FWO v the Supermarkets - What Employers Need to Know About Set-off Clauses and Annualised Salaries

Do your admin staff keep weekly timesheets? Are you checking annualised salaries are meeting award obligations for your award-covered staff at least monthly? If not, you may have a compliance problem.

The Federal Court’s recent decision in Fair Work Ombudsman v Woolworths Group Ltd & Ors[1] (Woolworths) has narrowed the scope of common law set-off clauses, limiting them to a single pay period. This creates significant uncertainty for employers who rely on annualised salaries to meet award obligations. The case sits uneasily alongside a Full Federal Court of Appeal judgment, highlighting the complexity of Australia’s workplace laws and creating legal uncertainty for employers. For businesses, the safest path forward is to turn to award annualised salary clauses or enterprise agreements, both of which offer greater legal certainty and compliance. Employers must also ensure their record-keeping is up to scratch. We’ve set out more information on Workable Law and IR’s take on this important decision below.

 Our employment contracts allow us to pay an annualised salary. Is this still ok?

It’s still okay, but because the salary paid each pay period needs to be reconciled against the employee’s award entitlements for the same period, the utility is significantly reduced. The Federal Court’s decision in Woolworths takes a reductionist approach to common law set-off clauses. Justice Perram confined the operation of contractual set-off to a single pay period, stating:

  “… my conclusions are that the [set off] clauses are only effective to discharge obligations under the Award within a single pay period”.[2]

 This aspect of the decision turned on s 323(1) of the Fair Work Act 2009 (Cth) (FW Act) which provides:

 323  Method and frequency of payment

 (1) An employer must pay an employee amounts payable to the employee in relation to the performance of work:

 (a) in full (except as provided by section 324); and

 (b) in money by one, or a combination, of the methods referred to in subsection (2); and

 (c) at least monthly.

Note 1: This subsection is a civil remedy provision (see Part 4‑1).

Note 2: Amounts referred to in this subsection include the following if they become payable during a relevant period:

(a) incentive‑based payments and bonuses;

(b) loadings;

(c) monetary allowances;

(d) overtime or penalty rates;

(e) leave payments.

Justice Perram interpreted this section as meaning that award entitlements (including to penalty rates and overtime) & contractual salary entitlements must be paid in full at least monthly (or in the case of Woolworths, fortnightly, as this is what had been agreed in the employment contract). Employers cannot ‘contract out’ of this provision using an employment contract to provide for the averaging and set off of pay entitlements over a greater period, such as 6-monthly or annually.

As such, to comply with the law as set down in this decision, employers cannot rely on “pooling” of over- and under-payments across longer periods (such as six months or a year) to discharge award obligations – using ‘overs’ in one pay period to offset ‘unders’ in another.

This ruling significantly weakens the usefulness of common law set-off clauses where modern awards or enterprise agreements cover staff.

 But other decisions have said annualised salaries are ok

That’s right. The approach taken in Woolworths sits uncomfortably with the Full Federal Court’s reasoning in Corporate Air Charter Pty Ltd v Australian Federation of Air Pilots[3] (Corporate Air), where an annualised averaging and set-off arrangement for award entitlements was permitted. In that case, the Full Bench said:

 “The respondent’s method for the calculation of set-off on an annualised basis is correct. It aligns with the clear meaning of cl 10.3 of the employment contract: “Where your pay exceeds your legislative entitlements, any above component not otherwise allocated may be offset against any other applicable entitlements”. Reading cl 10.3 alongside cl 10.1 and item 8 of the Schedule, “your pay” is understood to be on an annual basis: where [the employee’s] annual pay exceeds the Award amount, the difference may be set-off against [the employee’s] overtime entitlements.”[4]

The difficulty is that in Corporate Air the parties did not squarely argue the interpretation of s 323 of the FW Act. Similarly, as the Woolworths decision does not refer to the decision in Corporate Air, it may be that the decision wasn’t brought to the attention of the Court. As a result, the tension between these two inconsistent decisions is fertile ground for further technical debate, but provides little clarity or certainty for business.

So what should employers do?

Given the severe constraints now placed on common law set-off for award and agreement-covered employees, businesses should look for legally safe alternatives. The most reliable mechanism is the use of annualised salary provisions contained in modern awards or by negotiating compliant salary arrangements via enterprise agreements.

These mechanisms sit on firmer legal ground and allow employers to continue paying staff regular remuneration without a far lesser risk that set-off clauses will be struck down.

Practical tips

Award / Agreement-Free staff

If a modern award or enterprise agreement does not cover your staff, an annualised salary remains a safe and flexible option.

Staff Covered by Awards

a.       can you use a Guarantee of Annual earnings mechanism to obviate Award obligations?

 b.     If no to (a) does the Award contain an Annualised Salary clause?

 c.      If yes to (b), then look to immediately evaluate the ability to deploy such clauses.  We can help you build them.

It’s important for employers to understand that the effects of this decision are not confined to the retail industry, but will impact any industry and occupation where an employment contract set off clause has been used to set off award entitlements (without the arrangement being explicitly provided for by the Award such as an exemption or absorption rate arrangement).

 Here is a list of some awards which contain annualised salary clauses:

• Clerks – Private Sector Award 2020

• Banking, Finance and Insurance Award 2020

• Manufacturing and Associated Industries and Occupations Award 2020

• Mining Industry Award 2020

• Rail Industry Award 2020

• Health Professionals and Support Services Award 2020

• Legal Services Award 2020

• Local Government Industry Award 2020

• Oil Refining and Manufacturing Award 2020

• Pharmacy Industry Award 2020

• Salt Industry Award 2020

• Seafood Processing Award 2020

• Silviculture Award 2020

• Telecommunications Services Award 2020

• Water Industry Award 2020

• Wool Storage, Sampling and Testing Award 2020

• Hydrocarbons Industry Award 2020

• Horticulture Award 2020

• Ports, Harbours and Enclosed Water Vessels Award 2020

Get in touch

The Woolworths decision is another reminder of how complex and high-risk Australia’s workplace laws have become. Employers who rely on annualised salaries need to act now to make sure their arrangements are watertight. For practical advice on reviewing contracts, using annualised salary clauses, or finding safe ground in this shifting landscape, get in touch with Workable Law & IR, we can help you cut through the complexity with confidence.

[1] Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd; Baker v Woolworths Group Limited; Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092

[2] Woowlworths at [37]

[3] Corporate Air Charter Pty Ltd v Australian Federation of Air Pilots [2025] FCAFC 45

[4] Corporate Air at [89]