Key takeaway
- Set-off clauses and “all-in” salaries are no longer a safe shortcut; each pay period now needs to stand on its own.
- Record-keeping is critical: without accurate time and wage records, it is much harder to defend underpayment claims.
- Employers should review awards, contracts, timekeeping and reconciliation processes now to reduce the risk of long-tail underpayments.
Overview
A recent decision of the Federal Court in proceedings brought by the Fair Work Ombudsman against Woolworths and Coles has reshaped how employers should approach set-off clauses and “all-in” salaries for award-covered staff.
The Court confirmed that employers cannot rely on above-award payments in one pay period to make up for shortfalls in another. Each pay period must meet award entitlements, and record-keeping obligations still apply even where an annual salary is paid.
In a recent Workplace Relations Masterclass, hosted by our workplace relations Special Counsel, Adam Doughman, we unpacked the decision and what it means in practice for employers across industries. This insight summarises the key points and sets out practical steps employers can take now.
What did the Federal Court decide?
The case involved salaried managers employed by Woolworths and Coles under the General Retail Industry Award 2010. Both employers used contractual set-off clauses and annual salaries intended to cover all award entitlements, including overtime, penalties and allowances.
The Court held that:
- set-off clauses could only operate within the same pay period – over-award payments in one period could not be pooled and applied to shortfalls in another
- employees must be paid the award minimums (including penalties and overtime) for each pay period in which those entitlements arise
- paying an “all-in” salary does not remove an employer’s obligation to keep proper records of hours, overtime, penalties and loadings.
For many employers, this has significant implications for any arrangements that rely on averaged, annualised or “rolled-up” salaries.
High-risk and medium-risk awards: they are not all the same
One of the most important messages for employers is that not all modern awards deal with annualised salaries in the same way.
High-risk awards
Some awards do not include an annualised wage provision (for example, the General Retail Award and similar instruments). For these awards:
- set-off clauses may still be used, but each pay period must be award-compliant on its own
- employers cannot rely on the idea that things ‘average out’ over six or twelve months
- underpayments can accumulate quietly over time and later be pursued across multiple years.
Medium-risk awards
Other awards do permit annualised wage arrangements, but only if strict conditions are met. These usually include:
- a written agreement or confirmation
- clear outer limits on the hours covered by the salary
- detailed start / finish / break records
- regular reconciliations and top-ups within a specified timeframe.
Treating all awards the same – or assuming an ‘all-in’ salary can be used universally; risks building historic underpayments into your payroll system.
Record-keeping: no records, no defence
The Court also reinforced that employers cannot use an annual salary to sidestep record-keeping obligations.
For award-covered staff, that means:
- recording start times, finish times and unpaid breaks
- capturing overtime and penalty-rate hours, not just total hours
- managing ‘informal flexibility’ (extra hours at month-end, late-night logins) in a way that is transparent and documented.
Where records are incomplete or missing, courts and regulators are far more likely to accept the employee’s version of events about hours worked and entitlements owed.
We are seeing more employers move to digital time and attendance systems to:
- capture hours in real time
- reconcile annualised salaries against award entitlements
- respond quickly if concerns are raised by employees or the Fair Work Ombudsman.
IFAs and enterprise agreements: not a complete solution
In our masterclass, many employers asked whether individual flexibility arrangements (IFAs) or enterprise agreements could be used to ‘fix’ the risks highlighted by the decision.
In general:
- an IFA made under an award cannot leave an employee worse off overall than the award; if it does, it may be invalid and expose the employer to backpay claims
- enterprise agreements must still pass the ‘better off overall’ test for all current and hypothetical employees, including those who work regular overtime, weekends or public holidays.
Using IFAs or enterprise agreements simply to justify the same pooling and averaging of salaries that the Court criticised is unlikely to withstand scrutiny and may increase both financial and reputational risk.
Practical steps for employers
If your organisation uses ‘all-inclusive’ salaries for award-covered employees, the priority now is to understand your risk and develop a clear plan. Sensible steps include:
- Map your risk
- identify which awards apply, and which roles are award-covered
- distinguish between awards with and without annualised wage provisions
- review which employees are on ‘all-in’ salaries versus hourly or classified rates.
- Review contracts and set-off clauses
- check how pay periods are defined and how set-off clauses are drafted
- ensure contracts do not purport to override minimum award obligations
- consider whether current arrangements align with the Court’s approach to set-off.
- Improve timekeeping and wage records
- move away from ‘assumed hours’ or informal practices
- ensure time and attendance data is accurate, accessible and linked to payroll
- keep clear records of overtime, penalties and loadings, even for salaried staff.
- Introduce regular reconciliations
- for awards with annualised wage provisions, reconcile at least annually (many employers are moving to six-monthly)
- identify any shortfalls and make top-up payments promptly.
- Plan for issues before they arise
- consider how you will respond if an employee raises a concern about underpayments
- be prepared for potential Fair Work Ombudsman interest where systemic issues are identified in your sector.
Get ahead of underpayment risk
The Woolworths and Coles decision has implications well beyond retail. Any employer using set-off clauses or “all-in” salaries for award-covered staff should revisit their arrangements now.
RedeMont’s workplace relations team supports employers across government, corporate and private sectors to:
- review award coverage and pay structures
- stress test contracts, set-off clauses and flexibility arrangements
- design practical timekeeping and reconciliation processes that reduce risk.
To discuss how this decision may affect your organisation, contact our Workplace Relations experts.
