Contract set-off clauses curtailed triggering class action and other risks

The Federal Court of Australia last week handed down a significant decision in Fair Work Ombudsman v Woolworths Group Limited & Ors [2025] FCA 1092. 

In summary, the Court found that employers cannot offset underpayment of award entitlements in one pay period against overpayments made in a different pay period by relying on offset or averaging provisions in their employment contracts. For example, if employees are entitled to be paid weekly or fortnightly under an applicable industrial instrument, they must be paid all their minimum entitlements under that instrument in each week or fortnight and it is not possible to reconcile their entitlements averaged over a month or a year.

Background 

The case concerned alleged underpayments by Woolworths and Coles in respect of four separate but related proceedings decided together, two by the Fair Work Ombudsman (FWO) and two class actions commenced by Adero Law. Each of the proceedings related to underpayments under the General Retail Industry Award 2010 (Award). 

Woolworths had attempted to discharge its monetary obligations arising under the Award by reference to remuneration and other benefits calculated across a 26-week period under its employment contracts, and the Court found that Woolworths was unable to do so given the Award required fortnightly payments. Coles had a set-off provision in its employment contracts referable to salary generally satisfying all entitlements.

The Court held that the obligations arising under the Award to make monetary payments each fortnight meant that the set-off clauses in the Woolworths’ and Coles’ employment contracts were only effective to discharge obligations under the industrial instrument within each fortnight, as payment under the Award and the Fair Work Act 2009 (Cth) (FW Act) was required to be made within each pay period in full. Therefore, the set-offs could not be legally effected between different pay periods. 

Employee records

The Court also clarified the extent to which employers are required to keep employee records under the FW Act and the Fair Work Regulations 2009 (Cth) (FW Regulations). In this respect, the Court found that an employer will fail to comply with their record-keeping requirements if the records required to be kept have to be deduced from two sets of data, such as rosters and clocking data. This is because the record needs to be in a form that is readily accessible to an inspector or employee if requested and is capable of being copied. 

The Court also held that the records must include sufficient particulars to allow an employee to understand the basis on which the entitlements referred to are calculated, including for example, the reasons why penalty rates are payable and how they are calculated.

What employers should do now

We recommend that employers using salary set-off arrangements for award-covered employees:

• conduct reconciliations to calculate the amount of remuneration that would have been payable to the employee under the provisions of the award over each relevant pay period under the applicable industrial instrument;
• make additional payments in each pay period where the reconciliations undertaken show that an employee has received less than they would be entitled to under the industrial instrument;
• alternatively consider other available options such as annualised wage arrangements in applicable industrial instruments, individual flexibility arrangements and guarantees of annual earnings to avoid award provisions applying; and
• keep records of employees in one data set in a form that is readily accessible to an inspector or employee and capable of being copied upon request, to ensure compliance with the FW Regulations. These records must outline the employee entitlements, such as penalty rates, loadings and overtime hours and the basis for calculating those entitlements. 

Given that from 1 January 2025 penalties of up to AU$495,000 per contravention or AU$4,950,000 per ‘serious contravention’, or three times the underpayment amount (if greater) can be imposed in cases involving underpayments under the FW Act and industrial instruments, it is now more important than ever that employers implement the above recommendations. In addition, where an employer intentionally engages in such conduct, the offence may attract penalties of up to AU$1,650,000 for an individual or AU$8,250,000 for a corporation, or three times the underpayment amount, whichever is greater. A conviction for this offence may also carry imprisonment of up to 10 years for an individual involved in a contravention. 

Class action risks

Employers should also be aware that the Court’s decision may increase the potential quantum of underpayment claims, given the prevalence of offsetting practices across different pay periods in different sectors. This could, in turn, enhance the viability of underpayment class actions. Taking the steps outlined above will assist in demonstrating compliance, managing litigation risk and reducing the likelihood of being targeted by plaintiff firms or litigation funders. JWS can assist with other strategies to reduce this risk and the risk associated with investigations by the FWO.

Legislation to protect award penalty and overtime rates

In addition, the Fair Work Amendment (Protecting Penalty and Overtime Rates) Act 2025 (Act) commenced on 30 August 2025. The Act provides that when the Fair Work Commission (FWC) exercises its powers to make, vary or revoke modern awards under the FW Act, it must ensure that:

• the penalty and overtime rates that employees are entitled to receive are not reduced; and
• modern awards do not include terms that substitute employees’ entitlements to receive penalty rates or overtime rates, where those terms would have the effect of reducing the additional remuneration the employee would otherwise receive.

This amendment is intended to prevent the FWC making provisions regarding single rates of pay which substitute penalty rates and overtime. 

This article was written with the assistance of Madeleine Morris, Law Clerk.