Coles and Woolworths: Federal Court Tightens View on Offset Clauses

The Federal Court has handed down its long-awaited decision in the Fair Work Ombudsman’s cases against Coles and Woolworths. The Decision provides significant clarification regarding the application of how to apply “above award” payments and how that is to operate.

What did the Court say?

Justice Perram ruled that employers cannot use over-award payments in one pay period to cover shortfalls in another pay period when it comes to meeting award obligations. Instead, each pay cycle (weekly or fortnightly) must stand on its own to ensure the employee receives at least their minimum entitlements.

This decision is significant for employers who rely on contractual offset clauses to meet award obligations as it means – or at the least, creates uncertainty in respect of – whether pay must be at or above award minimum entitlements each pay cycle and or whether being better off over an annual cycle is “enough” to ensure pay compliance.

In Conflict with Earlier Cases

The case outcome appears to conflict with the earlier Corporate Air Charter decision, where the Full Federal Court endorsed the idea of annual pooling of salary against award entitlements. That inconsistency means there’s now real uncertainty in the law, and the Coles/Woolworths decision may well be appealed.

Why This Matters to Employers

Employers who rely on an annual salary to cover allowances, overtime, penalty rates and other entitlements may now face a higher risk of underpayment claims.  Overpayments in one week or fortnight cannot be used to cover shortfalls in another each cycle must stand on its own.

Effective offset clauses must clearly identify the payments that discharge award obligations and align with the award’s pay cycle.

Wording that suggests entitlements are satisfied “over six months” or “in full” may render clauses ineffective.  Courts may “read in” obligations to make a clause workable, but employers should not rely on this as precise drafting is essential.

What’s Next?

This decision is expected to be appealed. For now, employers should take a cautious approach and ensure employees are receiving their minimum entitlements in each pay period, not just in aggregate across a year.

Stay Connected!

Have any questions or need more details?

‍
Reach out to us. We’d love to hear from you!

Ross

Legal Practice Director, Drayton's Law