The Federal Court has ruled that contractual set-off clauses in employment contracts operate only within the same pay period and that payments made in one pay period cannot be applied to discharge award entitlements arising in another.
The judgment in Fair Work Ombudsman v Woolworths Group Limited; Coles Supermarkets Australia Pty Ltd [2025] FCA 1092 also clarifies record-keeping and overtime obligations under the Fair Work Act 2009 and the Fair Work Regulations 2009.
Background
On September 5, 2025, the Federal Court delivered its decision in the case. The proceedings, brought by the Fair Work Ombudsman (FWO) and supported by class action claims, addressed the legal operation of set-off clauses and record-keeping obligations under the FW Act and Regulations.
Both Woolworths and Coles employed salaried managers under contracts which purported to satisfy all entitlements under the General Retail Industry Award 2010, including overtime, penalty rates and allowances. The contracts calculated compliance by averaging over extended periods (26 weeks for Woolworths and 12 months for Coles).
The FWO alleged that this practice breached section 45 of the FW Act, by failing to pay employees in accordance with the Award, and section 323(1), which requires that employees be paid in relation to the performance of work in full. It also alleged failures to keep required employment records in accordance with section 535 and regulations 3.33 and 3.34.
Court’s Findings
1. Set-off clauses can only operate within the same pay period
“It is unlikely that payments which have occurred in past pay periods can be characterised as payments for the purposes of the Award. For the same reason, I think it unlikely that payments in the future can be characterised as payments in the present pay period either,” the court found.
His Honour found that the averaging methods used by Woolworths and Coles were inconsistent with section 323(1), when read together with the Award, because that provision requires employees to be paid in full in relation to the work performed and those payments must correspond to the pay period in which the work was done.
The Court interpreted Woolworths’ clause as operating only on a fortnightly basis, in-line with its pay cycle, and found Coles’ clauses valid only to the extent that they applied to entitlements within the same pay period.
Justice Perram also found contraventions of section 535(1) of the FW Act and regulations 3.33 and 3.34 of the Regulations, which require employers to keep accurate and accessible records of hours worked, loadings, penalty rates, allowances and overtime.
The Court found that Woolworths’ reliance on roster and clocking data was inadequate. Justice Perram held that these records did not establish compliance with the requirements in regulations 3.33 and 3.34 to keep records of actual hours worked.
Because of those deficiencies, the evidentiary presumption under section 557C of the FW Act applied, placing the burden on the employer to disprove underpayment.
2. Overtime
The Court confirmed that overtime provisions under the Award are engaged when employees are effectively required to work beyond rostered hours, even if not expressly directed to do so.
The existence of a contractual term referring to “reasonable additional hours” does not prevent overtime obligations arising where systemic work practices compel additional hours.
Justice Perram found that under the managers’ contracts of employment, which required them to work additional hours reasonably necessary to perform their duties, the workloads and management expectations in practice meant that those additional hours were worked at the employer’s requirement for the purposes of clause 29 of the Award. As a result, the overtime provisions were engaged.
3. Award Variations By Agreement
The Court also considered variations to Award conditions permitted by agreement, such as reduced breaks between shifts.
Justice Perram held that the employers had not established the existence of genuine agreements as required by the Award. Evidence that employees worked altered shifts was insufficient to prove consent.
The employers bore the burden of showing that any such agreement was made voluntarily and with an understanding of its effect, for example the employee being aware of the right or entitlement they forego.
Implications For Employers
The decision has significant implications for employers who rely on above-award salaries or set-off clauses to meet award obligations.
> Pay Period Compliance: Set-off clauses can only operate within each pay period. Averaging over longer periods is inconsistent with section 323 of the FW Act and awards.
> Set-Off Clauses: Clauses must clearly identify the award entitlements they are intended to satisfy and operate by reference to actual payments made under the contract.
> Record-Keeping: Employers must maintain detailed, contemporaneous records of actual hours worked and entitlements paid. Rosters and clocking data alone are insufficient.
> Annualised Salary Arrangements: Employers may consider adopting annualised wage provisions contained in awards, noting their detailed record-keeping and reconciliation requirements.
> Overtime Practices: Employers must ensure that workloads and rostering practices do not give rise to unrecorded overtime obligations.
> Award Variations: Any variation permitted under the award must be supported by written and informed employee consent.
Next Steps
Pending any appeal, the reasoning of the Federal Court represents the current position on the operation of set-off clauses and related compliance obligations under the FW Act. Employers should:
> Audit employment contracts to identify and amend non-compliant set-off clauses.
> Reassess the use of annualised salary arrangements to ensure they comply with the relevant award provisions.
> Upgrade payroll systems to ensure entitlements are reconciled per pay period and supported by accurate records.
> Strengthen internal policies governing overtime approval, award variations and employee consent documentation.
Failure to take these steps may expose employers to contraventions of sections 45, 323 and 535 of the FW Act and the reverse evidentiary burden under section 557C.
Note On Appeal
At the time of writing, no appeal has been determined. Given the decision’s implications across industries that rely on above-award remuneration, further appellate consideration is possible. Employers should monitor developments closely.
Contact Employer Assist
If you need assistance, please contact Employer Assist on (07) 3376 6266 or hvia@employerassist.com.au.