Supermarket giants vs Fair Work Ombudsman: Employer takeaways from landmark Federal Court decision

The Federal Court of Australia has delivered a significant decision clarifying key considerations for employers regarding off-set clauses and annualised salaries under industrial instruments. The ruling also reinforces employer obligations to maintain employee records in line with the Fair Work Act and Regulations.

In issue

• On 5 September 2025, the Federal Court of Australia issued a decision that clarifies the rules and obligations employers must consider when using off-set arrangements or annualised salaries under industrial instruments. This case involved the alleged underpayment of employees by Woolworths Group Limited (Woolworths) and Coles Supermarkets Australia Pty Ltd (Coles), as claimed by the Fair Work Ombudsman (FWO) and in two separate class action proceedings commenced simultaneously, termed the Baker and Pabalan proceedings (Class Actions). All employees involved were subject to written employment contracts that contained annualised salary arrangements under the General Retail Industry Award 2010 (Award).
• Both supermarkets were alleged to have underpaid their employees by failing to ensure that their respective annualised salary arrangements sufficiently covered all entitlements under the Award. The FWO also alleged that both supermarkets contravened the requirement for employers to keep certain records relating to their employees under the Fair Work Act 2009 (Cth) (Act), which gave rise to the question: Do record keeping obligations as per regulations 3.33 and 3.34 of the Fair Work Regulations 2009 (Regulations) apply if an employer is off-setting an employee’s entitlements through an annualised salary?

The background

This case involved four separate actions which were heard at the same time, however all involved the alleged underpayments by Woolworths and Coles of certain employees with reference to the Award.

The FWO alleged that Woolworths had underpaid approximately 19,000 of its store-based management positions, and that Coles had underpaid approximately 8,767 of its employees. Although both supermarkets had already made significant remediation payments amounting to approximately $307 million collectively, the FWO and the individuals involved in the Class Actions considered that more was owed, due to their disagreement of the interpretation of various clauses in the Award, employment contracts, and the Act.

The decision at trial

Set-off clauses

One of the main issues related to the operation of certain clauses within the employment contracts of the relevant employees, and their ability to ‘off-set’ the annual salaries against any shortfall generated by entitlements and monetary benefits under the Award. Woolworths’ off-set clause allowed for remuneration and other benefits under the contract to 'as far as possible' be in satisfaction of the minimum entitlements owed over a 26-week period.

The FWO argued that these clauses should not be allowed to operate due to section 323(1) of the Act, which requires employers to pay an employee any entitlements in full at least monthly, however in Woolworths’ case, the parties had agreed to a shorter pay period of a fortnight. Additionally, clause 23.1 of the Award requires employers to pay wages owed to employees either weekly or fortnightly.

The Court found that the set-off clauses included in the contracts for both supermarkets lawfully operated within a payment period, and that each salary payment was able to discharge an equal amount of any obligations owed within that payment period under the Award. This essentially means that the employers could not rely on making an over-award payment in one pay period to compensate any owing award entitlements in another pay period, limiting the operation of off-set clauses to a single pay period. Woolworths’ set-off clause was specifically referred to as an 'accounting abstraction' because there is no obligation to pay that amount under the Award or contract.

Record keeping obligations

The Act requires employers to keep certain employee records, and the FWO alleged both Woolworths and Coles of failing to do so.

Regulation 3.33 states that if an employee is entitled to be paid an incentive-based payment, bonus, loading, penalty rate or any other monetary allowance of identifiable entitlements, the employer must make and keep a record that sets out the details of such entitlements. Regulation 3.34 requires employers to make and keep overtime records, including the number of overtime hours worked each day, as well as the start and end times of any overtime worked.

Both Woolworths and Coles held the position that, because they were off-setting their employees’ entitlements, the employees were not entitled to be paid such entitlements or allowances, and therefore, Woolworths and Coles were not required to keep those records.

The Court held that both Woolworths and Coles had failed to comply with their record-keeping obligations under the Regulations. Importantly, the fact that Woolworths and Coles were using off-set arrangements or annualised salaries in their employees’ contracts did not have any effect of relinquishing their record keeping obligations, and data such as clock-in/clock out records and rostering records were insufficient to satisfy their obligations.

Woolworths’ and Coles’ failure to keep records also meant that section 557 of the Act applied, which required Woolworths and Coles to disprove the FWO’s allegations of underpayment, in circumstances where the employer failed to make, keep, or make available for inspection any relevant employee records.

Agreements under the Award

The issue arose as to what is necessary to constitute an agreement and who holds the onus of proving that such an agreement was reached.

Under the Award, the employer and an employee may agree to vary certain entitlements, including:

1. an agreement for the break of 12 hours to be reduced to 10 hours,
2. an agreement for the employee to take time off instead of being paid for a certain amount of overtime,
3. an agreement for an employee’s roster to be changed prior to the employee’s arrival at work, and
4. an agreement for an employee to be compensated for a public holiday by an equivalent day or time off without loss of pay, or an additional day or equivalent time as annual leave.

The Court held that, where an employee agrees to vary an entitlement, the objective circumstances must show that the employee was aware of the entitlement and agreed to vary it. Woolworths and Coles bear the onus of proving that an agreement was reached. The FWO has the legal burden of establishing the contraventions of the Act. Conversely, the employer has the affirmative burden of disproving any allegation in its defence, if the existence of the agreement was to be used as a defence.

Entitlements under the Award

Overtime

There was further debate between the parties as to whether it was necessary for an employer to require an employee to work overtime before the employee could do so. The Court held that the answer was 'yes', finding that Woolworths had required its employees to work additional hours that were reasonably necessary to perform their duties. Given that the contract of its employees contained a clause with clear wording to this effect, there was no legal debate between the parties as to whether it was even possible for an employee to work overtime without being required to do so.

Leave and rostered public holidays

The Court also considered the issue of whether authorised leave and public holidays ‘rostered but not worked’ constitute hours worked for the purpose of determining the extent of overtime that is payable under the Award. The Court held that rostered hours not worked due to an entitlement not to be at work count as hours worked for roster and overtime trigger purposes.

Implications for you

This case provides a number of key considerations and implications for employers across Australia.

1. Set-off clauses: Employers should not only ensure that any contractual set-off clauses adequately satisfy all relevant entitlements owing to an employee under an industrial instrument, but also be mindful that off-set clauses may only lawfully operate to cover such entitlements within a single pay period (rather than relying on making an over-award payment in one pay period to compensate any owing award entitlements in another pay period). This can be monitored by completing regular internal audits and exercises to ensure compliance and prevent any longstanding cases of underpayments.
2. Record-keeping obligations and best practice: Employers should ensure that they are meeting their obligations under the relevant sections of the Regulations to keep and maintain employee records, even if the employer is using off-set arrangements or annualised salaries under industrial instruments.
3. Agreements under industrial instruments: Employers should ensure that if required, they are able to prove that the objective circumstances show that the employee was aware of the entitlement and agreed to vary it. This can be achieved by ensuring that any such agreement is explicitly and clearly included in a written agreement or employment contract, rather than relying on documents such as internal policies or verbal conversations.
4. Entitlements under industrial instruments: Employers should ensure that their employment contracts, policies and procedures include clear and precise wording to indicate what may constitute overtime, to prevent confusion or ambiguity. Additionally, it is important that employers become familiar with the provisions of any applicable industrial instruments, to ensure they are aware of and are actively contemplating any and all considerations relating to employee entitlements, such as overtime.

Fair Work Ombudsman v Woolworths Group Limited & Ors [2025] FCA 1092