Application of set-offs in the construction of contracts
The Federal Court has recently handed down its long-awaited decision over two regulatory actions brought by the Fair Work Ombudsman (FWO) against Woolworths Group Limited (Woolworths) and Coles Supermarket Australia Pty Ltd (Coles)[1]; and two class actions against Woolworths and Coles, concerning alleged underpayments of employees covered by the General Retail Industry Award 2010 (Award).
The judgment of Justice Perram involved careful consideration of the relationship between set-off clauses and the Award entitlements, delivering valuable insights to assist employers effectively manage this area.
The facts
Between 2015 and 2019, Woolworths allegedly underpaid 19,000 of its managerial employees. Similarly, between 2017 and 2020, Coles allegedly underpaid up to 8,700 employees.
During these periods, Woolworths and Coles failed to monitor the entitlements of these employees under the Award and, as a result, did not pay the required entitlements. After discovering the underpayment, the FWO pursued matters in 2021, Woolworths made remediation payments of over $300 million and Coles made remediation payments over $7 million.
What is a set-off clause and why is it relevant to this case?
A ‘set-off clause’ is a term used in an employment contract. It operates as a mechanism for employers to pay an employee an all-inclusive and higher salary, instead of separate entitlements arising under the applicable modern award (i.e. penalty rates).
One of the issues in this case was whether the set-off clauses in Woolworths and Coles’ employment contract for its managers allowed them to ‘set off’ the higher salaries paid to those employees in each pay period against the respective entitlements under the Award. Woolworths and Coles’ pay periods were two weeks and one week, respectively.
The legislation
Section 323(1) of the Fair Work Act 2009 (FW Act) sets out employers obligations for paying employees. Applied to this case, it provides that Woolworths and Coles must pay each employee the amounts payable in relation to their performance of work in full (Frequency of Pay Obligation).
Decision
In essence, the Court affirmed the current legal position regarding set-off clauses in Australia:
- they can only operate within each pay period; and
- overpayments in one pay period cannot be used to set off underpayments in another pay period, whether a past or future pay period.
At [49] of the judgment, Perram J disagreed with Woolworths’ submissions that the Full bench of the Fair Work Commission in Re Annualised Wage Arrangements,[2] indicated that an annual salary arrangement can allow set-off over the period of one year. Perram J disagreed on the basis:
- of the Frequency of Pay Obligation in s 323 of the FW Act; and
- because the FWC deals with compliance mechanisms, as opposed to statutory obligations (such as the Frequency of Pay Obligation in s 323 of the FW Act).
Accordingly, the Court rejected the submission that an employer could rely on a 26-week and annual salary pay period to set-off award entitlements that the employer owed to the employee in each pay period. It concluded that for a set-off clause to operate lawfully, each fortnightly payment must discharge the obligations due in that same fortnight, rather than across a 26 week period. To that end, Woolworths and Coles contravened the Award by applying unlawful off-set clauses which had the effect of underpaying its employees.
Key takeaways for employers when considering contractual set-off provisions to satisfy award entitlements.
This case confirms that set-off clauses are only effective when they operate within the same pay period as the award entitlements.
Ultimately, set-off clauses can still protect employers and assist the defence of underpayment claims. However, the Courts, the Fair Work Commission, and the Fair Work Ombudsman will construe them strictly when considering their enforceability.
It is therefore critical that employers ensure that set-off clauses in employment contracts are accurately drafted and applied within the same pay period; otherwise, they risk facing similar underpayment claims, including significant penalties, to those as Woolworths and Coles.
[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.
[2] Re Annualised Wage Arrangements as at [2018] FWCFB 154; 271 IR 29 at [102].
