If you pay an annual salary to award-covered staff, the Coles and Woolworths underpayment decision should be on your radar. Paying a generous salary that “washes out” over a year is no longer enough: a set-off must satisfy award entitlements in each pay period — not on average across the year. That point redraws the compliance map for Australian employers, from SME business owners to local councils and not-for-profits.
What’s the real issue?
The issue is timing. For years the orthodox approach was simple: pay a healthy all-inclusive salary, add a broad set-off clause, and rely on the employee being “better off overall” across the year.
In Fair Work Ombudsman v Woolworths Group Limited & Ors [2025] FCA 1092, the Federal Court held that this averaging does not work. Section 323 of the Fair Work Act 2009 (Cth) requires payment “in full” and at least monthly. “In full” means that in any pay period where the salary does not cover the award entitlements arising, the employee has not been paid in full — however large the annual surplus.
The case concerned store managers under the General Retail Industry Award, but the principle applies to any employer with award-covered staff on an annual salary. Remediation already exceeds $300 million (Woolworths) and $7 million (Coles). An appeal is anticipated and the law is not fully settled — but do not wait before checking your arrangements.
What does this look like in practice?
Consider “Riverbend Retail” — an anonymised composite, not a real client. Its duty managers earn around $78,000, above the award across a typical year, each with a set-off clause covering “all entitlements”, paid fortnightly. In the pre-Christmas peak they worked long days, late nights and public holidays, and in those fortnights overtime, penalty rates and public holiday loading exceeded the fortnightly slice of salary.
Under the old thinking, the quiet fortnights covered the busy ones. No longer. Riverbend was exposed for every peak pay period, despite a generous annual wage bill — and one manager’s annual leave loading had never been separately paid.
What does the law say — and how must it be applied?
1. Set-off is confined to the pay period
A set-off cannot borrow surplus from one pay period to patch a shortfall in another. The court did not strike the Woolworths clause down — because it was drafted to operate “as far as possible”, it could be read down to work within each fortnight. A well-drafted clause remains valuable, but discharges entitlements only period by period.
2. Annual leave loading has no buffer
A set-off uses salary above the award minimum to absorb other entitlements. But loading is calculated on the salary itself — there is no surplus above it for the set-off to reach, so it must be dealt with expressly.
3. Varying award conditions requires provable agreement
Awards often contain facilitative provisions, such as taking time off instead of overtime. The onus is on the employer to prove agreement existed. An employee simply working a short-break shift is not acceptance, and a roster followed in practice or a general “standing consent” does not clear the bar. For managers who set their own hours, overtime is payable where the volume of work required longer hours — but not where they merely shift a start or finish while working rostered hours.
What are the risks and pain points for employers?
- Back-pay and penalties. Averaging arrangements may now generate underpayments in every peak pay period, plus civil penalties.
- Remediation reopened. Projects built on the old averaging assumption may now understate the liability.
- Payroll not built for it. Many systems check annual “better off overall” outcomes, not pay-cycle compliance.
- The loading gap. With no buffer, loading assumed to be “in the salary” may simply be unpaid.
- Weak evidence of agreement. Rosters, custom or a policy are risky proof — written contract terms are stronger.
- Transaction risk. In business sales, these exposures surface in due diligence, affecting price and warranties.
Our top five tips: what every employer should do
- Audit your contracts for set-off clauses — and their wording. Confirm whether your templates contain a set-off clause. If they do, make sure it is drafted to operate “as far as possible” and to the extent permitted by law — that softening language is what let the Woolworths clause survive. If they don’t, make it a priority fix.
- Reconcile per pay period, not per year. Shift your focus from annual averages to each pay cycle. Verify hours in real time, and where a peak period pushes award entitlements above the salary slice, top the employee up in that period. Build genuine buffer room into salaries for roles with fluctuating hours.
- Deal with annual leave loading expressly. Do not assume the salary absorbs it. Because there is no buffer for loading, address it directly so there is no gap.
- Get informed agreement in writing — in the contract, not just a policy. Where you rely on a facilitative provision (shorter breaks, TOIL, roster variations), the document must show the employee understood the specific entitlement they gave up and agreed to forgo it. A contract clause that names the entitlement beats a general policy or “standing consent” every time. The onus is on you.
- Choose the right structure for the role — and know the trade-offs. A set-off clause is still the workable default for most. Where it isn’t enough, weigh the alternatives (below) against the admin they demand.
Frequently asked questions
- Are set-off clauses still worth having?
Yes. The court did not outlaw them — it confined them to operating within each pay period. A clause drafted with “as far as possible” and to-the-extent-permitted language remains a genuine saving grace, so keep it and check its wording.
- What is a set-off clause actually doing?
It lets you use salary paid above the award minimum to satisfy other award entitlements such as overtime, penalties and allowances. After the decision, it can only do this pay period by pay period, not across the year.
- Why is annual leave loading such a problem?
A set-off relies on a surplus above the award, but loading is calculated on the salary itself. There is no buffer above the salary for the set-off to reach, so loading often has to be paid or dealt with expressly.
- Would an annualised wage arrangement under the award fix this?
It can, and being a creature of the award it isn’t undone by this decision. But it isn’t available under every award, is admin-heavy, and typically carries premium, outer-limit, record-keeping and annual reconciliation obligations. Employees can also terminate it on notice.
- What about an Individual Flexibility Arrangement (IFA)?
An IFA can vary award terms to suit both parties and must leave the employee better off overall. It works, but it is administratively demanding and the employee can terminate it on 13 weeks’ notice — so it offers limited long-term certainty.
- Is a guarantee of annual earnings a cleaner option?
It is, because it takes the employee out of the award system entirely, removing overtime and penalty obligations. The catch is that it only applies to high-income employees above the threshold (as at 1 July 2026, $190,100 per annum), so for most award-covered roles it isn’t available.
- Does an employee working a shift prove they agreed to vary their conditions?
No. Simply turning up and working is not acceptance. You must show the employee knew of the specific entitlement and agreed to give it up — ideally in a written contract term, not just a policy or roster.
- When do managers who set their own hours get overtime?
When the volume of work required them to work longer, overtime is payable. When they voluntarily shift their hours but work their rostered total, it generally isn’t — and you must be able to defend that position with evidence.
How Harrisons can help
Get an annualised salary wrong now and the cost is real: underpayment exposure in every peak pay period, back-pay, penalties and a hole in your next due-diligence process. The good news is that these exposures are manageable once you know where to look — and we help Australian organisations do exactly that:
- Audit contracts and set-off clauses and stress-test annualised salaries against pay-period compliance.
- Close annual leave loading gaps before they become claims.
- Put provable, written agreements in place where award conditions are varied.
- Choose the right structure — set-off, annualised wage arrangement, IFA or guarantee of annual earnings — for each role.
Don’t wait for a peak trading period to turn into a back-pay claim. Get in touch with our team today and start with an annualised salary and set-off contract audit.
This article is general information, not legal advice, and reflects the law as it stands at the time of writing. The decision may be subject to appeal. Please seek advice tailored to your circumstances.
Claire Harrison is the Founder and Managing Director of Harrisons, a flourishing HR consulting business that sprouted in 2009 from Claire’s passionate belief that inspiring leaders and superstar employees are the key success factor to any business. With over 20 years’ experience, Claire has worked as a HR Director of multi-national organisations, as a Non-Executive Board Director, and a small business owner. Claire’s corporate career includes working with companies such as BHP, Westpac, Fonterra and Mayne Nickless.
