The Federal Court provides guidance on annual salaries, ‘all-in’ rates of pay and wages compliance

Acknowledgements to Melinda Bell and Lyndel David for their contributions.

• Introduction
• Background
• What is a set-off clause?
• The Court's findings
• Other interesting issues
• Key lessons for employers

Introduction

On Friday, 5 September 2025, the Federal Court of Australia (Court) issued an important decision in Fair Work Ombudsman v Woolworths Group Limited & Ors [2025] FCA 1092 (FWO v Woolworths). The decision offers guidance to employers on how to ensure compliance with their legal obligations under modern awards, when using "annualised" salaries or all-in rates of pay with award-covered employees.

This decision is significant because it invalidates aspects of a common practice for Australian employers. The Court ruled that annual salary payments can only legally be set off against modern award entitlements that accrue within the same pay period (ie weekly or fortnightly, in this case).

This is a major obstacle to the widespread practice of relying on longer review or "reconciliation" periods to ensure wage compliance. Employers should take steps to review their use, including to ensure that salaries adequately remunerate employees for entitlements owing under industrial instruments in each pay period.

Background

The case involved four separate proceedings, heard together due to their similar nature.

In June 2021, the Fair Work Ombudsman (FWO) commenced proceedings against Woolworths Group Limited (Woolworths) and Coles Supermarkets Australia Pty Ltd (Coles) in relation to underpayments of their salaried managers working in supermarket and metro stores. In parallel, two class actions were initiated by employees against the same companies, Baker v Woolworths Group Limited and Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092.

The central allegation was that Woolworths and Coles had underpaid thousands of employees by failing to ensure their annual salaries covered all entitlements, such as overtime, penalty rates, and allowances, under the General Retail Industry Award 2010 (Award). Both companies had already made remediation payments, with Woolworths paying over $300 million and Coles over $7 million. However, the FWO and the class action applicants argued that more was owed because of a disagreement over the interpretation of set-off clauses in contracts and the Award itself.

What is a set-off clause?

In certain circumstances, employers covered by a modern award may absorb specific pay entitlements - such as overtime or penalty rates - into 'over award' payments provided under an employment contract. This arrangement, known as a 'set-off' clause, is often implemented by paying an annual salary which is set at a higher rate than the sum of the minimum wages set by the modern award and all other monetary benefits the modern award provides.

An example of the relevant clause from Woolworths' contracts is:

"If at any time you are entitled to any payment or other benefit as a consequence of the Employment (whether under legislation, an industrial instrument, the National Employment Standards or otherwise) including, without limitation, minimum hourly rates, penalties, overtime, allowances such as meal allowances and loadings such as annual leave loading (Minimum Entitlements), you agree that:

(a) as far as possible, the Remuneration and other benefits under this Agreement will be in satisfaction of the Minimum Entitlements over a 26 week period calculated at the applicable minimum rate:

(b) the Minimum Entitlements do not form part of this Agreement.

As part of this, your Base Salary and any allowance outlined in your Letter of Offer includes payment for:

(a) all hours you work over a 26 week period (whether part of your ordinary working hours or not):

(b) public holidays and substitute public holidays (whether you work on those days or not)."

The contracts used by Coles included a number of variations, including more or less detail, but did not include the 26-week "pooling" period. One such clause was as follows: "Your cash salary includes compensation for all entitlements, benefits or payments that might otherwise be due under any industrial instrument."

Contractual set-off clauses differ from the 'annualised wage' provisions under modern awards, with the latter requiring very detailed compliance steps to be taken, with less flexibility than a common law set-off clause.

The Court's findings

Justice Perram made several key rulings that have broad implications for employers.

Annualised salaries and set-off

The Court addressed the set-off clauses in the Woolworths employment contracts, which attempted to "pool" over-Award payments across a 26-week period to satisfy all entitlements payable under the Award. The Court found this to be an "accounting abstraction" rather than a true payment that could legally discharge the monetary obligations under an industrial instrument. The Court determined that a payment can only discharge an entitlement if it is made in the same pay period in which the entitlement arises.

To avoid an "absurd situation" where Woolworths would have to pay an employee's full salary and all Award entitlements on top of that, the Court reinterpreted the set-off clauses. It construed the reference to the "Remuneration"to mean "the payment of the Remuneration,"which tied the set-off to the actual fortnightly or monthly payments made. This validated the general approach to set-off, but limited its operation to a single pay period.

