Can employers still pay annual salaries to award covered staff?

At the start of this month, an important judgment was handed down dealing with alleged underpayments for Coles and Woolworths employees [1]. The judgment examined whether employers could rely on set-off clauses in employment contracts to pay employees annual salaries, rather than paying award entitlements, such as overtime pay, separately.

These are the types of questions that we are being asked about this decision.

Does this case mean we can no longer rely on set-off clauses to pay our award covered staff an annual salary?

No. Employers can continue to pay an annual salary to award covered employees if their employment contracts contain an appropriately worded set-off clause. However, employers must ensure that they are paying employees a sufficiently high salary to compensate them for all their award entitlements in each and every pay period.

Importantly, employers cannot use the above award salary paid in one pay period to offset an underpayment of award entitlements in another pay period. Each pay, whether it is weekly, fortnightly or monthly, must adequately compensate the employee for all the hours worked, and all their award entitlements, within that specific pay period.

If the salary paid for one or more pay periods is not enough, the employer will need to top-up the salary to ensure the employee is not underpaid in any one pay period.

We pay market rates, monitor the annual increases to award rates carefully and have always been confident that we pay above award. For our lowest paid employees, we pay a salary that is approximately 10% above the award, and more than that for the higher paid employees. Our employees only work business hours and don’t really work overtime. Do you see any exposure for us?

In light of this recent decision, we recommend that you review whether paying employees 10% above the award rate is sufficient compensation for all their award entitlements within each pay period. You will need to perform your analysis at the level of single pay periods and not over a year. You will also need to consider whether you have an appropriately worded set off clause in your employment contracts.

If the applicable award provides for annual leave loading of 17.5%, and you pay 10% above the award, then you may well be exposed when an employee takes annual leave. Consider whether the salary that you pay them in that specific pay period compensates them for the minimum wages, annual leave loading and other award entitlements that fall due for that pay period.

For example, if your employee takes annual leave for the entire duration of a pay period then, subject to the terms of the award, they are likely being underpaid. If that is the case, then you may wish to consider whether your business should be paying annual leave loading as a separate entitlement and relying on the set-off clause with respect to other award entitlements.

What do you recommend we do in light of this decision and what are other employers in our industry doing?

We are recommending that employers consider whether the annual salaries they pay award covered employees adequately compensate them for all their award entitlements, including annual leave loading, penalty rates, overtime pay and allowances, within each and every pay period. This may require an examination of patterns of work and overtime records.

Many employers perform a reconciliation on an annual basis; however, this will no longer be sufficient. Employers will need to determine this issue in advance, rather than in hindsight. Employers will need to understand up-front how much of each award entitlement is compensated for by the employee’s salary, as paid within a single pay period. For example, if employees work overtime and are paid an annual salary rather than overtime pay, how many hours of overtime can be worked within a single pay period without the employee being underpaid within that single pay period? This analysis must include consideration of actual patterns of work – for example, do employees work an hour of overtime each day, Monday to Friday? Or is overtime worked for 5 hours on a Sunday which may attract a higher overtime rate?

Some employers have found that the annual salary they are paying adequately compensates employees across the course of the year, but not across the course of a single pay period. These employees are being underpaid and this needs to be rectified. Employers will need to change how they compensate employees if there are underpayments within a single pay period.

What other employers are doing depends on what their applicable award requires and what the issues are for their workforce. There is no one-size-fits-all approach. Some employers are considering moving to paying overtime and penalty rates for some categories of lower paid employees, even though they have sought to rely on a set-off clause to date. Other employers will need to start paying annual leave loading as a separate payment when employees take annual leave.

How Justitia can help

The team at Justitia can assist your organisation to understand its obligations with respect to paying annual salaries to award covered employees and what changes you may be required to make to ensure you are not underpaying employees.

Get in touch with our friendly team: Contact Us

[1] 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