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22 October 2025

Woolworths And Coles Underpayments

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The Court's findings have significant implications for how employers should structure and document salary arrangements going forward.
Australia Employment and HR
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In a recent Federal Court decision, 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 — Woolworths and Coles were found to have underpaid employees in breach of the Fair Work Act 2009 (Cth)('FWA'). The case focused on the use of set-off clauses in employment contracts, which attempt to use fixed annual salaries to absorb various award entitlements like overtime and penalty rates. The Court's findings have significant implications for how employers should structure and document salary arrangements going forward.

Key takeaways for employers

  1. Set-off clauses are limited to each pay period – Employers cannot use overpayments in one pay period to offset underpayments in another.
  2. Record-keeping obligations apply to all employees (including salaried staff) – Paying an "all-inclusive" salary does not remove the need to keep detailed records.
  3. Award entitlements can't be varied informally even if the award permits variation – any variation must be by clear, written agreement.
  4. Leave and public holidays count as 'hours worked' – they should not be excluded from calculations of entitlements.
  5. Part-time employees must have written agreements for changes to hours – a roster change is not sufficient to vary ordinary hours.

What should employers do now?

For employers whose staff are employed under an award, and who are paid under an "all-in" rate, it would be wise to satisfy yourself that staff are being paid at least their award entitlements for each pay period. It would also be a good idea to check that adequate employment records are being kept for all staff, including those on "all-in" salaries. If you identify issues, it is a good idea to take legal advice, because stiff penalties can apply for non-compliance.

The Court's findings in more detail

Set off

Perram J addressed whether Woolworths and Coles could lawfully use set-off clauses in their employment contracts to balance out overpayments and underpayments of award entitlements across different pay periods.

Woolworths' contracts attempted to pool employees' payments over a 26-week period, effectively creating a notional "bank" of salary from which award entitlements could be offset.

However, the Court found this approach to be legally flawed, describing it as an "accounting abstraction" that failed to meet the requirements of section 323(1) of the FWA, of payment of entitlements within each pay period. Coles' various set-off clauses were similarly ineffective, despite differences in drafting.

The decision concluded that set-off clauses may only operate within a single pay period, meaning employers cannot rely on overpayments made in one fortnight to cover shortfalls in another.

Record-keeping

Despite Woolworths and Coles paying their managers on an "all-inclusive" basis, the Court found that they were still required by Fair Work Regulations 3.33 and 3.34 to maintain detailed records of employee entitlements under the Award.

The argument that these obligations didn't apply to salaried employees was rejected. Even if entitlements are absorbed into a salary via a set-off clause, it was held that the underlying entitlement still exists, and therefore the record-keeping requirements are triggered. The judge also emphasized that records must be readily accessible to Fair Work Inspectors and sufficiently detailed to allow employees to understand how their entitlements were calculated.

Importantly, relying on rosters or clock-in/out data as records, was found to be insufficient, as these sources require interpretation and do not meet the standard of a formal record under the Regulations. The judgment also confirmed that incomplete records still fall within the scope of the obligations, and failure to comply may result in civil penalties under section 535(1) of the FW Act.

Agreements under the Award

The judgement also considered what was required where the award permitted variation by agreement on certain matters.

The employers argued that certain variations to the award were valid based on internal policies or implied understandings between managers and staff.

However, the Court took a stricter view, holding that for such variations to be lawful, there must be clear and objective evidence of a genuine agreement, not just a policy or assumption. In other words, there must be a "meeting of the minds" between employer and employee, where both parties understand and accept the change to award entitlements. Without this, the variation could not be enforced.

Interpretation of 'hours worked'

Woolworths and Coles argued that only the hours actually worked should count toward the calculation of entitlements, suggesting that leave days and public holidays should be excluded. However, the Court held that leave and public holiday hours must be treated as "hours worked" for the purpose of assessing compliance with the Award. Excluding them would undermine the protective purpose of the Award and distort the calculation of entitlements such as overtime and penalty rates. This interpretation ensures that employees are not disadvantaged simply because they did not physically work on a given day.

Part-time employees

Finally, the judgment looked at how part-time employees are treated under the Award, especially when it comes to overtime and changes to agreed working hours.

Perram J confirmed that part-time employees are entitled to overtime pay when they work more than their agreed hours. This aligns with how full-time employees are treated and ensures consistency across the board.

The Court also clarified that any changes to a part-time employee's regular pattern of work must be made in writing before the change happens, as required by clause 12.3 of the Award. Roster changes can be made more flexibly, but they don't alter the agreed number of hours unless properly documented.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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