Annualised salaries, record keeping, and the conundrum of compliance
On first blush, the recent decision of Justice Perram involving the Fair Work Ombudsman v Woolworths and Coles [2025] FCA 1092 (Judgment) is catastrophic, and entirely unworkable, for employers.
A closer examination may reveal that so far as the decision impacts your workplace, the sky is not actually falling in. Employment contracts drafted with annualised salaries and set off provisions can still be sensibly and properly used. The critical challenge will be achieving thorough record keeping to support their compliance with any relevant award, and obligations under the Fair Work Act 2009 (Cth) (Act) in relation to frequency of payment provisions.
The real conundrum for employers arising from the Judgment is the need to ensure your systems and practices meet the prescriptive requirements of record keeping under the Fair Work Regulations 2009 (Cth) (Regulations); even where you elect to pay a “rolled up” salary.
Background
The Woolworths and Coles proceedings have a long and messy history. The common thread is the General Retail Industry Award 2010 (Award). But the parties and claims are numerous. Prior to the Judgment, both Woolworths and Coles had made remediation payments to employees totalling over $300 million. Subject to any appeal, those costs are now substantially larger.
The proceedings involved a FWO prosecution, underpayment claims from lead applicants run by litigation funded Adero Law, and two separate respondents with different contracts of employment governing their particular annual salary arrangements underpinned by the Award.
The Judge was confronted with more than 70 questions the parties wanted answered. He declined to answer many. This note is concerned with only two elements of the case: annualised salaries in light of frequency of payment provisions under the Act; and record keeping obligations under the Act and Regulations.
Annualised salaries and frequency of pay provisions
Woolworths and Coles paid supermarket managers an annual salary designed to compensate them for all hours worked, including penalties and overtime. The Award did not countenance annual salaries. However, as was made clear by the Full Bench of the Fair Work Commission in Re Annualised Wage Arrangements [2018] FWCFB 154 “of course it is not necessary to have an annualised wage provision in a modern award in order for an employer to be able to pay an employee to whom the award applies an annualised salary that compensates for or “buys out” various identified award entitlements.” This approach is not without risk, and needs to navigate the cardinal rule that parties cannot “contract out” of legislative obligations.
So, while an Award provision was not essential, did these contractual provisions do enough to achieve compliance?
A recap on section 323 of the Act: an employer must pay an employee amounts payable to the employee in relation to the performance of work in full and at least monthly. This includes penalties, loadings, monetary allowances and overtime rates for the relevant pay period. This is a civil remedy provision.
Although the Fair Work Ombudsman did not allege that either Woolworths or Coles had contravened section 323 of the Act, that provision became central to Perram J’s finding that both Woolworths and Coles could only apply any over award salary payments in a single pay period. That section, in conjunction with the annualised salary provision in each relevant contract of employment, led to a finding that each Company had underpaid a record number of employees.
In response to the underpayment claim, Woolworths relied on a contractual provision to the effect that remuneration and benefits under the contract would satisfy minimum entitlements under the Award over a 26 week period, and that the base salary included payment for all hours worked over a 26 week period. Although Perram J accepted that the contract could operate to attribute payment of minimum entitlements under the Award, he rejected the proposition that Woolworth could “pool” over Award payments across a six month period. Coles, on the other hand, had five types of clauses each making express that the payment was in total payment for any award entitlements. None sought to limit or average for a particular period of time.
In relation to both, Perram J found that “the obligations arising under the Award could only be discharged by a payment and that necessitates that the payment happen in the same pay period”.
It is significant that neither clause expressly included “set off”, a concept that attracted much attention and contract redrafting in the wake of the Full Federal Court’s decision Wardman v Macquarie [2023] FCAFC 13. Even still, Perram J surveyed that and other authorities and found that none provided any useful guidance on what he described as the “temporal difficulty which arises in the present case … and in particular the question of whether the discharge of a payment obligation imposed by an award in one period may be discharged by something which is not a payment such as a pool across a period”.
Of course, the issue that caused Perram J concern was that section 323 of the Act expressly references each pay period, and that obligation could not be contractually eroded.
A pending clarification…?
