Major change for annualised salaries & “set-offs”

Employers who use annualised (or “set-off”) salaries to meet modern award entitlements have been hit with one of the clearest warnings yet from the Federal Court of Australia. In a lengthy and detailed judgment delivered on 5 September 2025, Justice Nye Perram found that contractual set-off or “pooling” arrangements cannot be used to discharge award entitlements that accrue in one pay period by relying on overpayments made in other pay periods — unless the award or the pay arrangement expressly and lawfully permits it. The decision arose out of consolidated proceedings brought by the Fair Work Ombudsman against Woolworths and Coles and related class actions.

The rulings

In summary, the Court ruled that:

• an employer cannot generally rely on an annual salary or a contractual “set-off” clause to absorb award entitlements that arise in separate pay periods — put simply: an overpayment in pay period A cannot be used to excuse an underpayment in pay period B unless the statutory and award framework allows it.

• section 323 of the Fair Work Act 2009 (Cth) (and related award/payment frequency rules) requires award entitlements to be capable of being identified and paid within the relevant pay period – that is, contractual clauses cannot be used to circumvent those statutory/award obligations.

What this means for employers

• Employers using annualised salaries to “cover” overtime, penalty rates or fluctuating award entitlements can no longer assume that paying someone an above-award annual salary will automatically discharge periodic award obligations across different pay cycles. Where the award requires pay and entitlements to be assessed per pay period, set-offs across pay periods are likely invalid.
• The decision increases the compliance burden – that is, employers must be able to show, for each pay period, that the employee’s award entitlements were met (or that an express lawful annualised arrangement applied in that period). Without that evidence, retrospective underpayments may be found, and significant remediation ordered.
• Large employers that relied on pooling or six-monthly averaging to tidy up complex award entitlements are particularly exposed — the decision has already been estimated to push remediation liabilities (for Woolworths & Coles) into the hundreds of millions.

Quick Tips

• Pause reliance on multi-period pooling — review whether any contractual set-off or annualised clauses attempt to average or offset entitlements across multiple pay periods (treat them as high risk).

• Fix record-keeping — ensure you record, per pay period: actual hours worked, start/finish times, breaks taken, overtime/penalty calculations, and the basis for any annualised calculation. The Court stressed that good records are indispensable.
• Recalculate pay histories — run a payroll compliance review (by pay period) for roles paid on an annualised basis to identify any underpayments. If you find shortfalls, remediate promptly (and document the remediation).

• Review employment contracts and payroll systems — amend any clauses that purport to set off across pay periods and update payroll software so that award entitlements are calculated and stored at the pay-period level.

• Seek specialist advice — annualised salary arrangements remain workable in some circumstances but are legally technical; get a specific legal and payroll systems review rather than relying on generic templates.

How can FC Lawyers help?

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