Price check on payroll: Key lessons from the Coles and Woolworths decision

A recent (September 2025) decision of the Federal Court involving Coles and Woolworths supermarkets has challenged historical assumptions about the use of annualised salary or wage arrangements as a means to effectively perform statutory and award obligations to pay wages and other entitlements in Australia.¹

In other words, the decision emphasises that ‘we pay over the Award’ is not necessarily a sure fire ticket to payroll compliance.

The ongoing case concerns claims for unpaid wages and other entitlements by employees of the supermarkets, brought in two class actions and, separately, by the Fair Work Ombudsman. In general terms, the decision concludes that the supermarkets’ relevant industrial arrangements were not compliant with the statutory safety net for payment of entitlements and related record keeping, resulting in yet to be calculated underpayment liabilities. According to media reports these may approach $1 billion, plus civil penalties or fines that will presumably be ultimately imposed for contraventions of the Fair Work Act.

From some perspectives the outcome was a surprise. The supermarkets were paying the employees in question (to whom the General Retail Industry Award was applicable) above award fixed salaries intended to buy-out all liabilities imposed by the award for payment of wages and other entitlements, keeping only general records of hours worked. These arrangements were held to be ineffective where, in some pay periods, the employers could not prove (without specific records) that the employees were paid in accordance with the award, regardless of whether they might have been topped up in other pay periods.

Implications following the decision 

The potential implications of the decision are significant. It goes to the heart of what does and does not comply with the statutory safety net, including related record keeping obligations. Some employers who thought they were doing the right thing may in fact be non-compliant and at risk of liability to backpay wages and for substantial civil penalties or fines.

The decision is an interim decision of a single judge of the Federal Court and whether it holds up in all respects remains to be seen. However, for the time being it would be very prudent to treat it as gospel.

Significant points to be aware of:

• Award wages and entitlements due in one pay period must be paid in full in that pay period. An employer can legitimately apply (or set off) all payments made in that pay period, such as by an all-inclusive flat wage or salary, to all payments due in the pay period e.g., for wages, any loadings, overtime and allowances. Appropriate drafting in the employment agreement is likely to be required to effectively achieve this.
• However, an employer cannot legitimately apply (or set-off) over-award payments made in one pay period to make up for under-award payments in another pay period. It is probably not possible to draft an employment agreement to achieve this result.
• As a primary example of what doesn’t work, an employer cannot discharge its award payment obligations over the course of a year by paying an annual salary if, during the year, an underpayment occurs in one or more individual pay periods. It will not matter that, over the full year, the amount paid is mathematically sufficient to buy out all award entitlements that were due, on account of over-award payments made in other pay periods. Compliance must occur in each individual pay period.
• Similarly, the record keeping obligations imposed by the Fair Work Act and Regulations cannot be met other than by the maintenance of records which strictly comply with the law.
• For example, it may not be sufficient to point to an agreement providing for payment of an annual salary for regular hours of work plus reasonable additional hours, based upon an assumption that the salary being paid is sufficient to pay for all hours of work, whenever worked. If, in any pay period, work is performed that under an applicable award amounts to ‘overtime’ attracting a penalty rate or loading, then, the overtime hours must be specifically recorded along with details of the entitlements due. These are statutory requirements. It will not matter that the salary paid in the pay period is sufficient to cover all award-based entitlements, including for overtime, due in the pay period.
• The records legally required to be kept must be legible, readily accessible and capable of being copied and made available to an employee or former employee upon request. Data that requires some form of further analysis to produce the required record (such as general roster information or clocking in/out data) is not sufficient.
• Where an award provides that an employer and employee might agree about certain subject matter, e.g., for the taking of time off in lieu of payment for overtime, a valid agreement requires active agreement from the employee, made with knowledge of their options. It is not sufficient for the employer to point to internal policies or implied practices as indicative of the required ‘agreement’, and all such agreements should be documented.

Key messages for employers

Statutory and award payment requirements must be discharged in each pay period

While this might still be done with an annualised salary, deeper analysis is required to determine that the amount of salary paid in each pay period is sufficient to cover all legal entitlements due. A longer-term ‘overs and unders’ arrangement won’t work. If you are uncertain whether any of your industrial arrangements comply in this respect, you should check now.

One area that might present problems for some employers is in payment of annual leave loading – the 17.5% loading payable under awards on annual leave pay. If you are paying an annual salary intended to buy out the leave loading for employees entitled to it, then, the salary paid during periods of annual leave will have to be sufficient to cover the loading in the relevant pay periods. You will not be able to rely on over-award payments in other pay periods to make up any shortfall.

Your employment contracts, where relevant, should properly address these issues and if you are uncertain whether they do, you should seek advice now.

Your related record keeping should comply with the law

To help ensure your record keeping is compliant, refer to our quick guide to record keeping and pay slips, extracted from the Fair Work Regulations.

Failure to keep required records or to issue compliant pay slips, in themselves, amount to contraventions of the Fair Work Act attracting liability to a civil penalty or fine, additional to any further liabilities for unpaid entitlements.

A further consequence is that, in proceedings alleging an underpayment or similar, an employer who failed to keep required records bears a positive onus to disprove the allegations. Meaning you will start out as the loser unless you can prove otherwise.

Future considerations 

Payroll compliance has been a big issue in the past, and it will likely stay that way. Penalties for non-compliance, even for small businesses, can be crushing. To illustrate, as this article goes to press the Fair Work Ombudsman has just finalised a prosecution against a gift shop on Phillip Island in Victoria, in which the operators were fined a total of $450,000 for underpaying three workers a total of $40,000. Both of these cases serve as a stark reminder that payroll compliance is imperative and not just about paying above the Award rates or using annualised salaries, it is ensuring every single pay period meets statutory and Award obligations. 

Proactive steps now can prevent costly legal proceedings and reputational damage later. If there is any uncertainty about compliance, employers should seek expert advice. 

¹ Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd; Baker v Woolworths Group Limited; Pabalan v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092 (5 September 2025)