The Decision
In a recent Federal Court decision*, Justice Perram held that while contractual set-off clauses in an annual salary arrangement can be effective for the satisfaction of modern award entitlements during a pay period, they are ineffective between pay periods. This is a significant limitation on the practical use of contractual annual salary arrangements by employers. A perceived benefit of such arrangements has been that employers can take a ‘swings and roundabouts’ approach to complying with payment obligations in an award – if an employee is, by virtue of the salary arrangement, paid more than the award for one pay period, that premium provides a buffer that can then be drawn upon to protect the employer in the event that the salary is less than the award pay in another pay period, provided that the employee is not paid less than the award over the longer term. This is seemingly now at an end.
This decision considered the contractual salary arrangements used by Coles and Woolworths for retail managers covered by the General Retail Industry Award 2010.
While the decision was examining specific clauses used by Coles and Woolworths, the conclusion reached was not the product of the drafting of the clauses under consideration, but rather the result of the legislative scheme of the Fair Work Act and relevant contractual principles (which were extensively analysed in the judgment). As his Honour observed in relation to the Woolworths clause (at paragraph 66):
“Whilst it is not necessary to form a view about this for the purposes of this litigation, it is doubtful in my mind that cl 6 could ever be redrawn to achieve a six monthly pooling. It is unlikely that payments which have occurred in past pay periods can be characterised as payments for the purposes of the Award. For the same reason, I think it unlikely that payments in the future can be characterised as payments in the present pay period either. If this be correct, then a six monthly pooling operation for cl 6 cannot be resurrected by careful drafting.”
The Implications
This is a significant decision that disrupts a commonly adopted practice in Australian workplaces. It is not confined to the retail industry — it impacts all employers that have employees covered by modern awards and use contractual annualised salary arrangements. As noted above, the issue is not one that can be resolved by taking a different approach to the drafting of clauses. As such, employers should, as a matter of priority, review any use of annualised salary arrangements to ensure that the amount they are paying to employees in each pay period satisfies what is required by the award. Employers will not be able to take an approach where they rely upon a right of set-off and only examine whether total salary payments exceed award entitlements over an extended period (such as, in the case of the Woolworths clause, a period of six months).
*The decision is 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
