A recent Federal Court judgment has delivered a significant blow to a common payroll practice, ruling that Australian employers cannot use an annualised salary to "pool" payments and offset underpayments in one pay cycle with overpayments in another.
The decision, stemming from legal action brought by the Fair Work Ombudsman (FWO) against Coles and Woolworths, has redefined the rules around contractual set-off and record-keeping, leaving many companies at risk of underpayment claims and substantial penalties.
The FWO first launched legal action against Woolworths in 2021, alleging the supermarket giant had underpaid thousands of salaried managers by over a million dollars. This was followed by similar action against Coles, with the FWO claiming that annualised salaries were insufficient to cover entitlements for significant overtime, weekend and public holiday penalty rates, and other allowances. At the time, then Fair Work Ombudsman Sandra Parker stated that the action was a warning to all employers to prioritise compliance.
The core of the case centred on the “set-off” clauses in the retailers’ contracts. Woolworths’ clause, in particular, was designed to satisfy all award entitlements over 26 weeks, allowing the company to use excess payments from some fortnights to cover shortfalls in others.
However, Justice Nye Perram of the Federal Court rejected this approach. He ruled that for a set-off clause to be lawful, each fortnightly payment must discharge the award...
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