Between the conclusion of the hearing of the proceedings (which was in July 2023) and delivery of the Judgment, a Full Court of the Federal Court had cause to consider contractual set off in Corporate Air Charter Pty Ltd v Australian Federation of Air Pilots [2025] FCAFC 45. That decision is not referred to in the Judgment, nor was it concerned with section 323 of the Act. However, it did consider contractual offsets in the context of an express clause, finding [89]:
“The respondent’s method for the calculation of set-off on an annualised basis is correct. It aligns with the clear meaning of cl 10.3 of the employment contract: “Where your pay exceeds your legislative entitlements, any above component not otherwise allocated may be offset against any other applicable entitlements”. … “your pay” is understood to be on an annual basis: where Ms Pulaska’s annual pay exceeds the Award amount, the difference may be set-off against Ms Pulaska’s overtime entitlements.”
The decision was not concerned with whether there was failure to make a payment “in full” in any pay period. However, it does lend to a construction that over award payments can be ‘carried forward’ to meet minimum compliance in each pay period. When read in conjunction with Perram J’s decision however, it will unlikely “save” an employer from non-compliance if the ‘carried forward’ amount is insufficient to meet the minimum.
Record keeping
A perhaps more troubling feature of the Judgment, which employers will need to grapple with, was the finding that neither Woolworths nor Coles had complied with the record keeping obligations under reg 3.33 and 3.34 of Regulations.
Reg 3.33 provides that where an employee is entitled to be paid an incentive-based payment, bonus, loading, penalty rate or another monetary allowance or separately identifiable entitlement, an employer must make and keep a record setting out details of the payment. Reg 3.34 provides that if a penalty rate or loading must be paid for overtime actually worked by an employee, the employer must keep a record that specifies (a) the number of overtime hours worked by the employee during each day; or (b) when the employee started and ceased working overtime hours.
The primary line of defence from each of Woolworths and Coles was that the annual salary clause in the contract was evidence that the employees were not entitled to payment of those separate amounts. This was rejected.
In the alternative, for the purposes of reg 3.34, reliance was placed on Kronos and roster data. This was also rejected by Perram J, stating: “There is no doubt that Woolworths did not keep a record for each employee which literally specified this information” and “I do not accept that the Published Kronos Rosters together with the clocking data constitute records for the purposes of reg 3.34”. Perram J rejected the submission that the information could be deduced from existing records. Further, the capacity to deduce the information from two data sets did not constitute a compliant record, and accordingly the employers had failed to meet the requirement that a record must be in a form that is readily accessible to an inspector and capable of being copied and made available to an employee or former employee, as required under regs 3.31 and 3.42 of the Regulations.
It is interesting to observe that Perram J takes the view that a record is not readily available if an employer has to produce the document collated from data from separate information sources. In contrast, reg 3.42 which requires that an employer only has to make available a copy of the record for inspection and copying either within 3 business days after a request, if the record is at the worksite (and up to 14 days if sent by post), or ‘as soon as practicable after receiving the request’ if the document is offsite. There seems to be no requirement in the Act or Regulations that the document be available to be inspected immediately.
However, as it stands, this prompts the uncomfortable question: is the system in operation in your workplace in strict compliance?
What happens next?
So what does the Judgment mean for your workplace?
- Given the stakes, an appeal is almost inevitable. That said, recent decisions of the Federal Court in Dorsch v HEAD Oceania Pty Ltd [2024] FCA 484 and Helensburgh Coal Pty Ltd v Bartley & Ors [2024] FCAFC 45 (as upheld by the High Court) are demonstrating a propensity for strict reading and interpretation of the Act. This is likely a good time to review your contracts and systems and consider your level of comfort.
- The relevance of the Judgment is not limited to the Award, and the impact will vary depending on the particular award coverage in a workplace.
- Circumstance is key. Legal risk will turn on the particular combination of award coverage, contractual set-off clauses, actual amounts paid, word hours performed in your workplace and whether there is a system for recording hours worked.
- Contractual set off provisions that are loosely drafted or modelled on a ‘pooling’ method are vulnerable. Even where there is an intuitively sufficient ‘buffer’ provided through the annualised salary, the interpretation of record keeping requirements in this Judgment is the sting in the tail.