Many employers assume that paying an employee a fixed annual salary means they are covered for all Modern Award entitlements. A recent Federal Court decision involving Woolworths is a sharp reminder that this assumption can be costly.
We recently dealt with a client matter where the minimum Award entitlements had to be considered carefully, despite the employee being paid an annualised salary. That experience echoes the key lesson from the Woolworths litigation: you cannot rely on over-award payments alone unless your arrangements are legally precise and actively monitored.
The Woolworths decision - what was the issue?
In Fair Work Ombudsman v Woolworths Group (2025), the Federal Court examined whether Woolworths could rely on a contractual set-off clause to treat all over-award payments made over a 6-month period as satisfying Award obligations such as:
- minimum hourly rates
- overtime
- penalty rates
- allowances and loadings
Woolworths argued that, when looked at as a whole, employees were paid more than they would have earned under the Award, and that the excess payments could be retrospectively applied to cover any shortfalls.
The Court disagreed.
When set-off clauses don’t work
The Court confirmed that employers can structure contracts so that a salary payment satisfies both contractual and Award obligations - but only where this is done clearly, lawfully and in real time.
A payment will not satisfy Award entitlements where:
- it is made for a specific contractual purpose that excludes Award entitlements; or
- it is expressly designated for something other than Award compliance; or
- it is applied retrospectively across multiple pay periods rather than assessed each pay cycle.
In Woolworths’ case, the Court found that Award entitlements accrued each fortnight, because that was the employer’s pay period. As a result:
- Award entitlements had to be met in the same pay period they arose
- excess payments in later or earlier periods could not be “pooled” and reallocated
- a 6-month reconciliation approach was not permissible
Put simply, you cannot fix an underpayment later by pointing to overall generosity.
Record-keeping failures made things worse
The decision also highlights that salary arrangements do not reduce record-keeping obligations.
The Court found Woolworths had breached the Fair Work Act and Regulations by failing to properly record:
- overtime hours worked each day; or
- start and finish times where penalties or loadings applied
Importantly:
- contractual set-off clauses do not override statutory record-keeping obligations
- rosters and clock-in/clock-out data alone were not sufficient
This is a critical point for employers relying on salaried roles with irregular hours - if you can’t evidence compliance, you may be presumed non-compliant.
Why this matters for businesses now
This case reinforces a trend we are seeing across Fair Work audits and litigation:
- Annualised salaries are not “set and forget”
- Award compliance must be assessed pay period by pay period
- Over-award payments must be clearly linked to Award entitlements
- Record-keeping obligations remain strict, even for salaried employees
While the Woolworths decision is expected to be appealed, employers should not wait for further clarification. The legal risk already exists.
Practical takeaways for employers
If your business employs Award-covered staff on annualised salaries, now is the time to review:
- whether your contracts contain compliant and clearly drafted set-off or annualised wage clauses
- whether salaries are genuinely sufficient to cover all applicable penalties, overtime and allowances each pay period
- whether you are keeping records that would stand up to scrutiny
- whether regular reconciliation checks are being performed (and documented)
Paying above the Award is not the same as complying with it. The Woolworths case is a reminder that intent does not replace structure, and generosity does not replace precision.
If you are unsure whether your salary arrangements genuinely protect your business, a proactive review is far cheaper than defending an underpayment claim after the fact.
