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A landmark Federal Court decision has confirmed that set-off clauses in employment contracts will not always validly discharge award entitlements. In Fair Work Ombudsman v Woolworths Group Limited [2025] FCA 1092, the Federal Court held that employers cannot average or offset award underpayments across different pay periods using a set-off clause.
Facts
Woolworths Group Limited (Woolworths) employed salaried employees covered by the General Retail Industry Award 2010 (Award). These employees were paid an annual salary, paid in fortnightly instalments, which exceeded the minimum rate prescribed by the Award.
The employment contracts contained a set-off clause stating that the salary covered all award entitlements, including overtime and penalty rates, calculated over a 26-week period. As a result, Woolworths did not calculate or separately pay award entitlements in each pay period.
Between 2010 and 2020, Woolworths systematically underpaid more than 4,500 salaried staff by failing to ensure their annual salaries were sufficient to cover all hours worked under the Award.
The company self-reported the issue in 2019, estimating over $390 million in back payments owed to employees across its supermarket and Metro stores.
Despite self-reporting and subsequent remediation efforts, the Fair Work Ombudsman (FWO) pursued civil penalties against Woolworths and several subsidiaries, arguing that the breaches were serious, long-running, and systemic.
Issue
The FWO alleged that Woolworths had underpaid employees because award entitlements must be paid as they are earned, and employers cannot rely on averaging entitlements over an extended period.
The key issue for the Court was whether a set-off clause could lawfully operate across multiple pay periods, rather than within the pay period in which the entitlements arose.
Decision
The Federal Court held that award entitlements must be paid and set off within the same pay period in which they arise.
Employers cannot:
- average award entitlements over multiple pay periods; or
- offset underpayments in one pay period with overpayments in another.
Award entitlements must be paid in full, as actual payments, and as they are earned. Employers cannot use set-off clauses to contract out of their obligations under a modern award.
Accordingly, the Woolworths set-off clauses were invalid because they attempted to cover award entitlements over a 26-week period. Woolworths was found to have underpaid thousands of salaried staff and incurred a significant penalty.
Penalty
In one of the largest workplace law penalties in Australian history, the Federal Court ordered Woolworths to pay $50 million in penalties for widespread and prolonged underpayments to thousands of salaried employees.
The case serves as a stark reminder to all employers of the serious consequences of payroll non-compliance and the importance of proper award interpretation.
Key Takeaways for Employers
- Award entitlements must be met in each pay period, not averaged over time.
- Set-off clauses must align with the pay period in which entitlements arise to be enforceable.
- Employers must maintain accurate, accessible, complete and detailed records even for salaried employees. Records must include pay records (remuneration details, deductions and any entitlements like bonuses or penalty rates) and overtime records (number of overtime hours worked or start/end times of overtime hours).
- Any set-off clause that seeks to pool or average payments over an extended period is likely to be unenforceable and expose employers to underpayment risks.
- Review contracts and act now – failure to comply with these obligations may expose employers to legal risks, remediation and possibly significant monetary penalties.
Pointon Partners has experience in assisting clients to successfully remedy underpayments and avoid reputational damage. If you wish to discuss this article or have any queries about how your organisation is utilising set off clauses please contact Michael Bishop or Amelita Hensman from our Employment Team.
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.
