Set‑off rules rewritten: What the FWO v Coles and Woolworths decision means for employers

Annual salaries have long been used by Australian employers as a simple means to remunerate employees, including those covered by an award. However, the use of such annual salaries for award-covered employees is in the spotlight following a case in September 2025 involving the Fair Work Ombudsman (FWO) and Coles and Woolworths.

In one of the most significant decisions of 2025, the Federal Court held that employers must ensure that employees paid an annual salary receive their minimum award entitlements each pay period, and that employers cannot offset above-award payments in one pay period against underpayments in another pay period. This has significant implications for employers who rely on set-off clauses to pay annual salaries to award covered employees.

Federal Court proceedings

The Federal Court proceedings involved four matters heard in parallel, including enforcement proceedings brought by the FWO against Coles and Woolworths and class actions brought by employees of Coles and Woolworths. Broadly, the proceedings alleged that the supermarkets had underpaid a number of store managers and supervisors who were covered by the General Retail Industry Award (GRIA) as the supermarkets had failed to ensure the employees received their minimum award entitlements each pay period.

In defending the claims, Coles and Woolworths sought to rely on contractual set-off clauses which the supermarkets said allowed them to off-set annual salary payments against minimum award entitlements across multiple pay periods, and not just within the same pay period. The Woolworths contracts attempted to off-set annual salary payments against minimum award entitlements across a 26 week period, whilst the Coles contracts did not contain a time limitation for the set-off arrangement (i.e. presumably attempting to off-set across all pay periods).

The Federal Court rejected the approach of Coles and Woolworths, holding that an employer can only off-set annual salary payments against minimum award entitlements within the same pay period. In reaching this decision, the Federal Court relied upon the pay frequency provisions in GRIA which required award entitlements to be actually ‘paid’ either weekly or fortnightly, as well as section 323 of the Fair Work Act 2009 (Cth) (FW Act) which requires employees to be paid for the performance of work ‘in full’ at least monthly.

In addition to the significant finding regarding set-off clauses, the Federal Court also held that Coles and Woolworths had contravened the record-keeping obligations in the FW Act and Fair Work Regulations 2009 (Cth) to:

• keep records of any penalty rates, allowances or loadings that are payable (where an employee is entitled to be paid such entitlements); and
• keep records of the number of overtime hours worked each day (including start and end times of the overtime).

The supermarkets argued that they did not need to separately keep records of overtime hours, and penalty rates and allowances, as employees paid an all-inclusive annual salary in accordance with a set-off clause were not separately paid these amounts. In the alternative, the supermarkets argued that they had complied with the record-keeping obligations as the penalty rates and allowances payable, and the number of overtime hours worked, could be determined from the rosters and time and attendance records.

The Federal Court disagreed, holding that:

• the payment of an annual salary in accordance with a contractual set-off clause did not relieve the supermarkets of the above record-keeping obligations; and
• as the records needed to be ‘readily accessible’, employers could not rely on two different data sets to satisfy the record-keeping requirement, with the record instead needing to contain sufficient information for an employee to understand why the entitlement was being paid and how the payment had been calculated.

What to expect in 2026?

The Coles and Woolworths decision has (and will continue to have) significant implications for employers relying on set-off clauses to pay annual salaries to award-covered employees.

It is widely anticipated that there will be an appeal by Coles and Woolworths this year due to the significant financial implications of the initial judgment for the supermarkets (being an additional $500 million in underpayments for Woolworths and $250 million in underpayments for Coles).

However, in the meantime, pay period set-off is the ‘law of the land’, meaning that employers who pay annual salaries in accordance with a set-off clause for award-covered employees need to have systems and processes in place
to ensure that employees are receiving their minimum award entitlements each pay period.

Employers who set and forget annual salaries for award-covered employees are at high risk of underpayment claims, and breaches of record-keeping requirements. It is not enough to assume all is well because ‘we pay above-award’.

To mitigate against these risks, employers should consider:

• introducing a pay period reconciliation to ensure that the salary paid to an employee in a pay period is sufficient to satisfy minimum award entitlements;
• if a pay period reconciliation is not practical, then fixing the work pattern of award-covered employees, and calculating the minimum award entitlements for that work pattern to ensure the salary payments are sufficient each pay period to satisfy the minimum award entitlements;
• reviewing record-keeping practices for award-covered employees paid an annual salary, and making necessary changes to ensure that there is a sufficient record of overtime hours worked, and sufficient details of penalty rates, loadings and allowances that are payable;
• utilising annualised wage provisions in awards (such as the Hospitality Industry General Award 2020 and the Clerks –Private Sector Award 2020) as typically these allow for a yearly reconciliation of the annualised wage paid against minimum award entitlements; and
• reviewing contractual set-off clauses to ensure the drafting is sufficient to allow for pay period set-off of minimum award entitlements.