What the Coles & Woolworths Underpayment Decision Actually Means for Employers

Annualised Salaries and Set-Off Clauses: What the Woolworths and Coles Decision Means for Employers

On 5 September 2025, Justice Perram of the Federal Court handed down judgment in four related proceedings against Woolworths and Coles. Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd; Baker v Woolworths Group Limited; and Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092.

The proceedings concerned alleged underpayment of store managers and other salaried staff employed under the General Retail Industry Award 2010 of around 19,000 Woolworths employees (covering 17 June 2015 to 30 September 2019) and 8,767 Coles employees (covering 1 January 2017 to 31 March 2020), with the parallel class actions covering an even longer stretch back to 2013.

This case is significant for all employers who pay staff an annualised salary or ‘total salary’, intended to cover the employee’s award entitlements because the question considered where an employee is paid more than the Award requires in one period, can that surplus be used to offset a shortfall in a different period which is how employers usually intend to rely on set-off clauses.

What was in dispute

Both Woolworths and Coles paid store managers an annual salary ‘in satisfaction of’ the employees minimum Award entitlements, calculated and reconciled over periods of up to six months. Where an employee's award entitlements exceeded their salary in one fortnight, the employer's position was that a surplus generated in a different fortnight, within the same six-month block, could make up the difference.

The Fair Work Ombudsman argued that this approach breached section 323(1) of the Fair Work Act 2009 (Cth) (FWA), which requires an employee to be paid their full entitlements at least monthly. Both retailers had already made substantial remediation payments before the hearing (Woolworths over $300 million and Coles over $7 million), but the parties disagreed about whether more was owed, and that disagreement turned on how these set-off arrangements should be read.

What the Court decided

The six-month pooling model was rejected the Court confirmed in accordance with section 323(1) of the FWA, employees must receive payments for work performed in full, in the applicable pay period and as proper payments. Each individual payment to an employee could only discharge the Award obligations that fell due in that same pay period, not obligations arising earlier or later in the six-month block.

For Coles, several of the sample employees had no written contract term permitting set-off at all, and the Court declined to imply one, noting that a term is only implied where it is ‘so obvious that it goes without saying’. This was a high bar that this arrangement did not meet.

The practical effect means a surplus paid to an employee in one pay period cannot cover a shortfall in another. Where a contract validly provides for a set-off, it only operates within the pay period the payment was made in, not across a rolling 6 month or annual period.

Why this matters for employers

Annualised salary or ‘total salary’ arrangements are common across multiple industries and businesses relying on a set-off clause to reconcile pay against Award entitlements over a period longer than the pay cycle itself, may be contradictory to this reasoning.

What employers should consider

For businesses currently relying on an annualised salary or set-off arrangements, you should ensure:

• any set-off clauses used in employment agreements are compliant with the recent case law;

• time and wage records are kept in compliance of your obligations under the FWA and Award;

• set-off clauses should apportion salary payments for the award entitlements in the applicable pay period;

• consideration is given to how overtime is documented in your contracts as the wording may authorise overtime;

• any existing set-off arrangements are properly documented, not just implied or assumed; and

• employees are adequately informed before they enter into a set-off arrangement.

If you would like to talk through how this decision applies to your business, get in touch to arrange a conversation or review of your employment contracts.

This article is general in nature and is not legal advice. It should not be relied on as a substitute for advice about your specific circumstances.