Australia: Set-off Not Cure-all in Massive Woolworths & Coles Underpayment

Authors: Amy Zhang, Greg Robertson and Zeb Holmes 

The Federal Court of Australia has condemned the contractual set-off clause relied on by Coles and Woolworths, Australia’s two largest supermarkets, finding that pooling overpayments over multiple pay periods, and failing to track overtime and penalty loadings as a result, is unlawful. 

Coles and Woolworths (together, the Retailers) could be facing more than $1 billion in total underpayment remediation after the Federal Court ruled that they had underpaid nearly 30,000 salaried managers over several years.

The “basic problem”, as described by Perram J, was that employees were employed under written contracts providing for an annual salary, where the Retailers did not keep track of or pay their entitlements during each separate pay period.

The Retailers instead relied on a set-off clause, which involve giving a fixed salary above minimum entitlements, in this case under the General Retail Industry Award 2010 (General Retail Award), rather than separately considering each entitlement to overtime, penalty rate, allowances and the like. These arrangements are common for large employers, with the judgment raising questions about the legality of such arrangements across Australia.

 

Background

The ruling in question, FWO v Woolworths Group Limited; FWO v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092 (the Decision), relates to four separate actions heard in parallel.

These actions were brought by the Fair Work Ombudsman (FWO) and class action firm Adero Law, regarding underpayments of employees going back to 2015. The employees in question were store managers and the heads of individual departments.

The FWO alleged that Woolworths underpaid about 19,000 employees between June 2015 and September 2019, and that Coles underpaid about 8,750 employees between January 2017 to March 2020. The positions of the FWO and Adero Law were broadly similar, as indicated by the Retailers largely using the same submissions in both cases.

The contractual set-off clause used by the Retailers purported to satisfy all General Retail Award entitlements, by reference to the annual remuneration, which was said to be calculated over a longer period (e.g. 26-weeks in the case of Woolworths).

 

Decision – Set-Off

Perram J found that ‘pooling’ overpayments over a longer period constituted an “accounting abstraction”, which was not consistent with the obligation in section 323 of the Fair Work Act 2009 (Cth) (FW Act) that an employee must pay amounts payable (i.e. entitlements under the General Retail Award) in full, in money, at least monthly.

This pooling payment system, adopted by the Retailers, resulted in payment obligations referrable to specific pay periods not being made in those pay periods, but made in other pay periods across the longer timeline. Perram J held the FW Act and General Retail Award require “payment” of all obligations in the relevant pay period, and it was not good enough to have a holistic entitlement on the books that would allow minimum entitlements to be met (or even exceeded) over a longer timeframe.

Perram J concluded that the Retailers could only rely on their set-off clause for each specific pay period. It did not matter if an employee was paid at or above their entitlements over 26 weeks, their payments needed to be at or above their entitlements in each separate pay period. This may be particularly relevant for those store managers whose hours may fluctuate based on demand, with much higher hours around school holidays, long weekends and the like.

While the Decision is necessarily focused on the Coles and Woolworths set-off clauses separately, Perram J made comments for each Retailer that seriously brings into question whether even the most fastidious of drafting would satisfy him that pooling over-award entitlements over a longer period was consistent with the FW Act and the General Retail Award. In particular, he commented:

• For Woolworths [at 66]: “…it is doubtful in my mind that [the set-off clause] could ever be redrawn to achieve a six-monthly pooling. It is unlikely that payments which have occurred in past pay periods can be characterised as payments for the purposes of the Award. For the same reason, I think it unlikely that payments in the future can be characterised as payments in the present pay periods either. If this be correct, then a six-monthly pooling operation for cl6 cannot be resurrected…”; and
• For Coles [at 85]: “…I do not accept that it is possible to discharge Coles’ obligation to pay the entitlements falling due under the Award by anything other than an act of payment (rather than, for example, the existence of an accounting abstraction such as a pool over a six-month period). As I have explained above, I accept that in an employment context a properly drafted set-off clause may provide that payment of a contractual obligation in a pay period may discharge a payment obligation arising under an industrial instrument in the same pay period. When this occurs, a single payment discharges the two distinct monetary obligations. However, the obligations arising under the Award can only be discharged by a payment and that necessitates that the payment happen in the same pay period.”

A contractual set-off across multiple pay periods may therefore be non-compliant, and other large employers may be on the hook for similar arrangements.

Employers may wish to accordingly review whether there might be any different scope for annualized wage arrangements in the applicable award, through an individual flexibility arrangement, or an enterprise agreement, as opposed to merely relying on a common law set-off clause in an employment contract.

 

Decision – Employment Records

Under reg 3.33 and 3.34 of the Fair Work Regulations 2009 (Cth) (FW Regs), an employer must keep records that specify, for each employee, their rate of remuneration, including details of any loadings, penalty rate, or overtime payment.

In addition to his conclusions on the set-off clauses, Perram J also ruled that the Retailers did not comply with their obligation to accurately keep records, as they relate to the employee’s broader entitlements under the General Retail Award.

The Retailers did not keep records of the hours that may have attracted these separate loadings or penalty rates because they were relying on their holistic above-award annual salary and set-off clause. As Perram J succinctly put [at 97], “The relevant contractual set-off clauses do not have the effect of relieving these record-keeping obligations and the roster records and clocking data are insufficient to satisfy these record-keeping obligations.”

Again, it was not sufficient that employees were paid above the award rate over a ‘pooled’ period, or even if they were paid a correct rate during a specific pay period. Where an employee is entitled to be paid one of the entitlements specified in the FW Regs, the record must have the required details. The fact that an employer provides an “all-inclusive” payment does not alter that requirement.

This part of the judgment will also be news to many large employers, who may opt for an annualized arrangement with a set-off clause to avoid exactly this type of administrative oversight of each type of award entitlement.

 

Next Steps

The matter is now listed for a case management hearing on 27 October 2025, where the parties will try to agree on next steps in the proceedings. Due to the length and breadth of the underpayment, covering many employees and many sets of entitlements, it will be some time before a final outcome determines how much the Retailers will need to repay exactly.

The Retailers have both indicated that they are considering the Decision and there is a possibility that they will appeal. Such an appeal may relate to the underlying treatment of the set-off clauses or may just seek to reduce their overall payment liability.

In the meantime, in-house legal, HR and payroll specialists will need to closely consider both the compliance of their contractual set-off clauses and whether their Payslip and record-keeping practices are sufficient, given the Decision.

These pay arrangement issues go much further than the Retailers, and much further than even the retail industry. The Decision, and the potential size of the unpaid entitlements, may result in the FWO, unions, plaintiff law-firms and litigation funders looking out for similar pay arrangements at other large employers and commencing proceedings. Accordingly, it is important for employers to urgently review their practices and obtain advice as necessary.

Harmers Workplace Lawyers can provide advice in relation wage compliance, record keeping obligations and annualised salary arrangements. If you require legal advice or assistance, please contact our legal team at + 61 2 9267 4322.