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In the landmark decision of Fair Work Ombudsman v Woolworths Group Limited, the Federal Court found that set-off clauses in employment contracts will only validly discharge award entitlements if the payment under the clause occurs within the same period those entitlements are earned.
What is a set-off clause?
A set-off clause is a provision in an employment contract where an employer pays an employee at a higher rate, usually as a salary, rather than separately paying each award entitlement as it arises in that pay period. If properly drafted, a set-off clause can lawfully discharge the employer's obligations under the relevant modern award or enterprise agreement. However, as decided in the Woolworths case, this can only apply within a single pay period, and the payments must correspond to the award entitlements earned in that same period.
Below is an excerpt of one of the set-off clauses considered in the Woolworths case:
6) Minimum entitlements
If at any time you are entitled to any payment or other benefit as a consequence of the Employment (whether under legislation, an industrial instrument, the National Employment Standards or otherwise) including, without limitation, minimum hourly rates, penalties, overtime, allowances such as meal allowances and loadings such as annual leave loading (Minimum Entitlements), you agree that:
a) as far as possible, the Remuneration and other benefits under this Agreement will be in satisfaction of the Minimum Entitlements over a 26-week period calculated at the applicable minimum rate: and
b) the Minimum Entitlements do not form part of this Agreement.
As part of this, your Base Salary and any allowance outlined in your Letter of Offer includes payment for:
a) all hours you work over a 26-week period (whether part of your ordinary working hours or not): and
b) public holidays and substitute public holidays (whether you work on those days or not).
Fair Work Ombudsman v Woolworths Group Limited [2025] FCA 1092
In mid-2021, the Fair Work Ombudsman (FWO) commenced proceedings in the Federal Court against Woolworths and Coles in relation to the underpayment of salaried employees covered by the General Retail Industry Award 2010.
This decision involved four proceedings that the Court addressed together in a single judgment due to their similarity. Concurrent with the Woolworths and Coles proceedings, two class actions were initiated by employee groups in Baker v Woolworths Group Limited and Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092.
In the Woolworths case, employees received annual salaries that included a base salary, car allowance (if applicable) and superannuation. The salaries were paid in fortnightly instalments and exceeded the minimum wage set by the award. The employment contracts included a set-off clause (discussed above) that attempted to cover all minimum award entitlements over a 26-week period using the salary, rather than calculating and paying these entitlements each pay period.
The FWO argued that the set-off clause was unlawful because the Fair Work Act 2009 (Cth) requires employers to pay employees all their entitlements as they earn them, in full and at least once a month. Woolworths disagreed, contending that if the annualised salary arrangement was properly drafted, it could cover entitlements over the whole year. The Court rejected Woolworths' argument.
The Court held that employers cannot contract out of award obligations. Payments must be made in full and as actual payments, not just as calculations spread over a longer time. The Court found the set-off clause invalid.
Ultimately, the Court explained that the set-off clause could only lawfully operate if it was applied matching the payment made to the pay period. Pooling payments over six months and seeking to offset from pay period to pay period was not permissible.
The situation in the Coles case was similar. The Court reached the same conclusion: that set-off clauses can legally apply only within the same pay period and cannot be used to cover award obligations from different pay periods.
Other interesting issues
Record keeping
Regarding proper record-keeping requirements, the Court found that relying solely on employee 'clocking data' and roster information was insufficient to satisfy the detailed record-keeping obligations under the Fair Work Regulations 2009 (Cth). The Court explained that the records need to be readily accessible and clearly show the specific entitlements owed to employees.
Employers must keep detailed records of each entitlement, including overtime and penalty hours, rather than just the total hours worked.
Authorised overtime
The Court considered whether flexible hours worked by an employee count as overtime hours that require overtime payments. It explained that if employees work extra hours for personal reasons, such as voluntarily staying late without being asked, they are not entitled to overtime pay. Overtime is only required to be paid if the employer asks or directs the employee to work extra hours.
However, the Court also found that employment contracts can themselves authorise overtime, for example, by requiring employees to work reasonable overtime when necessary.
Agreement to set-off
The Court found that for a set-off agreement to be valid, both employer and employee must clearly agree on each part of it. In particular, where an employee is giving up a right or entitlement, it must be clear that they were aware of its existence.
An employer must also have evidence demonstrating that the employee agreed to the set-off arrangement and understood its terms.
Apportionment of set-off
The order in which salary payments were applied to satisfy award entitlements in a set-off was also a key consideration. The set-off clause should clearly specify how salary payments in a pay period are apportioned to particular award entitlements.
Woolworths claimed it could allocate payments to any liability it chose. However, the Court explained that this right was overridden by contract terms. The contract stated the salary and benefits were intended to cover minimum entitlements over a 26-week period, including all hours and allowances.
Accordingly, if the fortnightly salary covers all obligations, payments are inferred to be allocated evenly on a 'pari passu basis', discharging each obligation in full. The FWO argued that payments should be allocated in the order the entitlements appear in the contract, prioritising minimum wages first. However, the Court explained that this was incorrect as the wording of the contract indicated equal treatment of entitlements rather than a ranking.
Implications for employers
- Set-off clauses must align with pay periods - employers cannot rely on set-off clauses that pool or offset employee entitlements from pay period to pay period. To be valid, set-off clauses must operate within the same pay period in which the award entitlements arise.
- Authorisation of overtime - the employment contract itself can give a right to overtime, for example, by requiring an employee to work reasonable overtime when necessary.
- Detailed record keeping is essential - employers must maintain clear, accessible records that specifically document each employee's entitlements, including overtime and penalty hours.
- Review contracts and act now - failure to comply with these obligations may expose employers to legal risks and remediation.
If you would like to discuss how this decision impacts your business or have any questions regarding the issues mentioned in this article, please contact our workplace relations and safety team.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.
