Supermarket ‘Set-off’ Saga: A Clause for Pause

HR Policy Global view: Employers in Australia are challenged by the Modern Award system due to its complexity, frequent updates, and sector-specific rules, complicating the interpretation of employee entitlements. Missteps, especially with overtime, penalty rates, and allowances, have resulted in widespread underpayments and costly legal disputes, as evidenced by the Coles and Woolworths supermarket cases. 

The Background

A ‘set-off clause’ in an employment contract is a provision that allows an employer to balance out overpayments and underpayments across different pay periods.

The Federal Court of Australia, in its September 2025 ruling against Coles and Woolworths, addressed systemic underpayments of salaried employees under the General Retail Industry Award 2010 (GRIA). The court ruled that both companies’ use of annualised salaries with set-off clauses failed to secure minimum pay, including overtime and allowances, for each pay period, clarifying that employers can't average over multiple periods to fulfill award obligations.

The court highlighted significant record-keeping failures. This lack of accurate systems for tracking hours, overtime, and other entitlements led to underpayment of thousands of salaried managers. The ruling emphasizes the importance of meticulous payroll records and compliance monitoring. Non-compliance with award obligations, even for employees with higher salaries, constitutes a breach of law.

Both companies face substantial financial liabilities.  Woolworths estimate is between $180 and $330 million, while Coles estimate is between $150 and $250 million, excluding interest and superannuation. 

The case impacts all employers using annualised salary arrangements in Australia, underscoring the need for careful contract, payroll, and compliance reviews to ensure correct employee payments. The Fair Work Ombudsman will continue to scrutinize adherence to award obligations.

Key Actions for Employers

• Review Payroll and Salary Structures – Ensure that any annualised salary or set-off arrangements comply with award requirements, so employees receive all entitlements, including overtime, penalty rates, and allowances, for each pay period.
  
  
• Strengthen Record-Keeping and Compliance – Maintain accurate, detailed records of hours worked, overtime, and entitlements, and implement robust auditing processes to prevent inadvertent underpayments.

Audit and Update Employment Contracts – Examine contracts to remove or revise unlawful set-off clauses, clearly define pay arrangements, and ensure compliance with modern award obligations, reducing legal and financial risk.