Overview

Last month, the Federal Court handed down a significant decision in proceedings involving Woolworths and Coles which confirms that there are limitations on the extent to which annualised salaries can be used to satisfy minimum entitlements arising under industrial instruments and the Fair Work Act 2009 (Cth) on a longer-term basis.

The decision also reinforces that certain employee records must still be maintained by employers, even where an employee’s annualised salary is legally capable of setting off any related minimum entitlements in full.

Key Takeaways

In light of this decision, and subject to any appeal, employers should consider:

• Reviewing any existing annualised salary arrangements to ensure they are effective and legally compliant
• Analysing work patterns to identify whether they might give rise to significant or unexpected entitlements to penalties, loadings or overtime payments
• Adopting other mechanisms for implementing annualised salaries where appropriate, such as annualised wage arrangements authorised by an industrial instrument, individual flexibility agreements and guarantees of annual earnings
• Reviewing record-keeping processes to ensure full and accurate information is captured and kept in accordance with the Fair Work Regulations 2009 (Cth)
• Ensuring robust systems are in place to monitor employees’ actual remuneration against any underlying minimum entitlements and rectify any salary deficiencies within each pay period
• Seeking advice in response to any identified non-compliance, in particular before attempting to enter any future contractual set off arrangements.

Background

Between 2019 and 2021, Woolworths and Coles became the subject of four separate legal claims – two regulatory claims commenced by the Fair Work Ombudsman, and two representative claims made by class action firm Adero Law – each alleging that the supermarkets’ store-based managerial employees were underpaid certain entitlements arising under the General Retail Industry Award 2010 (Award). The actions together concerned around 30,000 individual employees, and the Federal Court heard them in parallel due to the commonality of issues raised.

The claims involved Woolworths’ and Coles’ practice of relying on ‘set off’ clauses in their employment contracts which purported to allow them to apply employees’ annualised salaries to satisfy all entitlements arising under the Award, including minimum hourly rates, penalties, overtime, allowances and loadings.

Woolworths’ practice involved ‘pooling’ its annualised salaries over a six month period and using that ‘pool’ to satisfy all Award obligations across the same six month period. In contrast, Coles’ set off clauses simply contemplated that its annualised salaries were paid in satisfaction of all industrial entitlements generally.

Woolworths and Coles contended that because of these contractual set off mechanisms, their annualised salary practices were such that their employees were lawfully compensated for all entitlements arising under the Award on a longer-term basis even if, for example, an employee may have worked a significant amount of overtime in certain pay periods due to fluctuating store demands. Woolworths and Coles also contended that because an annualised salary was paid for all purposes, there was no requirement to keep records of any individual entitlements that might otherwise arise under the Award (for example, overtime rates that were purportedly paid for within the annualised salary).

Legislative Framework

Section 323 of the Fair Work Act 2009 (Cth) requires employers to pay employees in full, on at least a monthly basis. Industrial instruments also typically contain their own requirements in respect of how and when certain entitlements must be ‘paid’ which are enforceable under the Fair Work Act 2009 (Cth).

It was contended in the proceedings that section 323 of the Fair Work Act 2009 (Cth) prevented Woolworths and Coles from using an ‘above-Award’ salary amount paid in one fortnightly pay period to offset Award entitlements arising in another.

In addition, section 535 of the Fair Work Act 2009 (Cth) requires an employer to make and keep prescribed types of employee records, including (amongst other things) records that are in a readily accessible form which:

• Set out any loadings or penalty rates that an employee is entitled to be paid; and
• Specify any overtime hours actually worked by an employee during each day, if those overtime hours attract a loading or penalty rate.  

It was contended that Woolworths and Coles failed to comply with these obligations by virtue of failing to make and keep records of the loadings and penalty rates arising for their managerial employees under the Award and any specific overtime hours worked by those employees which attracted such loadings or penalty rates (despite both supermarkets keeping roster records and clocking data).

The Decision

Justice Perram ultimately concluded that:

• Woolworths’ and Coles’ contractual set off clauses and associated annualised salaries were only effective in discharging Award obligations arising within a single pay period, as modern awards and the Fair Work Act 2009 (Cth) both require employers to actually pay amounts due and payable within the specific pay period in which they arise, and offsets cannot be applied from one pay period to another; and
• Reliance on all-purpose annualised salaries does not have the effect of relieving an employer of their statutory record-keeping obligations, and roster records and clocking data are insufficient to satisfy these obligations on their own.

The effect of these conclusions is that while an employee’s periodic salary payments can be used to discharge statutory or industrial obligations falling due within the specific pay period (so long as they are sufficient to do so):

• Any excess salary amounts cannot be applied to discharge entitlements of this nature arising in another pay period (in other words, ‘pay period pooling’ can be allowable but longer-term pooling which amounts to an ‘accounting abstraction’ is not – even by way of careful drafting); and
• Records of certain minimum entitlements arising under industrial instruments must still be kept, even if they are not individually paid for on an ‘entitlement-by-entitlement’ basis.

Conclusion

This decision is a timely reminder to employers about the importance of carefully establishing and maintaining remuneration and record-keeping arrangements, particularly where an industrial instrument applies.

Employers should take this opportunity to review their remuneration practices, contractual materials and employee records to ensure they are compliant with their legal obligations.

Further information / assistance regarding the issues raised in this article is available from the authors, Elizabeth Radley, Partner, and Richelle Farrar, Special Counsel, or your usual contact at Moray & Agnew.