours but did not due to approved leave or a public holiday, those rostered hours still count as if worked for the purpose of applying the Award’s working time thresholds.[6] In practical terms, this means that taking a day of leave or a public holiday does not reset or reduce the employee’s accumulation of hours for the calculation of overtime.
- Under the Award, overtime entitlements are not cumulative. Once overtime rates are triggered by any one condition, all further hours beyond that point are at overtime rates, regardless of other triggers. In other words, an employee should not be paid multiple overtime penalties for the same hour of work.
- Overtime under the Award should apply as soon as any qualifying condition is met (ie employers cannot manipulate the sequence of hours to delay overtime).[7]
Key takeaways for employers
- Annual salaries are not a free pass: Paying an annual salary does not allow an employer to ignore entitlements under an industrial instrument. It is unlikely that any contractual set-off arrangement will allow an employer to set-off entitlements across multiple pay periods. If a given pay period’s salary does not cover all overtime, penalty rates, loadings or allowances earned in that period, the shortfall is an underpayment that must be rectified.
- Ensure set-off clauses are effective: the terms of a set-off clause are crucial. Employers should review their existing employment contracts to ensure that set-off clauses are framed properly.
- Keep proper records: an ‘all-inclusive’ salary does not exempt an employer from the record keeping obligations under the FW Act and FW Regulations. Employers must record employees’ hours worked (including any overtime) and their entitlements.
- Record in writing any variation of industrial instrument conditions: if you want a salaried employee to forgo an entitlement under an industrial instrument (where such a variation can be agreed upon), you need their clear and informed agreement, preferably in writing. Without a documented agreement, the employee retains the right to claim the entitlement later, and any ‘understood’ or implied waiver will not be enforceable.
- Monitor hours and roster compliance: ensure that salaried staff still receive all minimum breaks, rest periods and days off as required by the applicable industrial instrument. If they work beyond those limits or on days that incur special rates, you must ensure any salary is sufficient to meet the applicable overtime or penalties.
Our team can assist if you require assistance with preparing or updating employment contracts to ensure it contains an appropriate set-off clause, as well as identifying or remediating any underpayment(s).
We can also assist you to assess whether other methods such as individual flexibility arrangements, annualised wage arrangements or guarantees of annual earnings can help meet award obligations. Such options can be complex and may not be a practical solution in all cases.
This article was written with the assistance of Vanessa Torrisi, Law Graduate.
[1] 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.
[2] Ibid [66].
[3] Ibid [124].
[4] Ibid [127], [143]-[145] and [159].
[5] Ibid [192], [194] and [200]-[201].
[6] Ibid [386].
[7] Ibid [700], [711] and [715].
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