In September 2025, the Federal Court handed down a significant decision relating to annual salaries and involving Woolworths and Coles. Many people thought that the decision changed the law in relation to annual salaries. It didn’t. It reiterated and confirmed the law.
Below is an explanation of how salaries are meant to work.
1. A Salary Is a Method of Payment — Not a Different System
An annual salary does not replace an award. It simply changes how remuneration is delivered, not what entitlements exist.
Where an employee is covered by a modern award:
The employment contract and the salary sit alongside the award. They do not displace it.
Think of a salary as a bundled payment that can be applied against award entitlements — but only if it is sufficient, properly applied and correctly recorded.
Chamber tip: The award remains the rulebook; the salary is just the payment mechanism.
2. Compliance Is Assessed Pay Period by Pay Period
One of the most important practical points confirmed by the Court is how salary sufficiency is measured.
Award compliance is tested each pay period—weekly, fortnightly or monthly — not across a year. Overpayments in prior pay periods cannot be used to satisfy liabilities in another pay period.
This is because section 323 of the Fair Work Act 2009 (Cth) (FW Act) requires employees to be paid in full and at least monthly in relation to the performance of work.
This means:
If the salary paid for the period is enough to cover those entitlements, the obligation is met. If it is not, there is an underpayment — regardless of how well paid the employee may be over the year as a whole.
Annual “better‑off‑overall” calculations or end‑of‑year reconciliations do not fix shortfalls in individual pay periods.
Chamber tip: Each pay run must stand up on its own if it is later scrutinised.
3. How Set‑Off Clauses Are Meant to Work
Most salary contracts include a set‑off clause stating that the salary is paid in satisfaction of award entitlements. These clauses do have a role, but they operate in a narrower way than many employers assume.
Properly applied, a set‑off clause allows the salary paid in a particular pay period to be credited against award entitlements arising in that same period.
What it does not allow:
In practice, this means that the payroll outcome — not the contract wording alone — matters.
Even annualised wage arrangements in modern awards have detailed and specific requirements that must be met, including setting the outer limits of overtime in each pay period and paying for work in excess of that.
Chamber tip: A set‑off clause only works when the numbers actually stack up in each pay run.
4. Salaried Employees Still Generate Hours and Entitlements
A common operational issue is the assumption that salaried employees do not “generate” overtime, penalties or allowances in the same way hourly staff do.
The Court confirmed that this is incorrect.
Where an award applies:
These triggers turn on actual hours worked, not how an employee is labelled or paid.
This is not the case for award/agreement-free employees, which typically include senior managers, executives, and professionals in IT, HR, legal and accounting (not payroll).
Chamber tip: Salaried employees still have working time that matters legally. Calculate how much extra work your salary buys you in each pay period and implement controls.
5. Why Record‑Keeping Is Central to Salary Compliance
Because salary compliance depends on what actually happened in a pay period, record‑keeping becomes critical.
Section 535 of the FW Act and Division 3 of the Fair Work Regulations 2009 (Cth) (FW Regs) require employers to keep records for 7 years that make it possible to determine:
This does not apply to award/agreement free employees and does not necessarily require clock‑punching for other roles, but it does require records that allow award compliance to be assessed.
Important: Where an employer has not kept time and attendance records as required under the Regulations, and there is no reasonable excuse, the burden of proof is reversed, and the employer then needs to disprove the employee’s claim.
Chamber tip: If your records can’t show compliance up to 6 years later, they are not strong enough.
The Practical Takeaway for Employers
The decision provides a practical map of how salary arrangements are expected to operate under awards:
✔ Salary must be sufficient each pay period
✔ Hours and entitlements still matter for salaried staff
✔ Records are essential, not optional
For businesses that rely on annual salaries, this is not about adapting to new rules — it is about ensuring everyday practices align with how salaries legally function.
Need help stress‑testing your salary arrangements against an award?
Contact the SA Business Chamber Business Advice Hotline on (08) 8300 0106 for practical guidance before issues snowball into disputes.
