Annualised Salaries – Federal Court Clarifies Set-Off and Pay Cycle Compliance
A recent Federal Court decision involving Woolworths and Coles has provided important clarification on how annualised salary and set-off arrangements operate under the Fair Work Act 2009 (Cth) and modern awards.
In Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092, the Court confirmed that while annualised salaries and set-off clauses are not unlawful, they can only operate within a single pay period. Employers cannot rely on averaging or pooling payments across multiple pay cycles to meet minimum award entitlements.
Background
Both Woolworths and Coles employed large numbers of salaried managers under contracts that paid an annual salary rather than hourly wages. Those contracts included clauses intended to allow the employer to treat the annual salary as satisfying award entitlements — including overtime, penalty rates and allowances — assessed over extended periods (such as six months).
The Fair Work Ombudsman challenged whether those clauses could lawfully operate to “set off” award shortfalls in one pay period against higher payments made in other periods.
Key Findings of the Federal Court
1. Set-off is limited to the pay period in which entitlements arise
The Court held that contractual set-off clauses are only effective to the extent they operate within a single pay period:
“the clauses are only effective to discharge obligations under the Award within a single pay period” (at [37]).
In practical terms, this means that payments made in one pay cycle cannot be used to offset award entitlements that arise in a different pay cycle. Overpayments in earlier or later periods cannot cure underpayments elsewhere.
2. Award obligations must be discharged by actual payments, not notional pooling
A central issue was that the contracts referred to satisfaction of award obligations by reference to an annual remuneration figure, rather than the payments actually made in each fortnight.
The Court rejected this approach, describing six-monthly pooling as an “accounting abstraction”, not a payment:
“the Award requires an employer to ‘pay’ the amounts which are due and the existence of an accounting abstraction is not a payment” (at [61]).
Only actual payments made in the relevant pay period can discharge award obligations arising in that period.
3. Annualised salaries are not unlawful — but they are not ‘set and forget’
Importantly, the Court did not find that annualised salaries are invalid or contrary to public policy. Nor did it suggest employers must abandon salaried arrangements altogether.
Instead, the Court confirmed that:
- Employers may pay employees an annual salary
- Set-off clauses may operate
- But only where the payments made in each pay period are sufficient to discharge any award entitlements arising in that same period
As the Court explained, each fortnightly payment can only discharge an equal amount of obligations falling due in that fortnight (at [81]).
4. Six-monthly or annual averaging is ineffective
The Court made clear that contractual drafting cannot overcome this limitation. Even carefully drafted clauses cannot lawfully permit:
- Banking excess payments across months, or
- Using future payments to satisfy present award obligations
The Court expressed doubt that six-monthly pooling could ever be achieved under the current legislative framework.
Practical Implications for Employers
This decision has significant implications for employers who rely on annualised salary arrangements, particularly those covered by modern awards.
What employers should do now
- Review employment contracts
Ensure set-off clauses do not purport to average or pool payments across multiple pay periods. - Assess pay period compliance
Employers should be confident that payments made in each pay cycle are sufficient to meet award entitlements arising in that cycle. - Maintain accurate time and entitlement records
Even for salaried employees, proper records are critical to demonstrate compliance. - Be cautious with “buffer” assumptions
Paying “well above award” in some periods does not protect against liability if entitlements are not met in others.
Why this matters
The Woolworths and Coles decision reinforces a long-standing principle of Australian employment law: award entitlements are pay-period specific and must be discharged by payment.
Annualised salaries remain lawful, but they require careful structuring, ongoing monitoring, and clear alignment between contractual payments and award obligations. Employers who treat salaries as a blanket buy-out of award conditions face increased compliance risk.
If your business uses annualised salary arrangements or set-off clauses, or you are an employee on an annualised salary and are concerned you are not being paid your entitlements, we can assist in reviewing.
The information above is general in nature and if you need tailored legal advice, contact the experienced team at Miller Sockhill Lawyers on 07 5444 4750.