On 5 September 2025, the Federal Court of Australia handed down highly anticipated decisions in FWO v Woolworths Group Pty Ltd and FWO v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092. 

Following these decisions, employers need to reconsider how they use set-off clauses in employment contracts to satisfy award entitlements. 

Typically, a set-off clause (which may also be described as an offset clause) is a written term of an employment contract whereby an employer and employee agree that the employer can designate the payment of remuneration to the employee as satisfying the employer’s legal liability to pay statutory entitlements under an industrial instrument or employment statute. 

Background

In 2021, the Fair Work Ombudsman (FWO) commenced legal proceedings in the Federal Court of Australia against Woolworths and Coles in relation to the underpayment of their salaried employees covered by the General Retail Industry Award 2010 (Award). 

The FWO alleged, as part of their case, that Woolworths and Coles had erroneously relied upon the set-off clauses in their employment contracts, which purported to allow the retailers to apply employees’ annualised salaries to satisfy all entitlements arising under the Award, such as minimum hourly rates, allowances, loadings, and overtime. 

These set-off clauses purported to “pool” over-Award payments across multiple pay periods (for Woolworths, a 26-week pay period) and to use that pool as a buffer against any Award payment shortfalls in another period. 

The FWO argued, however, that this practice of pooling was unlawful because section 323(1) of the Fair Work Act 2009 (Cth) (FW Act) requires employers to pay their employees all their entitlements as they earn them in full and at least monthly. 

Findings

In considering the terms of the employment contracts, His Honour Perram J rejected the proposition that Woolworths and Coles could lawfully pool over-Award payments in one pay period and apply them to cover Award underpayments in another. With regard to Woolworths, His Honour characterised the pooling as an “accounting abstraction” that could not legally discharge the obligation to pay award entitlements in the pay period in which those entitlements arise. 

His Honour observed that this sort of set-off practice is unlikely to be resurrected by “careful drafting”. Therefore, unless the Woolworths and Coles judgments are overturned on appeal or distinguished, the decisions will likely apply as a general principle about the legality and effectiveness of set-off clauses in employment contracts. 

Therefore, for a set-off clause to lawfully apply, the set-off must be made by reference to an above-Award payment made in the same pay period in which the Award entitlement accrues, and not across pay periods. 

Perram J’s reasoning was consistent with the FWO’s position, as well as section 323(1) of the FW Act which requires that amounts payable in relation to the performance of the work be paid “in full” within the relevant pay period. 

In addition to deciding on set-off clauses, Perram J further held that a set-off clause did not absolve employers of their obligations to keep and maintain employee records as required by Reg 3.33 and Reg 3.34 of the Fair Work Regulations 2009 (Cth) (FW Regulations). Woolworths and Coles had attempted to argue that raw clock-in/out data and roster data were sufficient, but the Court disagreed finding that such raw data required analysis and interpretation, rendering them inadequate in form and therefore, non-compliant with the FW Regulations. 

Due to the fact that Woolworths and Coles had failed to keep employee records in accordance with the FW Regulations, section 557C of the FW Act was enlivened, which triggered a reversal of the evidentiary burden and Woolworths and Coles were required to disprove factual allegations of underpayment, rather than the FWO or the employees needing to prove them. 

The Court’s conclusions about record-keeping mean an employer will have difficulty relying on raw data about hours worked in the absence of records that comply with the FW Regulations. In other words, it is not possible to cast the record-keeping onus on employees to record their own time. 

Practical Implications for Employers 

While the decision emanates from disputes in the retail sector, its principles resonate far beyond. Employers who remunerate staff with “all-in” or annualised salary models should act promptly to: 

1. Review all current annualised salary arrangements to ensure that, in every pay period, the payments received cover all entitlements owing. Additionally, any set-off clause must be expressly confined to discharging liabilities within that same pay period. 

2. Redraft existing employment contracts where such contracts attempt pooling or averaging across pay cycles, since these clauses may be wholly or partly void. Accordingly, employers should redraft such clauses to ensure conformity with the Court’s decision. 

3. Strengthen record-keeping systems to ensure detailed, contemporaneous records of overtime hours, penalties, and start/finish times of overtime. 

4. Reconcile underpayments as they occur. 

5. Where required, engage external experts to build protections into payroll systems to ensure that employees are being correctly paid during a relevant pay cycle. 

It is also important to recognise where legal advice is required. As we have seen, underpayment matters are complex, time consuming, and costly, and seeking legal advice early could help in mitigating these costs.

Please reach out to the team at WilliamsonBarwick should you require any assistance as we would be happy to assist you.