Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd; and others

The Federal Court has confirmed that annual salaries under employment contracts can only be used to set off award or enterprise agreement entitlements on a pay-period-by-pay-period basis. The Court has also clarified the level of detail required by employers to meet their employee record keeping obligations, including those required to demonstrate that the annual salary being paid is sufficient to meet the minimums under the applicable award.

Background

On 5 September 2025, Justice Perram of the Federal Court handed down a long awaited decision in four separate proceedings, that had been combined by the Court. The case deals with significant underpayment claims brought by the Fair Work Ombudsman (FWO) and by class actions on behalf of employees against the two major players in the Australian retail supermarket industry. Each of the four proceedings claimed that thousands of supermarket managers employed in the retail supermarket industry had been underpaid since at least 2015.

The claims alleged that the affected managers were employed under employment contracts which paid them an annual salary, rather than the hourly rate under the applicable award, the General Retail Industry Award 2010 (Award).

Given the scope and complexity of the claims, Justice Perram divided the case up into a large number of initial questions on the underpinning legal principles. These questions included whether employers are able to set off a salary provided in an employment contract against award entitlements, as well as the scope of the record keeping obligations under the Fair Work Act 2009 (Cth) (FW Act).

The legal principles determined in this case will now be applied to the factual background of each of the supermarkets and the affected managers in further hearings.

Salary and set off arrangements

Some awards contain a clause that allows covered employers and their employees to enter into formal annualised wage arrangements, which allow an employer and an employee to enter into an agreement to pay an annual wage in satisfaction of entitlements under the applicable award. This is a formal arrangement, with strict procedural requirements.

For awards that do not permit annualised wage arrangements, or where an individual employer and employee do not want to enter into a formal annualised wage arrangement, employers and employees can enter into a contract of employment that provides an annual salary with a set off clause. There has long been a question as to whether the obligation to meet award entitlements can be satisfied by an annual salary that is assessed yearly or if it has to be assessed on a pay-period-by-pay-period basis. In this case, Coles and Woolworths both employed managers under contracts of employment that contained an annual salary with a set off clause.

The FWO’s claim in this case was that the Award entitlements had to be satisfied in each pay period as set out in the Award and that salary payments which were above the award minimums in one pay period could not be used to set off award underpayments in another pay period across the year.

In contrast, the employers argued that salaries paid under a contract of employment should be able to be pooled (either six monthly or annually) and set off against Award entitlements payable over the same period, effectively asking the Federal Court to rule that set off clauses could be more broadly applied.

After detailed consideration, Justice Perram found that the FWO’s position was correct and that the annual salary could only set off award payments during each pay period. Justice Perram also found that while contractual set off is available there are limits to what types of award entitlements can be set off against salary when it is not being done under an award annualised wage arrangement clause. The Court found that what types of payments can be set off would depend on the terms of the contract and the type of award entitlement, so that only payments which are similar in nature can be off set.

Record keeping obligations

The FWO argued that the supermarkets had breached section 535 of the FW Act by not keeping certain records relating to their employees. Section 535 of the FW Act requires records be kept for 7 years and details the types of records that need to be kept.

Judge Perram examined the supermarkets’ approach to employee record keeping, such as relying on rosters and verbal agreements, and whether these were compliant with the Fair Work Act’s obligations, and found that the supermarkets had failed to keep the records required under sections 535 of the FW Act and regulation 3.33 of the Fair Work Regulations 2009 (Cth) (FW Regulations). The Judge made note that the employer bore the onus of keeping the records and that they had to:

• Include records of any incentive based payment, bonus, loading, penalty rate or other monetary allowance an employee is entitled to be paid;
• Where penalty rates or loadings were payable on overtime hours, specify in the record either the number of overtime hours worked by the employee during each day or when the employee started and finished working overtime hours each day; and
• Keep the records in a form that is readily accessible to an inspector.

Judge Perram found that the supermarkets relying on rosters, or even electronic clocking in and out systems where they were unreliable, were not sufficient to meet these obligations. While Judge Perram did not spell out exactly how the records needed to be kept, he made it clear that the obligation to keep the employee records and particularly the records of hours for overtime and penalty payment sits with the employer, not with the employee.

Agreements made under an award

It is permissible for an employer and employee to enter into an agreement to vary the way that obligations and entitlements under an applicable award are to be met. This could include agreements to vary start and finish times or for changes to rosters.

A number of the underpayment claims in this case could have been impacted by these types of individual agreements as allowed for under the Award. Judge Perram was asked to decide what type of evidence was needed for an employer to rely on such an agreement.

Judge Perram held that, where those agreements exist, and the employee is forgoing a right or entitlement by way of that agreement, the employee must be aware of their rights in order to accept a variation to those rights. Further, the employer was required to keep fulsome written records of this agreement on their files.

Key takeaways

While the decision is interlocutory in nature, the legal principles decided will have significant implications for employers.

• Employers should be reviewing any contractual set off arrangements to ensure that any award or enterprise agreement obligations are still being met on a pay-period-by-pay-period basis;
• Employers should be ensuring that their employee records meet all the FW Act requirements; and
• Any agreements made under an award between the employer and the employee include details to prove that the employee was aware of any right or obligation they would not receive as a result of the agreement and that fulsome records are kept of this.

We note these claims will now be programmed for a further hearing to apply these legal principles to the complex facts and may be subject to appeal. We will continue to monitor developments and provide updates as the matter progresses.

This article was written by Erica Hartley, Partner, Danielle Flint, Partner and Robert Malcolm, Senior Associate.