Federal Court rules out contractual set-off of award entitlements between pay periods

The Federal Court handed down its long-awaited decision this morning in proceedings commenced by the Fair Work Ombudsman, and class actions, against Coles and Woolworths.[1] The decision will have wide-ranging implications across the businesses community and warrants prompt and decisive consideration by employers who rely on contractual set-off provisions to satisfy award entitlements.

Justice Perram found that the set-off clauses in the retailers’ employment contracts were unable to operate as drafted and could only discharge obligations under the General Retail Industry Award 2010 (Award) within a single pay period. Critically, this set-off could not be effected between pay periods.

Background

In 2021, the FWO commenced legal action in the Federal Court against Coles and Woolworths in relation to the alleged underpayment of their salaried employees of $115 million and $1.1 million respectively. The underpayments largely arose from annualised salary arrangements which were said to be insufficient to cover the number of overtime hours actually worked by the relevant employees.

Then Fair Work Ombudsman, Sandra Parker, considered the court action to be a warning to all employers that they could face serious consequences if they did not prioritise compliance, and said that businesses paying annual salaries could not take a ‘set-and-forget’ approach to paying their workers.

Set-off

When used in the employment law context, set-off refers to the practice of simultaneously satisfying obligations arising under an award or enterprise agreement and a contract, through a single payment. It is common practice for employers to pay an above-award amount pursuant to a contract in order to satisfy a range of award conditions. While this decision accepts the availability of this within a pay period, it sends a warning to employers to reconsider how award obligations can be met between pay periods.

The decision

The set-off clause used by Woolworths received the most attention in the decision. That clause purported to satisfy all Award entitlements, including minimum rates, penalties, overtime, and allowances, by reference to the annual remuneration, calculated over a 26-week period.  The intention was to allow Woolworths to pool any excess payments that were over Award entitlements across six months and use that pool to offset any shortfalls.

Perram J concluded that for the set-off clause to lawfully operate, it had to be read such that each fortnightly payment would discharge the obligations under the Award due in that fortnight, and not across pay periods within the 26-week period.

Concerning the five different clauses under consideration in relation to Coles (and the two employees who did not have a written contract), Perram J similarly found that Coles’ obligations to pay Award entitlements could not be discharged by anything other than the act of payment within the pay period, rather than by the reference to a pooled salary over a six-month period.

While the decision is necessarily focussed on the specific set-off clauses at issue, Perram J commented that it was doubtful that any level of careful drafting could have effected the set-off sought by the retailers by way of pooling over-Award payments on a six-monthly basis and relying on payments made in future or past pay periods to satisfy Award obligations.

Immediate implications

This decision requires employers to take stock of the approach being taken to the payment of employees who are covered by an industrial instrument. Remediations that are in play or already undertaken may also need to be revisited. These matters warrant serious consideration at the leadership level, given the significant civil and criminal consequences that may arise both for organisations and individuals involved in serious contraventions and intentional underpayments.

As part of this consideration, employers may wish to consider the suitability of other mechanisms for achieving award compliance through remuneration arrangements. For example, award-based annualised wage arrangements, individual flexibility arrangements and guarantees of annual earnings. The limitations and administrative requirements involved with such arrangements are well-traversed and may impact their viability in particular cases. However, in the context of increased penalties for underpayments, enhanced regulatory avenues for enforcement and a growing appetite for class actions in this space, it is important that employers carefully consider potential vulnerabilities in their payroll compliance framework.

The decision also has far-reaching implications for retail employers more broadly, given other significant findings made by Perram J in respect of interpretation of up-to-now vexed provisions of the retail industry Award. 

We will be circulating a more detailed insights piece analysing the broader implications of this decision.