Employers who pay annualised salaries to discharge wage and other monetary entitlements under an industrial instrument have been put on notice following the recent Federal Court decision handed down against Woolworths Group and Coles Supermarkets Australia[1] (“the Woolworths and Coles case”).
Whilst these cases focused on the retail sector, there are lessons to be learned for other sectors, and in particular the manufacturing sector, given the complexity of the Manufacturing and Associated Industries and Occupations Award 2020 (“Manufacturing Award”) featuring numerous penalty rates, shift loadings, annual leave loadings, overtime, and various allowance entitlements.
On 5 September 2025 Australia’s Federal Court found that Coles and Woolworths had systematically underpaid thousands of salaried store managers by failing to compensate them for all hours worked, including overtime, as required under the General Retail Industry Award 2010 (GRIA). The court ruled that the companies’ use of annualised salary arrangements and contractual set-off clauses did not satisfy their award obligations, and that their record keeping practices were inadequate.
This landmark decision by Justice Perram, which consolidated actions brought by the Fair Work Ombudsman (FWO) and class action proceedings, highlights critical lessons for employers around the need for precise timekeeping, robust record-keeping systems, and strict adherence to award interpretation. These lessons are relevant for all award-based employers.
Set-off clauses
A significant finding in the case referred to the ability to set-off annualised wage obligations over multiple pay periods. Woolworths employees were paid annual salaries that included a base wage, superannuation, and a car allowance where applicable and these salaries were paid fortnightly. Interestingly, the employment contracts contained a set-off clause that attempted to satisfy all minimum award entitlements over a 26-week period using the total salary, rather than calculating and paying those entitlements within each individual pay cycle (being the fortnight the employees were paid). The court found this method invalid, emphasising that award obligations must be fulfilled in each individual pay cycle.
The GRIA, states wages must be paid for a pay period according to the number of hours worked by the employee in the period or they may be averaged over a fortnight. Woolworths’ approach of averaging payments over a 26-week period does not align with what is permitted under the GRIA, instead requiring that the employer correct each chosen pay period.
Of note is that the Manufacturing and Associated Industries and Occupations Award 2020 (Manufacturing Award) however, allows employers to reconcile overpayments and underpayments across a 12-month period (Section 28.3). However, there is a formal requirement to complete an annual review to calculate the total remuneration the employee would have received under the award and compare it to the actual annualised wage paid. A critical condition of this arrangement is that accurate records must be maintained throughout the year. If any underpayment is identified during the annual review, the employer must pay the employee the amount of the shortfall within 14 days.
Record-keeping
The Federal Court found both Coles and Woolworths failed to comply with their record-keeping obligations under regulations 3.33 and 3.34 of the Fair Work Regulations 2009 (Cth). The obligation is for employers to keep records of the number of overtime hours worked by the employee during each day or when the employee started and finished working overtime hours if a penalty rate or loading was payable for overtime hours worked. Further, records must not be inferred from rosters or timesheets and, under Regulations 3.31 and 3.42, must be accessible to both inspectors and employees and capable of being copied upon request.
Of note was that the Federal Court ruled that roster records and clock-in/clock-out data does not satisfy the record-keeping requirements under the Fair Work Act 2009 and Fair Work Regulations 2009. Section 535 mandates that employers maintain accurate, legible, English-language employee records for at least seven years, which must be readily accessible to Fair Work Inspectors. These records must detail incentive-based payments, bonuses, loadings, penalty rates, and overtime hours.
The Court ruled the contractual set-off clauses did not exempt the employers of these record-keeping obligations.
The Federal Court found that this inadequate record-keeping by Woolworths and Coles triggered the ‘reverse onus’ provision under section 557C of the Fair Work Act, introduced by parliament in 2017. This provision dictates that if an employer fails to maintain or produce accurate employment records when an underpayment claim is filed, the burden of disproving the employee’s allegations falls on the employer in any legal proceedings.
Given the significant reliance often placed on clock-in/out systems in the manufacturing sector, and the requirement under the Manufacturing Award to keep a record of the start and finishing times of work, and any unpaid breaks taken, manufacturers must revisit their current record-keeping processes and controls.
Summary of lessons for the Manufacturing Sector
| Key matters | Lesson for Manufacturing Sector |
| Set-off clause – what can a set-off clause set off and are there any period considerations? | Set-off clauses must clearly identify which provisions of the Manufacturing Award will be satisfied by the payment of the annualised wage. In addition, where a particular set-off arrangement would make an employee worse off, such as having more than 14 days to correct an annual shortfall, an employer cannot contract out of this obligation. |
| Record keeping – clock-in/clock-out | Clock-in/clock-out systems may be insufficient for compliance. Employers must maintain detailed records of start/end times and unpaid breaks to meet Fair Work requirements. |
| Reverse Onus Provision (Fair Work Act 2009, s557C) | Employers must proactively maintain accurate records, as they now bear the burden of disproving underpayment claims. |
Steps manufacturing organisations should consider taking
- Conduct a broad and wide-reaching wage compliance health check
The issues raised in this update only scratch the surface around broader wage compliance risks that exist for employers. It is strongly recommended that organisations who are yet to undertake a broad review of their wage compliance commence a health check as soon as possible. The health check should consider technical interpretation, controls and process, data, and the overall payroll environment. We also recommend some level of sample testing is undertaken.
- Review set-off clauses
Possibly as a component of a wider ranging health check, employers need to identify those award or agreement-covered employees who are paid fixed periodic salary payments (e.g. annualised salary) to determine the efficacy of the set-off clause.
- Review record-keeping
Employers should assess their current recprd-keeping compliance and ensure they currently capture how many overtime hours employees work each day, when those hours start and end, and any extra pay or allowances that apply. It’s important to have a system that tracks the actual hours worked—rosters alone aren’t enough to count as a proper record for overtime purposes.
Rick Kimberley is a partner and leads the Australian Global Employer Services practice at RSM. He has considerable experience in helping organisations in obtaining assurance over their wage compliance obligations. Should you wish to have a confidential and no obligation conversation with Rick and his team he can be contacted at Rick.Kimberley@rsm.com.au.
[1] 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 (5 September 2025).
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