Many employers operate under the belief that paying an annual salary acts as a kind of “safety net”, one that automatically covers penalties, overtime and allowances without the need for further calculations, relying on a “set-off clause”.
But the recent Federal Court decisions involving Coles and Woolworths show that this isn’t necessarily the case. Even when an annual salary looks generous, employers may still fall foul of award obligations if those entitlements aren’t satisfied in the correct pay period.
What is a Set-Off Clause
A set-off clause in an employment contract is where an annual salary is intended to cover all entitlements under an Award, such as minimum wages, overtime, allowances, and penalty rates.
These clauses are common, but they only work if the salary genuinely exceeds the employee’s minimum Award entitlements. If not, the business risks underpayment breaches.
The Coles & Woolworths Case Explained
In a few recent cases involving the Fair Work Ombudsman, and Coles and Woolworths separately, the Federal Court was asked whether employers could measure compliance with Award entitlements across a longer period (e.g. 6 months) or whether they had to test compliance on a pay period by pay period basis.
Justice Perram held*:
- Award entitlements must be satisfied in each pay cycle
- Employers cannot “pool” or average payments across multiple periods to meet obligations
- Over-Award payments in one pay period cannot offset shortfalls in another
Why This Matters for Employers
This ruling has significant implications for payroll compliance:
- Annualised salary arrangements may not protect employers if entitlements aren’t met in every pay period
- Underpayment risks remain event if overall annual salaries look generous
- The Fair Work Ombudsman is likely to rely on this interpretation when pursuing underpayment claims
What Employers Should Do Now
To minimise risk and demonstrate compliance:
- Audit employment contracts – review set-off clauses to ensure they are legally robust and actually reflect what happens in practice (we’re currently seeing big gaps between what the contract says happens, and what actually happens)
- Check payroll practices – confirm systems can test Award compliance each pay cycle
- Review salary levels – ensure salaries are set high enough to comfortably cover Award entitlements
- Seek expert advice – proactive action is far cheaper than defending an Ombudsman investigation
Key Takeaway
The Coles and Woolworths decision is a reminder that salary arrangements can’t be “set and forget”. Employers need to actively test pay period compliance to avoid costly underpayment claims and reputational damage.
Let’s wait and see if this decision is appealed.
At UPP HR, we partner with businesses to make sure their employment contracts and practicalities of payroll are watertight. If you’re unsure about your current set up, we’d love to help you sleep better at night, shoot us a message.
* This aligns to the General Retail Industry Award and recommend a specific review for individual circumstances.