On Friday 5 September 2025, the Federal Court of Australia handed down a significant employment decision. It has serious ramifications for employers who use annualised salaries to pay employees with Modern Award wages and conditions.
The Court determined that set-off clauses only operate lawfully pay-period to pay-period, not over the course of a year with an annualised salary 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.
Background & decision
Since 2021, the Fair Work Ombudsman (FWO) has been pursuing retail giants Woolworths and Coles for underpaying employees covered by the General Retail Industry Award 2010 (Award).
The Federal Court found that Woolworths and Coles had not been recording Award overtime and penalties for retail managers. This led to widespread and significant claims of underpayments which Coles and Woolworths had been rectifying.
Although Woolworths and Coles made over $300 million and $7 million respectively in remediation payments, both the FWO and class action applicants claimed much more was owing.
The key issue in the case concerned how Coles and Woolworths used "set-off" clauses in employment contracts to try and offset, or absorb by averaging, Award overtime and penalty rate entitlements.
What is a set-off clause?
A "set-off" clause allows employers to count salary payments toward fulfilling award entitlements like overtime or penalties. This has been a widely accepted practice for a long time.
However, the Federal Court has now found that 'set-off' clauses can only operate within a single pay period.
Employers cannot pool salary payments across months or a year to cover shortfalls in other periods.
This means that each pay cycle must independently satisfy all award obligations.
This case sends a clear message to employers - you must closely monitor all pay arrangements to ensure compliance with awards each pay period. You can no longer rely on broad salary structures to meet specific Modern Award entitlements averaged over a salaried year.
What this means for employers
Practically, if an employee is covered by a Modern Award, including that they fall under a classification set out in the Modern Award, an employer must calculate any entitlements owing under the Modern Award, and ensure they are paid for these entitlements, each and every pay period.
It is now practically very difficult to make annualised salary arrangements expressed to compensate employees for any entitlements owing under the Modern Award. It is difficult but not impossible. It is also inherently risky if not done properly.
It may be necessary to consider moving employees falling under Modern Award classifications onto a wages model rather than an annualised salary structure.
Employers can still pay employees a salary - and keep a set-off clause in the contract for good measure – but must have accurate time and attendance recording processes to ensure each pay period that any Modern Award-based entitlements are paid correctly based on actual time worked.
Woolworths is reported to expect after-tax liabilities to be as large as $530 million, on top of $486 million already repaid. Coles is reported to expect to pay $150 million and $250 million, including interest and costs such as superannuation, to resolve its underpayments. That is on top of the $31 million it already paid.
This case is a salient reminder that failure to pay correct Modern Award entitlements may land corporate employers at serious risk of significant back-pay civil penalty liability for each and every non-complying pay period.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
