Over and under, under and over: The future of set-off clauses in employment contracts

Earlier this month, Justice Perram of the Federal Court of Australia issued a lengthy judgment in the consolidated proceedings against supermarket giants Coles and Woolworths in relation to alleged breaches of the Fair Work Act 2009 (Cth) (FW Act), the Fair Work Regulations 2009 (Cth) (FW Regulations) and the General Retail Industry Award 2010 (Award) (Judgment)[1].

The Judgment considered a number of contested matters that included:

• the application of contractual set-off clauses;
• record-keeping obligations pursuant to the FW Regulations in relation to award-covered employees paid annualised salaries; and
• agreements between employees and employers to vary entitlements under the Award.

Set-off clauses for award-covered employees

Employers of award-covered employees commonly pay an all-inclusive ‘annualised salary’ in satisfaction of ordinary hours and other modern award entitlements. It is well accepted that an annualised salary must be set at a level that satisfies award-entitlements by reference to actual hours of work and, with carefully drafted contractual clauses attributing the entitlements for which the payment is intended to satisfy, overpayments can be set-off against underpaid entitlements.

A key issue to be determined in the Judgment was the period in which an employer can apply contractual set-off. That is, whether employers can set-off overpayments with underpayments across pay periods, or whether contractual set-off is limited to each pay period. The set-off clauses considered in the Judgment varied, but there were common themes of ‘pooling’ arrangements which Coles and Woolworths relied upon as the basis for approaching set-off across pay periods.

However, section 323(1) of the FW Act requires that employers pay employee entitlements in relation to the performance of work ‘in full’ and ‘at least monthly’. Pay cycles can be more frequent than this according to modern awards and in the case of Coles and Woolworths the pay cycle was fortnightly. Having regard to section 323(1) of the FW Act, Perram J held that employers may only set-off pay entitlements within a pay period.

While Perram J’s finding is consistent with the Fair Work Ombudsman (FWO)’s position (as reflected in the FWO Remediation Guide), the decision is significant. Prior to the Judgment judicial authority had not considered the period over which employers can set-off overpayments with underpayments in the context of enforcement action involving allegations of contraventions of section 323(1) of the FW Act.

Record-keeping under the FW Act

Perram J also held that Coles and Woolworths contravened record-keeping obligations under Reg 3.33 and Reg 3.34 of the FW Regulations by failing to maintain records of award entitlements (such as loadings, penalty rates, monetary allowances and/or overtime). Perram J held that paying an all-inclusive salary does not remove the obligation to record these Award entitlements which arise by reference to the work performed notwithstanding the employment contracts do not stipulate these individual entitlements nor are these entitlements paid separately to employees.

Significantly, Perram J found that roster records and clocking data (i.e. an employee clocking in and out from a shift) are insufficient to satisfy the overtime record-keeping obligation pursuant to Reg 3.34 of the FW Regulations on the basis this data – across two sources – did not constitute a record that was ‘in a form readily accessible to an inspector’.

‘Agreements in writing’

Perram J also considered the evidence required to establish an employer and employee had reached an ‘agreement in writing’ when seeking to vary work arrangements under the Award such as, for example, varying part-time employees’ regular pattern of work. Perram J held that the employer bears the onus of proving such agreement and there can be no such agreement unless the employee was aware they were giving away entitlements as a consequence of the variation (if relevant). This means, for example, relying upon a workplace policy as evidence of agreement would not suffice; specific agreement with the employee is required.

Practical steps for employers

We expect the Judgment will be appealed and we will provide updates on appeal proceedings. In the interim, employers ought to review annual salary arrangements for award and enterprise agreement covered employees to ensure payments satisfy entitlements on a pay period basis.

We also recommend reviewing record-keeping obligations to ensure rostering, time-keeping and payroll systems can produce data of enlivened award / agreement entitlements by reference to actual hours of work. While pragmatic and commercial arrangements around ‘exceptions reporting’ have been in play to date for many industries paying annual salaries to award covered employees, this approach risks contravening record-keeping obligations. Employers may also need to train managers and staff on working requirements to assess how and when overtime might be required and how this will be managed at the operational level to ensure compliance.

If your business requires specific advice on the application of its current set-off clauses or current record keeping systems, please do not hesitate to reach out to Gadens’ Workplace Advisory and Disputes team for Assistance.

[1] Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd; Baker v Woolworths Group Limited; Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092

Authored by:

Jonathon Hadley, Partner
Louise Rumble, Partner
Lauren Chappill, Associate