Should We Lose Sleep Over Wage Compliance In Australia? Not Quite

There has been much discussion in the market suggesting that the Federal Court's recent 'Supermarkets Decision' will significantly disrupt the way businesses are required to pay employees and cause resulting issues for sponsors buying or selling businesses. We do not think this is the case.

While the Supermarkets Decision does require businesses to rethink some long-standing remuneration practices, we don't think this needs to be a deal-breaker. With robust due diligence and a proactive compliance strategy, the pathway to wage compliance is well within reach.

We are working with Warranty and Indemnity (W&I) insurers to make sure that the scaremongering we have seen in public analysis of the decision so far does not translate into a reduced appetite to provide such insurance on private equity deals.

What is the Supermarkets Decision?

On 5 September 2025, Justice Perram of the Federal Court of Australia handed down his decision in 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 (the Supermarkets Decision).

The decision addressed a number of wage compliance issues, including record keeping obligations, the authorisation of overtime, and the making of agreements under modern awards. However, the decision's impact comes from the finding that, among other things, employers cannot set off an overpayment to a salaried employee in one pay period against an underpayment of an award entitlement in another pay period.

For example, an employer may pay an overall salary of $150,000 per year to an employee which is intended to compensate for ordinary hours and a reasonable amount of overtime. In one particular pay period, it may be that the employee does not receive enough remuneration to fully compensate them for the overtime they worked in that period. However, in another pay period, they may receive more remuneration than they would be entitled to under the award. The Supermarkets Decision makes clear that in this scenario the employer cannot set off the overpayment against the underpayment, because the employee must receive at least their full award entitlements in each and every pay period.

What does this mean for sponsors' portfolio companies?

In light of this decision, we recommend that sponsors take a structured approach to reviewing wage compliance across their portfolio companies:

1. Identify the relevant employee cohort: Determine which employees are paid a salary and are covered by a modern award or enterprise agreement. This will exclude all wage-based employees, who will generally already be paid on an hourly basis in line with the award, and all employees who are not covered by a modern award or enterprise agreement.
2. Segment by the high income threshold: Categorise these employees into those earning above the high income threshold (currently $183,100, indexed annually), and those earning below.
3. Use guarantees of annual earnings where available: For the employees earning above the high income threshold, consider issuing guarantees of annual earnings (if they haven't already been issued). While such a guarantee is operative, the underlying modern award will not apply, substantially reducing wage compliance risk for that employee.
4. Manage risk for employees below the threshold: For the employees earning below the high income threshold, there is a risk that they may be underpaid in some pay periods and overpaid in others. Employers of these employees should consider how to better track the hours worked by these employees (noting that record keeping obligations in this regard are already significant) in order to ensure that employees are paid correctly in each pay period. By understanding how much 'buffer' is in an employee's salary each pay period, employers can better manage how work is performed within that buffer – for example, by not authorising overtime work, requiring employees to take time in lieu, or providing 'top up' payments for peak work periods. Alternatively, employers may also wish to consider entering into an annualised salary arrangement under the relevant award, where this is available.
5. Focus on director liability and due diligence: Directors of portfolio companies need to know that they may be personally liable for any underpayment of wages. However, as with directors' work, health and safety liability, a full defence is available where the director has undertaken appropriate due diligence. In practice, we are seeing companies implement measures such as simple annual payroll audits and regular testing of payrules in order to establish and maintain that due diligence defence.

Application to your deals

We expect it will become standard for sellers to be asked RFIs in relation to whether it has considered the Supermarkets Decision, and what steps it has taken to address wage compliance risk.

Forward-thinking sponsors should prepare for this well in advance of a sale process. A clear explanation of the company's compliance framework can be developed relatively simply and, in any event, these steps will be necessary in order to support the director's due diligence defence referred to above.

Ultimately, we expect that sanity will prevail and market practice will settle quickly. We are optimistic that W&I insurers will continue to insure deals in circumstances where sellers can demonstrate a considered and defensible approach to wage compliance.

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.