01 Oct SIGNIFICANT RULING OFFERS VITAL GUIDANCE ON VARIOUS MATTERS RELATING TO WAGE AND MODERN AWARD COMPLIANCE

INTRODUCTION

In a significant ruling, the Federal Court of Australia has offered guidance on various matters relating to wage and modern award compliance, including the use of set-off clauses in employment contracts. The case, Fair Work Ombudsman v Woolworths Group Limited & Ors; Baker v Woolworths; Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092 (“Decision”), has extensive implications for employers who pay workers an annual salary to meet modern award obligations.

BACKGROUND

The proceedings stemmed from allegations of underpayment by Woolworths and Coles, affecting thousands of salaried managers.  The Fair Work Ombudsman and class action applicants argued that the companies failed to ensure annual salaries covered all entitlements under the General Retail Industry Award 2010 (as applicable at the time), including overtime, penalty rates and allowances.

KEY FINDINGS

The key findings of the Decision are set out below:

1. Set-Off Clauses Limited to Single Pay Periods

The Court ruled that employers cannot offset underpayments in one pay period with overpayments made in another.  Set-off clauses must operate within the same pay cycle (typically weekly, fortnightly or monthly).

2. Record-Keeping Obligations Reinforced

Employers must maintain detailed and accessible records of employee entitlements, including overtime hours, penalty rates and loadings.

Section 535(1) of the Fair Work Act 2009 (Cth) (“FW Act”) requires an employer to make, and keep for seven (7) years, employee records of the kind prescribed by the Fair Work Regulations 2009 (Cth) (“FW Regulations”) in relation to each of its employees.  There are three (3) relevant record-keeping obligations:

(a) Accessibility requirement: Regulation 3.31(1)(b) requires records to be in a “form that is readily accessible to an inspector”.

(b) Higher rates of pay requirement: Regulation 3.33(3) requires there to be a record setting out any incentive-based payment, bonus, loading, penalty rate or other monetary allowance an employee is entitled to be paid.

(c) Overtime hours actually worked requirement: Regulation 3.34 requires that if a penalty rate or loading must be paid for overtime hours actually worked, the employer must make and keep a record that specifies either the number of overtime hours worked by the employee during each day or when the employee started and finished working overtime hours.

In the Decision, it was found that roster records and clocking in/out data were insufficient to satisfy these record-keeping obligations, particularly the requirement to identify any separately identifiable amounts of loadings, penalty rates or other monetary allowances. 

3. Flexible Hours vs Required Overtime

The Court clarified that employees are only entitled to overtime payments when additional hours are worked at the employer’s requirement – not where flexible hours are worked for personal convenience [at paragraph 534 of the Decision].

4. Authorisation of Overtime

Another central issue was whether overtime is only payable if a manager expressly directs an employee to stay back, or whether it can also arise from broader obligations in a contract of employment.

In the Decision, as the contracts of employment stated that employees may be required to work “reasonably necessary additional hours” to perform their duties, it was found that employees were entitled to overtime even without a specific instruction from their manager.  Clauses like this are very common, and while they give employers flexibility, they can also be interpreted as an ongoing authorisation for overtime.

5.  Agreements Under Awards

The Decision also sheds light on the phrases connoting agreement, which typically vary the terms of a right or entitlement in the Award such as:

• • “By an agreement between an employer and an employee”

• “An employer and an employee may agree”

• “…an employee’s roster for a given day may be changed by mutual agreement with the employee”
  

The Decision expresses that for an employer to argue that an agreement was reached, the objective circumstances must indicate that the employer and the employee have reached a consensus “ad idem” on the subject matter of each clause; there should be a “meeting of the minds” [at paragraph 193 of the Decision].

The Decision states:

“Each of the clauses set out above involves an employee foregoing a right or entitlement which the Award confers upon them.  For an employee to agree to forego that right or entitlement the objective circumstances must indicate that the employee was aware that the right or entitlement existed.”

IMPLICATIONS FOR EMPLOYERS

• Reconciliation practices must be revised to ensure award entitlements are met in each pay period.
  
• Even carefully drafted contractual set-off clauses will not allow an employer to offset underpayments in one pay period with overpayments made in another, unless allowable under the applicable modern award.
  
• Record-keeping systems must be upgraded to capture specific entitlements, not just raw time data.
  
• Reconsider how employment contracts deal with additional hours.  Rather than leaving the obligation open-ended, the employment contract could include a cap on what is considered “reasonable additional hours”.  For example, a clause may provide that an employee can be required to work up to five additional hours per week, and that any additional hours beyond this must be expressly approved by a manager in writing.  This approach allows the employer to retain flexibility, while limiting exposure to ongoing and uncontrolled overtime claims.
  
• Employers should also implement clear authorisation processes for overtime.
  
• Ensure that where an agreement is reached to vary a right or entitlement conferred in a clause of a modern award, documentation is kept which demonstrates the agreement reached with the individual or group of employees.
  
  

CONCLUSION

The Federal Court’s decision in this case marks a pivotal shift in wage compliance and modern award for award-covered employees.

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