Understanding the Federal Court’s landmark decision on Coles and Woolworths

On Friday, 5 September 2025, the Federal Court of Australia delivered a major ruling on the wage theft saga involving Coles and Woolworths. In a long-awaited decision, Justice Perram shut down the supermarket giants’ defence, ruling that they can’t offset underpayments in one pay cycle with overpayments in another. The judgment delivers a major blow to the widespread use of annualised salary arrangements, and tightens the screws on a practice some might see as corporate corner-cutting.

Paying employees an annualised salary designed to absorb award entitlements has long been a common practice among employers. Under this arrangement, the salary is calculated to compensate for entitlements, including overtime, penalty rates, and loadings. Employment contracts typically include a set-off clause confirming that all monetary entitlements under the relevant award are accounted for within the employee’s total remuneration.

The decision

Woolworths and Coles used different set-off clauses in their employment contracts, but both aimed to achieve the same outcome: to meet modern award or enterprise agreement entitlements through a single payment spread over an extended period.

Woolworths, in particular, included a clause intended to satisfy all obligations under the General Retail Industry Award 2010 (Award) across a six-month timeframe. This, it seemed, allowed the company to offset any underpayments in one period with overpayments made in another.

The Federal Court was asked to decide whether employers using annualised salary arrangements and set-off clauses are still required to meet all award entitlements in each individual pay period or whether employers can balance out underpayments and overpayments across multiple pay periods.

Justice Perram of the Federal Court said, “I accept that in an employment context a properly drafted set-off clause may provide that payment of a contractual obligation in a pay period may discharge a payment obligation arising under an industrial instrument in the same pay period. When this occurs a single payment discharges the two distinct monetary obligations. However, the obligations arising under the Award can only be discharged by a payment and that necessitates that the payment happen in the same pay period.”

Put simply, employers must ensure that all award entitlements are met in each individual pay cycle.  Employers cannot use annualised salary arrangements to offset underpayments in one period with overpayments from another.

Justice Perram stated, “It was unlikely that payments which have occurred in past pay periods can be characterised as payments for the purposes of the Award. For the same reason, I think it unlikely that payments in the future can be characterised as payments in the present pay period either.”

Although the decision examined the specific set-off clauses used by Woolworths and Coles, the Federal Court made clear that its conclusion was not based on the precise wording of those clauses. Instead, it turned on the broader legal principles governing set-off arrangements.

Record keeping

Justice Perram also found that the payment of an annualised salary did not remove obligations on employers to maintain records. In particular, the maintaining of rosters and clock-in clock-out data was not sufficient to show that an employee had not worked significant overtime, as “Coles failed to operate an overtime system for these employees, and s 557C [of the Fair Work Act] makes the ensuing evidentiary vacuum a calamity which belongs to Coles and not its employees.” Section 557C operates as a reverse onus provision, meaning that where Woolworths and Coles failed to maintain accurate records, it bore the burden of disproving allegations of contraventions.

A further hearing on the matter is listed for late October, which should determine the outcome for nearly 30,000 affected employees.

Broader implications for employers

The impact of this decision extends beyond the retail sector, where no doubt other major retailers will be considering whether they have met pay obligations under applicable modern awards and enterprise bargaining agreements.

This ruling exposes businesses to significant back-pay liabilities, with Woolworths and Coles already facing hundreds of millions in remediation costs. The decision applies broadly and sends a clear message: employers across all sectors must urgently review any salary models that attempt to absorb award and enterprise bargaining agreement entitlements.

Beyond financial exposure, the ruling signals a shift in compliance expectations. Employers must ensure accurate, ongoing record-keeping of hours worked and award entitlements to meet legal obligations. Many may need to rethink whether salaried arrangements are appropriate for award-covered roles, potentially moving toward hourly pay structures. With increased regulatory scrutiny and a heightened risk of litigation, including class actions, businesses must proactively audit their payroll practices to minimise future risk.

If any of the information in this article has raised questions about your payroll and compliance obligations for your business, or if you have another workplace matter with which you need assistance, please reach out to the Citation Legal team for a confidential discussion.

About our author

Zaynab Aly is a Solicitor at Citation Legal. She has a particular interest in the retail industry and regularly provides advice on workplace matters to find solutions for clients.