The Federal Court's recent decision in Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia; Baker v Woolworths Group Limited; Pabalan v Coles Supermarkets Australia [2025] FCA 1092 is a watershed development for employers in the retail sector and beyond.
The case, which involved both regulatory proceedings by the Fair Work Ombudsman (FWO) and class actions, offers important guidance on annualised salary arrangements, set-off clauses, record-keeping requirements, and the calculation of entitlements under the Fair Work Act 2009 (Cth) (FW Act).
While primarily focussing on the application of the General Retail Industry Award 2010 (Award), the Court's analysis of both the FW Act and common law principles of set-off, means the decision has application to all employees covered by modern awards, and potentially also to those covered by enterprise agreements.
Background
The proceedings concerned allegations that Woolworths and Coles had underpaid thousands of salaried managers and department heads by failing to ensure their annual salaries covered all Award entitlements, including overtime, penalty rates, and allowances. Both employers had made substantial remediation payments (over $300 million by Woolworths and $7 million by Coles), but the FWO and class action applicants argued that further sums were owed.
Key takeaways for employers
- Set-Off Clauses: Only Effective Within a Pay
Period
The Court held that set-off clauses in employment contracts, which purport to allow an employer to "absorb" Award entitlements (like overtime and penalties) into an annual salary, are only effective to the extent that they operate within the same pay period (e.g. weekly, fortnightly or monthly). Employers cannot lawfully "pool" over-award payments across longer periods (such as six months or a year) to offset underpayments in other periods. Each pay period must stand alone for compliance purposes. This was specifically held to include the obligation to pay any annual leave loading during the period when an employee is on annual leave. This set-off issue has been a long term contentious issue within the legal community, over which we now have certainty.
- Record-keeping obligations remain (even for salaried
staff)
The Court confirmed that employers must keep detailed records of hours worked, including overtime, even for employees paid an "all-inclusive" salary. Roster and clocking data alone are not sufficient unless they clearly specify the number of overtime hours worked and the relevant details required by the Fair Work Regulations.
- Burden of proof shifts where records are
inadequate
If an employer fails to keep proper records, section 557C of the FW Act shifts the burden of disproving underpayment allegations onto the employer. This can make defending claims extremely difficult.
- Agreements to vary award entitlements must be genuine
and informed
Where the Award allows for variation of entitlements by agreement (e.g., reducing the 12-hour break between shifts to 10 hours), the employer bears the onus of proving that a genuine, informed agreement was reached. Employees must be aware of the right they are giving up.
- Overtime and penalties: no double counting, but no
"pooling" either
The Court clarified that overtime and penalty entitlements are not cumulative unless expressly stated, but employers cannot "pool" payments or allocate them arbitrarily to different entitlements across pay periods. Each entitlement must be satisfied in the period it accrues.
- Remediation payments and compensation
Remediation payments made to address past underpayments are relevant to compensation but do not erase the original contravention. Employers cannot offset overpayments in some periods against underpayments in others for the purpose of avoiding liability.
What should employers do now?
- Audit your payroll and employment contracts for compliance with the Award and the FW Act.
- Ensure all Award entitlements are met in each pay period—not just "on average" over the year.
- Maintain robust, accessible records of hours worked, including overtime and breaks.
- Train managers and payroll staff on the importance of compliance and the risks of non-compliance.
- Seek legal advice before implementing or relying on annualised salary or set-off arrangements.
Conclusion
This decision is a timely reminder that compliance with the FW Act and Modern Awards is not optional or negotiable. Employers must be proactive in ensuring that their salary arrangements, record-keeping, and payroll practices are watertight. The risks of getting it wrong are significant, not only in terms of financial liability but also reputational harm.
If you have questions about your obligations or would like a compliance review, please contact our employment law team.
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.
