On 5 September 2025, the Federal Court of Australia handed down its long-awaited decision in respect of the Fair Work Ombudsman’s (“FWO”) prosecution (and related class actions) against Woolworths and Coles. 1
The Court determined that employers are only permitted to “set-off” over-award salary payments against obligations arising under an award within the same pay period.
This insight summarises the key findings and take-aways from this significant decision.
Background
In 2021, the FWO commenced proceedings in the Federal Court of Australia against Woolworths and Coles regarding the alleged underpayment of salaried managers covered by the General Retail Industry Award 2010 (“GRIA”).
This litigation followed self-disclosures made to the FWO by the supermarkets.
The FWO’s subsequent investigations uncovered that the underpayments largely stemmed from the setting of annual salaries which were insufficient to cover minimum entitlements due to the managers under the GRIA, particularly overtime.
Set-Off
It is common for an employer and employee to agree to an arrangement whereby the employee is paid an above-award rate (such as an annual salary or an all-inclusive flat rate) which is inclusive of all monetary entitlements arising under an applicable industrial instrument, such as minimum rates of pay, overtime, penalties, loadings and allowances.
However, the period over which set-off can occur has been the subject of debate for some time now. The FWO’s general position is that employers need to pay their employees in full for each pay period in accordance with the applicable industrial instrument.
In this case, Woolworths relied upon a contractual clause which sought to set-off the annual salary paid to employees against any shortfall in GRIA entitlements across a 26-week period. Coles relied on five differently drafted set-off clauses.
Ultimately, Justice Perram rejected the “pooling” of payments across multiple pay periods and found that two payment obligations arose in each fortnightly pay period:
an obligation to pay a fortnightly instalment of the contractual annual salary; and
an obligation to pay amounts due under the GRIA each fortnight.
On this reasoning, “pooling” money across multiple pay periods (which was described by Justice Perram as an “accounting abstraction”) could not constitute payment in satisfaction of all GRIA entitlements falling due within a pay period.
Accordingly, the Court concluded that:
“… an employer is only permitted to set off over-Award salary payments against obligations arising under the Award within the same pay period. Put another way, an obligation to pay overtime in one payment cycle cannot be set off against payments made in excess of Award obligations in a later (or earlier) payment cycle.”
Record-Keeping
Another aspect of the FWO’s case was that Woolworths and Coles had failed to comply with their record-keeping obligations under the Fair Work Act 2009 (Cth) (“Act”). This refers to the obligation to keep details of entitlements such as loadings, penalty rates and allowances, as well as a record of the number of overtime hours actually worked.
Breaches of the record-keeping requirements of the Act attract separate financial penalties.
In response, Woolworths and Coles argued that they were relieved from their record-keeping obligations because they paid the managers an all-inclusive salary.
In the alternative, if it was found that Woolworths and Coles were required to keep records, it was argued that the employees’ roster and clock-in/clock-out data was sufficient.
Justice Perram rejected these arguments. Specifically, Justice Perram held that the requirement to record certain details under the Fair Work Regulations 2009 (Cth) (“Regulations”) is enlivened by the employee’s entitlement. How an employee is paid does not alter that requirement. The existence of a set-off clause similarly does not alter the requirement.
It was also held that raw roster and clock-in/clock-out data was not in a form that complied with the Regulations. In other words, even though roster and clock-in/clock-out data is necessary to identify overtime hours, the raw datasets do not constitute proper records for the purpose of the Regulations because a level of interrogation is required to distill this information.
These findings were relevant to section 557C of the Act which places the burden of disproving underpayment allegations on the employer. In relation to Coles, Justice Perram commented that “s 557C makes the ensuing evidentiary vacuum a calamity which belongs to Coles and not its employees”.
Key Takeaways
The significance of this decision is not limited to employers covered by the GRIA. Many of the provisions considered by the Court in this case arise in awards that apply in other industries and occupations, too.
As a result of this decision, all employers should:
Conduct a review of your salaried employees’ remuneration arrangements to ensure that they are sufficient to cover all entitlements due on a strict pay period basis.
Review your employment contracts in relation to set-off to confirm that the drafting remains appropriate in light of this decision.
Ensure that your record-keeping practices are compliant, even for employees paid an all-inclusive rate. Retaining roster data and clock-in/clock-out data alone will not be sufficient.
For employers in the retail industry, it will also be necessary to review the Court’s commentary on specific GRIA provisions to ensure that your pay rules and processes align with same.
The Court has not yet made a determination on compensation or penalties. We will be keeping an eye on the outcome of the case management hearing scheduled next month and if any appeal is lodged.
Please contact Cassie Burfoot, Director, Emily Gray, Senior Associate, or Jemma Andretzke, Lawyer, in our Employment & Workplace Relations Team if you have any questions about this decision in the context of your business and remuneration arrangements.
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.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.