Annual Salaries and Setting Off Modern Award Entitlements

7 Sept

Employers need to take an even closer look at both their contracts of employment as well as their payroll practices and compliance auditing following the 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 FWO and class action litigants commenced proceedings against both Coles and Woolworths on the basis that annual salary payments could only satisfy the employers’ obligations to pay modern award entitlements within each pay period. The applicants challenged the practice of attributing over-award payments across pay periods in satisfaction of obligations under the General Retail Industry Award 2020.

Meaning and Operation of “Attribution Clauses” in Employment Contracts

Section 323 (1) of the Fair Work Act (Cth) governs how pre-existing entitlements under a modern award must be paid in full. Failure to do so constitutes contravention.

One set off clause referred to “Remuneration and other benefits under this Agreement” satisfying modern award obligations, without an explicit reference to “payment of”. The Federal Court of Australia found that the clause failed to refer to a payment, instead relying on a notional 26-week “pool”. The Court described the 26-week pool as an “accounting abstraction” which could not lawfully discharge modern award obligations, which require actual payment.

The Court held that the correct construction of this set off clause required reading the clause as a reference to “the payment of the Remuneration…” and to disregard six-month pooling. Consequently, each fortnightly payment discharges an equal amount of modern obligations for that fortnight.

Five other exemplar set-off clauses similarly aimed to satisfy modern award entitlements via salary. The Court held that each of the five clauses must operate within a pay period and must refer to “payment of” to be valid.

The Court also found that salary payments may discharge modern award obligations without explicit attribution clauses, providing there is a close correlation between the contractual payment and the modern award entitlement.

Record-Keeping Obligations

Regulations 3.33 (3) and 3.34 of the Fair Work Regulation 2009 require:

a record of any incentive-based payment, loading, penalty rate, bonus, or allowance to which an employee is entitled; and
a record detailing the number of overtime hours actually worked each day or the times they started and finished (3.34).

The practical effect of these obligations is that employers must keep rosters and time sheets for all employees covered by modern awards or enterprise agreements. Without a roster, it is often impossible to identify the overtime hours each day. Overtime hours cannot usually be identified from daily start and finish times alone or from a time sheet for the whole pay period.

The Federal Court of Australia held that both Woolworths and Coles failed to keep the required records for relevant salaried employees. Set-off clauses or all-inclusive salary arrangements do not relieve them of record-keeping obligations. Rostering or clock-in data alone did not satisfy the regulations.

These findings are consistent with our advice and approach to wage compliance, remediations and litigation. They are also foundational to the way CheckPay, our proprietary underpayment detection and calculation software, is able to detect and calculate underpayments with such precision.

Section 557C of the Fair Work Act - Employer Burden to Disprove CLaims

Section 557C of the Fair Work Act 2009 (Cth) places the burden of disproving allegations on an employer if they failed to make or keep required records.

Regardless of whether an employer utilises an annualised wage arrangement under a modern award which contains such a clause or a contractual set off in each pay period, it must demonstrate that an employee’s pay is at least equal to what they would have received under the modern award. Without keeping these records, it is impossible to calculate what was payable under the modern award to use as a benchmark.

The court found that s 557C applies to allegations, not just contraventions, can apply to partial or incomplete failures, and shifts the legal burden to the employer. The burden applied to Woolworths in the case of Ms Brown and to all of the FWO's case against Coles because of their record-keeping failures.

Employer TO DO List

Engage an experienced solicitor to review and (re)draft employment contract templates with compliant set off clauses.
Review and implement or revise rostering practices, time-keeping obligations and other record-keeping requirements.
Review and implement or revise payroll practices which calculate modern award entitlements in each pay period to use as a benchmark to ensure salary payments equal or exceed the modern award entitlements.
Implement a compliant annualised wage arrangements and practices for employees covered by any of the following modern awards which contain an Annualised Wage Arrangement clause: