EMA Note

On 5 September 2025, the Federal Court confirmed that annual salaries under employment contracts can only set off entitlements in a single pay period. The Court also confirmed that despite paying employees an above-Award annualised salary, employers must keep detailed records of applicable loadings, penalty rates, and overtime¹. 

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Set-off Clauses

The case concerned allegations by the Fair Work Ombudsman (together with employees represented in a class action) that Woolworths Group and Coles Supermarkets Australia underpaid thousands of salaried managers covered by the General Retail Industry Award 2010. The employment contracts contained set-off clauses attempting to satisfy all minimum entitlements made over a 26 week period (Woolworths) or a 12 month period (Coles).

However, the Court confirmed that an employer is only permitted to set off over-Award salary payments against obligations arising under the Award within the same pay period². Employers must pay their employees in full for each pay period, in accordance with the applicable Award, Enterprise Agreement, or the Fair Work Act 2009 (Cth) (FW Act)³.

Employers cannot offset an underpayment in one pay period against an overpayment in another period. Each pay period must stand alone.

Record-Keeping Requirements 

The Court also clarified the extent to which employers are required to keep employee records under the FW Act and the Fair Work Regulations 2009 (Cth).  

Woolworths and Coles both failed to maintain adequately detailed employee records. The companies took the position that because entitlements were being offset against annual salaries, employees were not entitled to separate payment of those amounts and therefore they were not required to keep detailed records.

The Court held that set-off clauses do not waive the legal requirement to keep proper employee records, and roster records and clocking data are insufficient to satisfy record-keeping obligations.

Employers must record:

• Overtime hours worked each day (separately recorded, not just total hours or rostered hours)
• Start and finish times of overtime if penalty rates or loadings apply
• Details of penalty rates, loadings, and allowances with sufficient information for employees to understand why and how payments were calculated

These records must be maintained in one data set that is readily accessible to an inspector or employee if requested, and capable of being copied.  

Failing to keep employee records triggers the ‘reverse onus’ under section 557C of the FW Act. This means that the employer will bear the onus of disproving underpayment claims made by their employees. Without proper records, this is extremely difficult or impossible for an employer.

Payroll Reconciliation

Employers must now ensure payroll systems are configured so that reconciliation occurs in every pay period to ensure salaried employees are paid at a level that meets or exceeds award entitlements due in that pay period, including minimum wages, overtime, penalties and allowances.

What Employers Should Do Now

1. Review employment contracts – ensure set-off clauses only operate within individual pay periods, not across multiple periods.
   
2. Conduct reconciliations – to calculate award entitlements payable over each relevant pay period and remediate underpayments.
   
3. Review and configure payroll systems – to ensure salaried employees receive payments meeting or exceeding their entitlements for that period, including minimum wages, overtime, penalties, and allowances.
   
4. Maintain comprehensive records – detailed, accessible records in one source, showing daily overtime hours, start and finish times for overtime, and applicable penalty rates or allowances.
   
5. Provide managers training – to understand correct overtime authorisation procedures and ensure accurate recording of working hours.

Require further information/assistance?

EMA Consulting offers tailored training programs to strengthen your workplace capability, including Whistleblowing. You can find out more about this course at: https://emaconsulting.com.au/aged-care-whistleblowing/
 
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This EMA Note is not comprehensive advice about your situation and does not cover all your obligations.  If you require further information or advice, please contact your Consultant.

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. As above, para 568. ↩︎
3. Fair Work Ombudsman Payroll Remediation Guide, April 2025, p 16 ↩︎