On 5 September 2025, the Federal Court handed down a decision that shakes up the practice of relying on contractual set-off clauses to balance overpayments in one pay period against shortfalls in another.
In the case of Fair Work Ombudsman v Woolworths Group Limited; Coles Supermarkets Australia Pty Ltd [2025] FCA 1092, the Court made it clear that set-offs can only occur within the same pay period and employers cannot carry forward payments made to employees for the purpose of covering entitlements owed in a later pay period. While the decision does not abolish set-off clauses altogether, it significantly curtails their usefulness and makes their role far narrower by confining their application to offsetting award entitlements within a single period, except where the award otherwise allows.
Impacts of the Decision
1. Set-off limited to each distinct pay period
Set-off clauses cannot operate across pay cycles, which means that employers cannot use an overpayment in one period to cover an underpayment in the next. Section 323 of the Fair Work Act 2009 (Cth) (the Act) requires employees to be paid “in full” for each prescribed period.
The Court distinguished set-off clauses from annualised salary arrangements, which are specifically provided for under Modern Awards and/or Enterprise Agreements. Employers may still offset entitlements across periods under those instruments, but only where it is expressly permitted.
2. Set-off contract terms must be clearly drafted
To be effective, a set-off clause must directly link the salary to the entitlements it is intended to cover. Contracts should specify which Modern Award or Enterprise Agreement allowances, penalties, or rates are being offset
3. Payroll Reconciliations
Employers will now need to conduct reconciliations each pay period and immediately top up payments that fall short. Annual or retrospective reconciliations are no longer sufficient, and this requirement could significantly increase payroll complexity and cost.
4. Record-keeping & relying on set-off clauses
Employers relying on set-off clauses or annualised salaries must comply with strict record-keeping requirements, including keeping detailed records of overtime and penalties, even if paid via a ‘rolled-up’ rate. Clock-in data or rosters alone are insufficient, and reconstructed or partial records are invalid. Given the reverse onus set out in section 557C of the Act, incomplete records shift the burden of proof squarely onto the employer.
5. Overtime
A contractual clause authorising “reasonable overtime” is a standing authorisation. However, hours worked at the employee’s own initiative or convenience are not employer-directed overtime.
6. Agreements with employees
Where a Modern Award requires employee agreement, the employer must prove that the employee knowingly consented.
The Fair Work Ombudsman and employee representatives will act on this decision immediately, irrespective of the possibility of an appeal. Therefore, it’s imperative that employers adjust their practices without delay and ensure that their contracts, remuneration structures, payroll processes, and record-keeping systems are reviewed to minimise the risk of potential underpayments.
Get in touch to discuss your options with our team.