On 5 September 2025, the Federal Court of Australia handed down a landmark decision in proceedings brought by the Fair Work Ombudsman (FWO) and class actions against Coles and Woolworths.
The ruling sends a clear warning to all employers who rely on contractual set-off provisions to discharge award entitlements. It makes one thing plain: set-off clauses are no longer a “safety net” unless applied strictly, pay-period by pay-period.
Why this Fair Work ruling matters for employers
For years, many employers have assumed that annual salaries or half-yearly reconciliations could comfortably absorb overtime, penalties, and allowances. The Court has now confirmed that approach does not meet award obligations.
This decision significantly strengthens the FWO’s position in underpayment proceedings, raises the compliance bar for employers, and highlights the risk of multimillion-dollar remediation programs when payroll practices fall short.
Key findings from the Federal Court
1. Annualised salaries and set-off provisions
- Annual salaries may only offset award entitlements if the payment is made within the same pay period.
- Longer “pooling” periods (such as 26 weeks) are invalid and will not shield employers from liability.
2. Record-keeping obligations
- Annual salaries do not remove the obligation to maintain detailed records of overtime, penalties, and allowances.
- Inadequate records shift the burden of proof to the employer under the Fair Work Act.
3. Over-Award payments and bonuses
- Excess payments in one pay period cannot offset shortfalls in another.
- Bonus payments are separate entitlements and cannot be used to “top up” underpayments.
4. Overtime requirements
- “Reasonable additional hours” in contracts may constitute a requirement to pay overtime.
- Extra hours worked purely at an employee’s discretion will not always trigger an entitlement.
5. Data-driven underpayment claims
- Where records are incomplete, courts may accept statistical and data-modelling approaches to calculate underpayments.
Moving forward – What employers should do next
| Review set-off clauses: | Ensure salary contracts clearly tie payments to entitlements in each pay period. |
| Reconcile regularly: | Move to short-cycle reconciliations to correct any shortfalls immediately. |
| Keep detailed records: | Maintain compliant and accessible records—not just raw rosters or log-on data. |
| Define overtime rules: | Clarify “reasonable additional hours” in contracts and policies. |
| Upgrade systems: | Invest in payroll and compliance systems capable of evidencing pay-period compliance. |
We recommend employers should immediately audit their contracts and payroll practices, amending set-off clauses where necessary to reflect pay-period obligations. It is also important to strengthen record-keeping systems to meet Fair Work standards, ensure that overtime and penalty policies are clearly documented and consistently applied, and seek expert advice to minimise the risk of Fair Work Ombudsman action or class claims.
This decision has raised the stakes for employers across award-covered industries. What once passed as “industry practice” may now expose your business to significant financial and legal risk.
Don’t wait for the FWO to come knocking. Contact our team today to review your contracts, payroll systems, and compliance practices to ensure you’re protected.
Disclaimer: This article is general in nature and provides a summary only of the subject matter without the assumption of a duty of care by Effective Workplace Solutions. No person should rely on the contents as a substitute for legal or other professional advice.