Annualised Salary Trap: What Employers Must Learn from Woolworths & Coles

In a landmark decision held by the Federal Court in September of 2025, Justice Perram has warned all employers that set off-clauses are not the ‘get out of jail free card’ they may have once believed them to be. 

In a jointly commenced class action against supermarket giants Woolworths Group Limited (Woolworths) and Coles Supermarkets Australia Pty Ltd (Coles) by the Fair Work Ombudsman, employees subject to annualised salary contracts alleged a total of $116 million in underpayment of wages and entitlements. The class members argued that the underpayments occurred due to Coles and Woolworths’ failure to ensure their set-off clause arrangements covered all available entitlements under the Retail Industry Award 2010 (Award). 

What is a Set-Off Clause?

A set-off clause is a common feature in any well-drafted employment contract, particularly where an employee is paid an annualised salary. The purpose of a set-off clause is to allow an employer to offset payments, entitlements or other benefits owed to an employee (e.g. penalty rates, overtime, allowances, loadings) under an industrial instrument i.e. Modern Award, or Enterprise Agreement, by way of a higher overall salary. In other words, instead of paying these entitlements separately, the employer “sets them off” against the total salary amount.

The set-off clauses contained in Woolworths’ and Coles’ employment contracts allowed each employer to pool the Award entitlements made over a respective 6-month and 12-month period to satisfy each Woolworths’ and Coles’ obligation to pay the entitlements owed to the class members under the Award. 

The Court determined that this was unlawful, referring to section 323(1) of the Fair Work Act 2009 (Cth) (Act). The Court clarified that employers must calculate and pay an employee’s entitlements “in-full” within each pay period, “at least [on a] monthly [basis]”, and cannot use overpayments in one pay period to fix underpayments in another. As such, set off clauses are only legally effective when they operate within the employer’s prescribe pay-period.

This meant that Woolworths and Coles had underpaid its employees. This followed each of these employers already having made significant payments to these same employees in excess of $300 million.

Record Keeping Obligations

The Fair Work Regulations (Regulations) 3.33 and 3.34 outline that employers must create and maintain particular records for each employee, including:

1. Rates of remuneration paid to an employee.
2. Gross and net amounts paid to an employee;
3. Deductions made from an employee’s gross pay;
4. Details of incentive-based payments, bonuses, loadings, penalty rates and other monetary allowances;
5. Number of overtime hours worked; and
6. When an employee starts and ends overtime hours.

The Court found that Woolworths and Coles had failed to keep records of their employees’ entitlements under the Award, arguing that annualised salary arrangements would not entitle their employees to additional payments for overtime, penalties etc. Rejecting this argument, the Court found that set-off clauses do not relieve an employer from their record-keeping obligations under the Act and the Regulations.

Importantly, the Court indicated that standard ‘clock-in and clock-out’ timesheets provide roster details, however this is not sufficient record-keeping to satisfy regulation 3.34. More detailed and readily available records are required.

Key Takeaway for Employers

This decision potentially exposes employers to an increased risk of liability for underpayments of wages and other entitlements. It should be noted that Coles and Woolworths have appealed the decision, pending a final judgment. However, until then, this decision remains effective. With increased scrutiny from regulators and a likely rise in underpayment claims, now is the time for employers to act.

Addressing these issues properly requires a legal review of your employment contracts, payroll systems, and record-keeping practices. Proactive compliance now can help mitigate risk and avoid costly disputes later. 

Our team of experts can assist with:

• Reviewing and updating employment contracts.
• Auditing payroll and record-keeping systems for compliance with the Act and Regulations.
• Advising on technology solutions to improve timekeeping and data capture.
• Supporting remediation strategies and workforce communications where underpayments may have occurred.

*Prepared by Isabella Turner with the assistance of Mia Topen.