On 5 September 2025 the Federal Court handed down its judgement in the Coles and Woolworths underpayment case.
The decision dealt with two questions regarding award covered staff who are paid an annual salary.
- Can an employer use extra salary paid in one period to cover award shortfalls in another?
- Do employers still need to record overtime for award covered salaried staff?
The Court delivered a clear message: an overpayment in one pay period cannot be used to off-set an underpayment in another and employers must record overtime for award-covered salaried staff.
Lessons for employers
Set-off permitted only within the pay period
An employer can satisfy award entitlements if they:
- have a properly drafted set-off clause in their employment contracts; and
- pay employees at least what they would have received under the award in each pay period.
The Coles and Woolworths case confirmed that an above award salary can only offset award entitlements in each individual pay period.
“Pay period” refers to the pay period required by the relevant award. For example, under the Building and Construction General On-Site Award 2020 employees must be paid weekly.
This means additional pay from one week/fortnight/month (depending on the required pay period) cannot be applied to make up for a shortfall in another week/fortnight/month.
This also confirms the practice of many employers (particularly in hospitality and retail) to “top up” employees each month or at end of the year in attempt to rectify underpayments is unlawful.
Overtime records
Paying an annual salary does not avoid the record keeping requirements under the Fair Work Regulations, including the requirement to record whether the employee is entitled to be paid penalty rates and overtime under an award.
Employers must keep proper, accessible records for at least seven years.
No records?
If records aren’t properly kept, the burden of proof switches to the employer to prove that the employee didn’t work the hours they claimed.
The Court remarked:
“Coles failed to operate an overtime system for these employees, and s 557C makes the ensuing evidentiary vacuum a calamity which belongs to Coles and not its employees.”
Reasonable additional hours = authorised overtime
It is commonplace for salary contracts to include a clause stating that employees may need to work “reasonable additional hours” to get their job done.
If the employee is covered by an award, and the employer requires them to work reasonable additional hours that fall outside their ordinary hours of work, those additional hours of work will be authorised overtime, attracting the relevant rates under the award.
Therefore, this overtime must be adequately remunerated in the same pay period by the employee’s annual salary.
Key Takeaways
Employers who pay annual salaries to set off award entitlements should:
- Audit contracts: Review and update their set-off clauses
- Track payments: Ensure employees are paid at least what they would receive in each pay period under the award – an overpayment in one pay period cannot be used to offset an underpayment in another.
- Record hours: Maintain clear, legible records of hours that attract overtime and other penalty rates under the award.
- Additional hours: Make sure “reasonable additional hours” are rostered and documented.
