Background
Woolworths and Coles, like many retailers, paid annual salaries to employees in store-based management positions covered by the General Retail Industry Award 2010 (Retail Award), rather than calculating and paying Retail Award entitlements in the pay periods when they arose. Until now, this has been seen to simplify payroll by paying an equal instalment each fortnight or month (by Woolworths and Coles respectively). It also provides for regular and consistent payments for the employees on those salaries.
Woolworths and Coles both reviewed the sufficiency of the salaries paid to their employees against the underpinning award and undertook significant remediation programs exceeding $300m for Woolworths and $7m for Coles.
Despite these remediation programs, the Fair Work Ombudsman commenced proceedings against Woolworths and Coles separately in 2021 for failing to pay the employees as required by the Retail Award. Class actions on behalf of employees were also filed against Woolworths and Coles. There were significant differences of opinion between the parties impacting the identification and quantification of underpayments.
The Court heard all proceedings together in mid-2023 and made key decisions in the 201-page judgment. The case will return to Court (currently listed for November 2025) for the parties to address how to determine individual entitlements and finalise declarations. There is also the prospect that one or more of the parties will appeal aspects of the decision (once proceedings reach a point where appeals can be made).
Key issues
Set off is limited to a single pay period
One key issue considered by the Court was whether the annual salaries paid to the employees and the set off clauses in their employment contracts (where included) could be applied to account for all payments due under the Retail Award for more than one pay period, particularly in circumstances where the Retail Award does not expressly provide for such annual salaries.
The Court determined that set off should be confined to a single pay period on the basis that, under the Fair Work Act 2009 (Cth) (FW Act), an employee must be paid in full, in money, at least monthly (or more frequently if the pay cycle is shorter) and this requirement cannot be altered by an employment contract alone.
As a result, an employer cannot ‘pool’ the above-award amounts of salary payments that occur in pay periods throughout the year and rely on them to cover deficiencies in other pay periods. Moreover, if an adequate set off arrangement is not agreed (and able to be proved), the salary payment will only cover base rate entitlements, and other award entitlements (for example, penalties, loadings, allowances and overtime) will need to be paid in addition to salary.
Effectively, this means that in each pay period an employee must be paid the greater of their regular salary amount or their award entitlements. A pay deficiency in a pay period results in non-compliance with the applicable modern award and the FW Act even if, over the course of a relevant period (for example, six months or a year), the total of salary amounts paid exceeds the amount of total award entitlements.
In addition, a pay deficiency will result in non-compliance with each of the award pay entitlements that arose during the pay period. A later correction or remediation to make up award entitlements will not absolve the non-compliance, although it will be taken into account when awarding compensation and imposing penalties for non-compliance.
Onerous record keeping obligations apply
The Court held that where a modern award applies to a salaried employee, separate records of award entitlements like penalty rates, loadings, allowances and overtime must still be kept even though the employee may receive a payment expressed as a salary payment in each pay period. This is because the obligation to keep records is triggered by an employee’s entitlements to these payments under the applicable award, regardless of whether the payments are separately itemised or ‘rolled up’ into a salary.
The Court also commented generally on the types of records that will meet the requirements of the Fair Work Regulations 2009 (Cth).
The ‘details’ required to be kept of any incentive-based payment, bonus, loading, penalty rate, or other monetary allowance or separately identifiable entitlement to which an employee is entitled must contain sufficient particulars to allow an employee to understand the basis for, and calculation of, each entitlement (reg 3.33(3)).
Where a penalty rate or loading must be paid for overtime hours actually worked and an employer must keep a record specifying either the number of overtime hours worked by the employee each day or when the employee started and finished working overtime hours, it is not enough that this information can be deduced from clocking and rostering data; the information must be ‘readily accessible to an inspector’ and available for inspection by the employee. As a result, records must consist of something more than clock in and clock out times (reg 3.34).
Employers who fail to keep proper records risk civil penalties for breach of the FW Act. In addition, since 15 September 2017,ii unless an employer provides a reasonable excuse for a failure to keep the required records, the onus of proof is reversed where an underpayment claim regarding a relevant entitlement is made. This means the employer needs to disprove allegations of non-compliance, making it significantly harder to defend underpayment claims.
The nature of agreement required to vary default award conditions – informed consent
Some of the pay entitlements in dispute in the proceedings could be reduced or removed where the Retail Award permitted Woolworths or Coles and an employee to agree to vary the default conditions. These sorts of provisions are commonly found in modern awards and enterprise agreements and are relied upon by employers to introduce more flexibility into work arrangements.
The Court held that if an employer wishes to rely on such individual variations to award conditions, it must prove that an agreement was reached and there must be clear evidence that the employee understood and agreed to forgo specific rights or benefits. For example, if an employee agreed to a break between work periods of less than 12 hours, it must be clear that they understood they would be forgoing a 12-hour break and, possibly, associated payment of ‘double the rate’ when, as agreed, a 12-hour break is not provided.
