Price check on employee salaries: Lessons from the Coles and Woolworths underpayment litigation

Towards the end of last year, the Federal Court of Australia delivered its highly anticipated decision relating to underpayment allegations made against Woolworths and Coles by the Fair Work Ombudsman and various salaried employees. The decision clarifies record-keeping obligations and addresses the often-misunderstood relationship between annual salaries and modern award entitlements.

Key takeaways from the Coles and Woolworths decision

The judgment is long and technically dense, yet its practical messages are plain:

• Salaried employees can still be (and often are) covered by modern awards.
• ‘Set-off’ clauses in employment agreements have significant limitations.
• Accurate time and attendance data remain indispensable, even more so in a world of flexible and remote work.

Salaries and employment agreements do not displace the modern award safety net

There is still an alarmingly common misconception that employees engaged under a written employment agreement and/or paid an annual salary cannot (for those reasons alone) be covered by a modern award. When we ask clients about award coverage for a particular employee, it is not uncommon for them to respond that the employee is not covered by any modern award “because they are on a common law contract” or “because they are paid a salary”.

In fact, award coverage arises completely independently of any contractual arrangements, and application cannot be limited or avoided by private agreement (other than by way of a guarantee of annual earnings for certain high income employees, in a prescribed form and subject to its own limitations).

It is certainly permissible to pay an award-covered employee an annual salary, but such a salary does not displace, and must therefore meet or exceed, any underlying award entitlements. Award entitlements must be properly understood and carefully accounted for (based on actual hours of work) in comparison with contractual remuneration.

Set-off clauses under the microscope

Both Woolworths and Coles attempted to rely upon ‘set-off’ wording in employment contracts, stating that annual salaries paid to their employees were in full satisfaction of all award entitlements.

Justice Perram affirmed that such clauses can work, but only to the extent that salary payments truly meet or exceed the total award obligations that arise in each and every pay cycle.

Some of the contracts in issue went beyond this limitation by purporting to ‘pool’ salary across six months, so that overpayments (i.e. relative to award entitlements) in one pay period could be ‘set-off’ against any underpayments in another pay period. The Court declared that this approach is incompatible with section 323 of the Fair Work Act 2009, which requires that minimum entitlements for the performance of work must be paid in full for each pay period in which they arise. In other words, the notion that an overpayment in January can be ‘banked’ to cover an underpayment in April was rejected out of hand.

An employer must be able to demonstrate that, for every single pay period, the amount actually paid to an employee equals or exceeds the monetary value of all applicable award entitlements for that pay period, including overtime, penalty rates, allowances and loadings (including annual leave loadings).

Record-keeping failures and the burden of proof

Although it is not the primary focus of this article, the judgment also devoted considerable attention to time and wages records. The Court emphasised that certain specific record-keeping requirements mandated under the Fair Work Regulations 2009 were not met through the existing practices of Coles and Woolworths. These observations have caused quite a stir because they would, no doubt, apply equally to many, if not most, employers within Australia.

This is even more significant due to a reverse onus of proof, which (to oversimplify slightly) means that employers who have not kept mandatory records must disprove allegations relating to matters which the proper records would otherwise have established. The decision underscores that maintaining precise records of hours worked by award and enterprise-agreement-covered employees, including a separate record of overtime hours is essential, even if staff are on annual salaries.

Why hours still matter for white-collar employees

Although many of the affected employees in this case were department or store managers for the two supermarkets, the Court’s reasoning applies indiscriminately across industries. Salaried status does not erase the need to know exactly when and how much people work.

Justice Perram commented that arguments against keeping detailed overtime records for salaried staff “fail to deal with” situations where hours blow out beyond the amount implicitly absorbed by a salary.

With remote working and flexible schedules becoming increasingly commonplace, the potential for unmonitored excess hours – and hence unanticipated award liabilities – has never been higher.

Classification and award / enterprise agreement interpretation remain the starting point

Ultimately, proper compliance starts with detailed assessments of award / enterprise agreement coverage and properly applying classifications under those instruments. Without first correctly understanding coverage, the relevant classification level, and the precise spread of ordinary hours permitted, an employer cannot reliably identify the level at which a salaried employee’s remuneration should be set to avoid underpayments.

Practical implications for employers

In light of the ruling, employers should carefully consider taking the following measures:

• Periodically auditing salaried roles to ascertain or confirm modern award / enterprise agreement coverage and classification. Coverage and classification can vary over time with changing circumstances, for example, if the scope of an employee’s duties have increased or they have attained new qualifications.
• Undertaking ‘stress-test’ modelling to understand whether fixed salary payments would meet or exceed every entitlement arising under an applicable award or enterprise agreement in various expected or possible scenarios.
• Reviewing and tightening employment agreements, including ensuring that any ‘set-off’ clauses are properly drafted.
• Considering whether it is practicable and, if so, how best to record and monitor actual hours of work (including overtime) for salaried employees.
• Considering guarantees of annual earnings for high income award-covered employees.
• Considering the need for making individual flexibility arrangements under an applicable modern award or enterprise agreement, especially where an employee has requested flexible working hours (for their own benefit) that may expose the employer to overtime or penalty payments.
• Implementing or clarifying policies and processes that require pre-approval of overtime and that capture remote log-ins and after-hours work.

Reach out to Macpherson Kelley’s employment lawyers for advice on awards, employment agreements and underpayment

The Coles and Woolworths decision serves as a reminder that large, well-established companies can still misunderstand employment contracts and employer obligations, resulting in unlawful underpayment. Cross-checking agreements and entitlements with an employment lawyer and receiving best practice advice from the outset can potentially save your business from dealing with costly disputes. Contact our Employment, Safety and Migration team if any of the above raises questions for you.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.