Employee records

The Court held that paying an "all-in" annual salary does not relieve employers of their legal duty to keep proper records. The Court found that Woolworths and Coles failed to keep records specifying penalty rates, loadings, and overtime hours as required by the Fair Work Regulations 2009 (Cth) (FW Regulations).

This failure to comply with record-keeping obligations under section 535 of the Fair Work Act 2009 (Cth) (FW Act) had a significant consequence - it triggered section 557C of the FW Act, which shifts the burden of proof to the employer to prove the factual matters on which the underpayment claim is based. This meant that the employers were required to disprove the FWO's factual allegations of the underpayment, rather than the FWO having to prove them.

Compensation under the FW Act

The court considered how compensation should be calculated under section 545 of the FW Act, which allows for orders awarding compensation for "loss that a person has suffered because of the contravention".

The Court rejected both employer's argument that they should be able to offset an employee's underpayments in one period with over-Award payments made in other periods. The Court's reasoning was that the over-Award payments in one pay period could not be used to reduce the employers' liability for a separate failure to pay an Award entitlement in another pay period.

The Court similarly rejected the use of bonus payments to offset underpayments, noting that these were separate entitlements and not causally connected to the underpayment.

Other interesting issues

In the decision, the Court also engaged with several other interesting issues in the context of wage compliance.

Agreements under the Award

Modern awards often provide for the variation of entitlements by agreement with employees, as was the case with various relevant entitlements under the Award that impacted the pay outcomes for employees in the proceedings.

In taking a very practical approach, the Court held as follows:

"As a matter of ordinary language there will be an agreement (or the parties will agree) where the objective circumstances indicate that the employer and the employee have reached a consensus ad idem on the subject matter of each clause; that is to say, there should be a meeting of the minds."

(See paragraph [193]).

The issue then turned to who in the proceedings had the obligation to prove the existence of an agreement. The Court held that, where the proof of the agreement was part of proving the contravention of the Award, the FWO or class action applicants bore the onus of proving the existence of the relevant agreement. Whereas, if the existence of the agreement was being relied upon as a defence to an alleged underpayment, then the employers bore the onus.

This adds another layer of complexity for employers, as each clause or entitlements needs to be considered to identify who bears the onus of proof. The practical implications that flow from this issue is the importance of thorough record keeping to ensure that employers are able to prove the existence of an agreement, where necessary.

Requirements to work overtime

The Court found that a general requirement to work reasonable additional hours included in an employment contract could be sufficient to constitute an employer's "requirement" to work overtime.

However, the Court also clarified that an employee's entitlement to overtime is not automatically triggered by voluntarily working extra hours for personal convenience. Overtime is generally payable when an employee works hours that are "reasonably necessary to perform their duties".

The keeping of proper records

The Court found that reliance on an employee's "logon/logoff" or "clocking" data and roster information was insufficient to meet the detailed record-keeping requirements under the FW Regulations. The court reasoned that records must be readily accessible and must specifically state the details of entitlements, not just provide raw data that an inspector would have to interpret or deduce.

This finding underscores that employers need to have systems that actively track and record specific entitlements, not just total hours worked.

Methodology for underpayment Calculations

The Court approved a methodology for calculating underpayments for employees where records were incomplete or missing.

The FWO and employers agreed that a statistical approach was necessary, but disagreed on the specific figures. The Court ultimately found that it was appropriate to use an average overtime figure derived from a subset of employees with complete records and apply it to those with incomplete records.

This case provides a precedent for using data-driven methodological approaches in underpayment cases where complete records are unavailable and the situation in which this will be an acceptable approach.

Key lessons for employers

This decision is a reminder for Australian employers, particularly those in retail and other industries that commonly use annualised salaries. To ensure compliance, employers should take the following steps:

Step	Action items
Review set-off clauses	Ensure any contractual set-off clause links salary payments to the satisfaction of all relevant entitlements under the relevant award.
Conduct regular reconciliations	Implement a system to conduct regular reconciliations of an employee's actual hours and entitlements, and ensure that any shortfalls are identified and rectified immediately.
Detailed record-keeping	Maintain accurate records that comply with the requirements of the FW Regulations.
Understand overtime and penalty rate obligations	Ensure your policies clearly define what constitutes reasonable additional hours, when overtime is required and how these hours are compensated.

Finally, set-off and award entitlements often give rise to complex interpretive and practical issues. Our expert team, across Australia, is able to assist minimise the legal risks of any employment practices impacted by this decision.