This could represent a significant shift in practice for employers and employees who have previously relied on roster patterns or implied agreements to vary award entitlements. To follow the Court’s position in this decision, employers need to ensure that any agreement to forfeit overtime or other award benefits is explicit, clearly documented, and supported by evidence that the employee provided informed consent.
Overtime worked by salaried employees – factual assessment required
Particular difficulties can arise in respect of calculating entitlements for salaried employees who roster their own hours or otherwise work flexibly to cover the requirements of their role.
The Court considered how to identify overtime entitlements under the Retail Award where salaried employees have discretion over their working hours. It was held that the employment contracts authorised ‘reasonable additional hours’ and there did not need to be an explicit direction to work overtime on each occasion. Instead, a factual question regarding whether the overtime worked was ‘reasonably necessary’ was involved, and the employer had the burden of proving the work was not required.
The Court specifically observed that:
if an employee unilaterally alters their rostered hours but works the same number of hours as were rostered, there is no entitlement to overtime, and
if an employee works longer than their rostered hours because of operational needs or workload, and those additional hours exceed the Retail Award’s limits, an overtime entitlement arises.
Specific Retail Award issues
The Court also addressed a number of additional matters at issue in the proceedings. Whilst these were in relation to interpretation of the Retail Award, other modern awards commonly contain similar provisions. Other issues included:
circumstances that trigger overtime entitlements under the Retail Award, including the meaning of ‘ordinary hours’, ‘spread of hours’, ‘roster conditions’ and ‘additional hours, and including the impact of store-specific trading hours on the spread of hours
the application of overtime rules to part-time employees
the meaning of ‘double the rate’ in the context of the penalty for providing an insufficient break between periods of work (which, consistent with amendments to the Retail Award, was found to mean double the base rate of pay)
whether rostered hours not worked due to leave or public holidays count towards roster and overtime calculations
whether the requirement for consecutive days off within a defined period is satisfied if the consecutive days overlap roster weeks (or fortnights)
the circumstances in which an employee ‘regularly works Sundays’
when a salaried employee is entitled to an overtime meal allowance
how annual leave loading should be calculated, and
whether non-branded or generic clothing items are ‘protective’ or ‘special’ and therefore attract the special clothing allowance entitlement.
The detailed analysis and interpretation of these points highlights the complexity and nuance involved in applying the Retail Award—and, by extension, other modern awards with similar language. If you are unsure how these issues may affect your business or require assistance interpreting award provisions, our team can provide tailored advice to help you navigate these challenges and maintain compliance.
Initial considerations for employers
There are a number of initial questions an employer can ask to help understand the effect this decision might have on them.
What kind of annualised salary are you paying? For example, is it under an annualised wage arrangement under an award, a guarantee of annual earnings, a formalised individual flexibility agreement, simply under a contract of employment or is it assumed that the employees know that they don’t receive the award conditions on top of their salary? Each type of annualised salary arrangement has a different level of risk and requires a slightly different approach to documentation.
Are your salaried employees covered by a modern award or other industrial instrument? The existence of an employment contract and a payroll system designation as ‘employment contract’ or ‘individual agreement’ might not be sufficient to answer this question. Also, the payment of a salary does not remove the award obligations unless very specific requirements of a guarantee of annual earnings or other specific instruments are applied.
Do all your salaried employees have a current, valid, written employment contract? Do employment contracts include adequate set off clauses? NB, set off clauses that may have previously been considered sufficient should still be reviewed given the Court’s consideration of clause construction in these proceedings.
Are salary instalments sufficient to cover all award entitlements during the pay period given the way the employees work, such as shift lengths, weekend work, work outside the span of hours?
Are there processes in place to identify when it might be necessary to supplement salaries, for example, during annual leave when annual leave loading obligations arise under many industrial instruments?
Are there processes in place to ensure employees safely work within the boundaries you have allowed for when setting salaries? Do you regularly review how employees work and review salaries in light of that information?
Are you keeping time and attendance details for employees who are paid annualised salaries?
Do you have systems in place to keep the required records in a readily accessible form? When assisting employers with understanding their payroll compliance, we regularly need to combine rosters, time and attendance and payroll data to deduce the required record. However, the Court’s approach in these proceedings suggests that an employer must generate a single source of truth to confirm an employee’s hours of work and entitlements, rather than relying upon interpreting records that show hours or entitlements when read together.
Do you want to cease paying annual salaries and instead pay in accordance with the award and, if so, do you have a strategy in place to do that in the longer term and to manage your obligations in the meantime?
Have you considered other means of implementing arrangements akin to annual salaries, for example, a guarantee of annual earnings for eligible employees, or via individual flexibility arrangements?
The decision is a wake-up call for all employers using annual salaries for award-covered staff. Compliance requires careful structuring of salary arrangements, rigorous record keeping, and clear, informed agreements with employees. Our integrated legal and consulting team is ready to help you understand your risk in this area and navigate these challenges. We combine legal expertise with practical, data-driven solutions. Our team can help you assess risk, design compliant remuneration structures, and implement robust payroll and record keeping systems tailored to your business.
There are a number of initial questions an employer can ask to help understand the effect this decision might have on them.
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