Recent decisions of the Fair Work Commission – Annualised salary arrangements

Read the full series:

Part 1: Recent decisions of the Fair Work Commission – Flexible working arrangements

Part 2: Recent decisions of the Fair Work Commission – Portable long service leave

This article unpacks the Federal Court’s decision in 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 (“Coles/Woolworths”).

The Federal Court decision – Overview

The Coles/Woolworths case was a significant first-instance decision addressing how employers manage annualised salaries and award compliance.

The case involved proceedings brought by the Fair Work Ombudsman and employee representatives against Woolworths and Coles. The central issue was whether employers could rely on contractual “set-off” clauses to treat an annual salary as satisfying award entitlements over an extended period (for example, 26 weeks), rather than within each individual pay period.

The Court rejected the approach of treating annual salaries as satisfying award obligations when assessed over extended periods. It found that compliance must be assessed against the entitlements that fall due in each pay period, based on the hours actually worked. Employers could not rely on overpayments in one pay period to offset underpayments in another, particularly where the contractual set‑off clause did not operate on a pay‑period basis and award entitlements were not satisfied as they fell due.

Key findings – Set-off clauses and pay periods

While the Coles/Woolworths decision may be subject to an appeal, the current position is that employers can pay an annual salary that is intended to compensate for award entitlements, however:

• an annualised salary must still meet minimum award requirements for each pay cycle based on the hours actually worked, and
• where a shortfall arises in a particular pay period, it cannot be cured by overpayments in another period.

The Court made clear that employers cannot create a notional “pool” of wages across multiple pay periods to satisfy compliance.

For businesses relying on annualised salary arrangements, this decision significantly constrains the way those arrangements can be used to demonstrate compliance and increases overall compliance risk.

Record keeping – Non-negotiable obligations

The Coles/Woolworths decision also placed strong emphasis on record keeping.

The Court rejected arguments that paying employees an “all-inclusive” salary removes the need to maintain detailed time and pay records. Instead, employers must keep accurate records of:

• hours worked
• overtime, and
• penalty rates and allowances

to demonstrate compliance with applicable awards or agreements.

The Court also expressed concern that reliance on rosters or “clock in” and “clock out” data was insufficient where those records did not directly capture the information required under the Fair Work Regulations, such as the number of overtime hours worked and the start and finish times of those hours. The Court emphasised that employers must maintain records that clearly and readily demonstrate compliance, rather than requiring inferences to be drawn from underlying data.

Employers must ensure that records are in a form that is readily accessible and enables compliance to be easily assessed by a Fair Work Inspector or an employee upon request.

This position aligns with Fair Work Ombudsman guidance, which confirms that employers must still meet record‑keeping obligations even where annualised salaries or offsetting arrangements are used.

Importantly, failures in record keeping can shift the burden of proof in underpayment claims, making it significantly harder for employers to defend allegations.

Fair Work Ombudsman guidance – Payment obligations

Under section 323 of the Fair Work Act, employers must pay employees:

• in full
• in money, and
• at least monthly

for all work performed.

Modern awards and enterprise agreements may impose stricter requirements (for example, weekly or fortnightly payment cycles), and employers must comply with those requirements where they apply.

Employers must ensure that payment arrangements comply with the Fair Work Act as well as any applicable award or enterprise agreement. Contractual arrangements cannot override these statutory or industrial obligations.

Practical implications for employers

These developments have broad implications across all industries, particularly for businesses that:

• pay employees annual salaries or flat rates
• rely on set-off clauses in contracts, or
• do not track actual hours worked, particularly for award-covered or salaried employees.

What employers should do now

In light of the Federal Court’s findings and regulator guidance, businesses should take a proactive approach to compliance.

Review salary arrangements
Confirm that annual salaries cover all applicable award entitlements for each pay period and for all actual hours worked (including overtime and penalties).

Audit employment contracts
Assess whether set-off clauses are appropriately drafted and recognise that they will not overcome underpayments where award entitlements are not satisfied in a given pay period.

Verify payroll systems
Ensure systems are capable capturing actual hours worked and monitoring compliance against award entitlements on a per-pay-period basis.

Strengthen record keeping
Maintain accurate records of hours worked and entitlements for all employees, with particular attention to award‑covered and salaried employees whose pay is intended to absorb award entitlements.

Conduct periodic compliance checks
Undertake regular audits to identify issues early and reduce exposure to historical underpayment claims.

Key takeaway

The effect of the Coles/Woolworths decision is clear. Annual salaries are not a substitute for compliance with award obligations. Employers must ensure that employees receive their full entitlements in each pay period and must maintain accurate records to support this. For businesses, this represents a shift away from reliance on broad contractual mechanisms toward more disciplined, systems-based compliance.

How the Victorian Chamber can assist

The Victorian Chamber can provide expert guidance to employers on structuring and implementing annualised salary arrangements. Our Workplace Relations team can assist with contract reviews and system checks to ensure businesses meet all award obligations while minimising compliance risks. By leveraging the Chamber’s support, organisations can confidently navigate the complexities of annual salary compliance and protect themselves from potential claims. If you are wanting to get further information, please contact the Workplace Relations Advice Line on 03 8662 5222.