September 2025

Federal Court Ruling on Annual Salaries: What Employers Need to Know Now

Overview

In a significant decision earlier this month, the Federal Court confirmed for the first time that annual salaries paid to award covered employees must satisfy all minimum entitlements in every pay period. The Court also confirmed that companies must keep detailed timesheets for all salaried staff, including overtime (FWO v Woolworths Group Ltd & Ors [2025] FCA 1092).

Background

In 2021, the FWO commenced legal action against supermarket giants Coles and Woolworths in the Federal Court over alleged underpaying salaried managerial staff.

Both companies paid an annual salary under their contracts but did not pay or keep records correctly.  Specifically, the issues involved unpaid overtime, penalty rates, allowances as well as a failure to keep proper records.

The court addressed the central issue of whether the contractual clauses allowing employers to “set off” annual salaries against award entitlements were lawful.

The court found that both companies had failed to keep the required records even though they paid annualised salaries meant to cover these entitlements. In simple terms, they didn’t properly track and pay for the overtime and penalties employees were entitled to.

The Decision

The Federal Court has now made a ruling that:

‘Employers must ensure that salaries meet award entitlements in every pay period, not just over a full year.’

This means employers cannot average entitlements like overtime or penalty rates over an extended period. Instead, they must pay correctly each pay period (eg. weekly or fortnightly), ensuring employees are fully compensated for their hours worked and other entitlements every time they’re paid.

The court also rejected the argument that over-award payments made in some pay periods could be used to offset underpayments in other periods. 

Bonus payments are separate and cannot be used to reduce an employer’s liability for underpayments unless a causal link could be established.

What this means for Employers

Given the stakes, an appeal is almost inevitable, although Coles and Woolworths are not expected to decide on this until early 2026.

In the meantime, if you’re paying employees an annual salary, especially those covered by modern awards, it is a critical point in time to review your payroll compliance and record keeping practices:

1. Pay correctly every single pay cycle

Ensure employees are paid their full entitlements including overtime, penalty rates and allowances every pay period, not just averaged over a year. For example, if an employee works extra hours or on weekends, the wage for that pay period must cover those extra payments.

2. Keep detailed records of all hours worked (salary and non-salary employees)

Employers must have a system in place to track and record hours worked by employees. This includes salaried workers, not just those paid by the hour. This decision highlighted that having manual timesheets or informal records is not enough—you need a reliable, clear system to ensure that all hours worked are documented properly.

3. Review employment contracts and set-off clauses

Many employers include set-off clauses in contracts, which allow them to offset certain entitlements like overtime or penalty rates within the salary. However, the Court made it clear that set-off clauses cannot replace proper record-keeping.

Employers can no longer rely on these clauses to justify not paying employees for overtime or penalties within any pay period. Any adjustments made under set-off clauses must happen within the same pay period, not carried over to later pay cycles.

Key Takeaways

  • Salaries must cover all Modern Award entitlements in full every pay cycle.
  • Set-off clauses cannot replace actual payment of overtime, penalties, etc.
  • The court’s decision affects all industries, not just retail.
  • Strong payroll and record-keeping systems are essential.
  • Employers must track all hours worked for all employees, even those on a salary.
  • Failure to keep accurate records may result in penalties under the Fair Work Act.
  • Regular payroll reconciliations or wage audits are essential to identify and remediate underpayments within each pay period.

Next steps

In light of this decision, employers should:

  • Review employment agreements and salary/set-off clauses,
  • Strengthen payroll and record keeping systems,
  • Implement regular reconciliation or wage audit processes to track entitlement vs actual pay, within any pay period.

It is important that you understand the impact this decision may have on your business. Reach out to our team, we’re happy to help you comply with all the necessary requirements.