Set-Off Clauses: Salaries no longer ‘set-and-forget’

The decision of Fair Work Ombudsman v Woolworths Group Limited & Ors [2025] FCA, passed down by the Federal Court of Australia in September, has restricted the use of set-off clauses in employment contracts to satisfy industry award entitlements.

This case combines four separate proceedings against respectively Woolworths Group Limited (Woolworths) and Coles Supermarkets Australia Pty Ltd (Coles), two proceedings initiated by the Fair Work Ombudsman (FWO) plus two class actions commenced on behalf of several thousand salaried Coles and Woolworths managers. Each claimed that the supermarkets failed to accurately pay their employees by ensuring that their annual salaries covered all industry award entitlements for salaried employees.

Whilst the case deals specifically with the General Retail Industry Award 2010, the restriction of set-off salary arrangements and clarification of employer obligations under industrial instruments are relevant to businesses across all industries.

1. ‘Set-Off’ Clauses

Set-off’ clauses are good practice inclusions in employment agreements intended to enable employers to apply above award/EBA payments in satisfaction of award or industrial instrument requirements such as penalty rates, overtime, allowances and loadings.  

However, a key question considered by the Federal Court was whether set-off clauses in the Woolworths and Coles employment contracts did in fact enable the companies to satisfy their award obligations via this mechanism.

2. Judgment

The set-off clause utilised by Coles and Woolworths in their employment agreements asserted a right to pool payments in excess of the award over a six-month period in satisfaction of their obligation to pay other employee entitlements over the same period. Rejecting the six-monthly pooling, the Court considered section 323(1) of the Fair Work Act 2009 (Cth) (FWA) which requires an employer to pay an employee all amounts payable in full, at least monthly. The operation of section 323(1) effectively requires that payment-based award entitlements can only be discharged by payment in the same pay period as the entitlement arises. This prevents attribution of over-award remuneration payments across longer pay periods such as the six-month period specified in the Woolworths and Coles employment contracts.

Coles and Woolworths also submitted that they were not subject to an obligation under section 535(1) of the FWA to keep employee records needed to calculate entitlements such as overtime and penalty rates under the annualised salary set-off arrangements. Also rejecting this argument, Justice Perram held that ‘all inclusive’ salaries do not relieve employers of their legal duty to keep proper records. It was also held that rosters and clocking data alone are insufficient to constitute appropriate records.

Finally, the failure to comply with section 535(1) of the FWA triggered the application of section 557C of the FWA which shifted the burden of proof to the employer regarding factual matters on which the underpayment claim was based.  This meant the FWO was relieved of the obligation to prove the factual allegations of underpayment and instead Woolworths and Coles had to disprove them.

3. Aviation and Transport Context

The principles set out in this decision are particularly relevant to the aviation and transport industries which frequently involve variable hours with complex payment structures and allowances. Clearly, adopting an above award payment with a set off clause without fully understanding the underlying award entitlements is not sufficient.

Crucially, failure to meet these requirements now exposes an employer to the risk of backpay liabilities and civil penalties. A combined liability of over $307 million was assessed against the two supermarkets involved in this case.

While including a set off clause remains vital, any attempt to pool the above award payments for a period longer than a month is no longer viable.  We recommend revising your set off clauses whilst also ensuring you have appropriate systems and processes in place to meet your record keeping obligations (and to validate any set off on a month by month basis).   Implementing a system to then regularly check (and rectify any deficiencies) to ensure an employee’s entitlements are being paid in accordance with the relevant award will minimise the risk.

Finally, on a side note, this decision should not affect the FWC decision regarding Network Aviation’s EBA ([2025] FWCFB 176] which held that where employees are paid on higher rates of pay than required by the Award and are asked to work hours in excess of 38 hours per week (including ordinary hours, reserve periods and reasonable additional hours), to the extent the extra hours might be seen as a detriment, it is outweighed by the higher rates of pay and other allowances that pilots will receive under the EBA as compared to what pilots would have received under the Award.  On this basis, the FWC determined each pilot was better off overall under the EBA as compared to the Award at test time and therefore the Better Off Overall Test (TEST) was satisfied.  Further whilst relevant to the assessment of whether the EBA satisfied the BOOT, the absence of a term providing for the averaging of hours over a specified period in the Award does not preclude the inclusion of such a term in a agreement that permits the averaging of hours over a specific period (in this case 12 months) so long as the term does not compromise the EBA’s assessment under the BOOT.

Contacts 

Adam Martin 
+61 3 9119 2585
adam.martin@nortonwhite.com

Alison McKenzie 
+61 3 9119 2535

alison.mckenzie@nortonwhite.com

Keira Nelson
+ 61 2 9230 9440
keira.nelson@nortonwhite.com