Offset Clauses After the Coles & Woolworths Ruling - What You Need to Know

Quick Answer: Your offset clauses are still valid, but they only work if your payroll covers Award entitlements every pay cycle. Keep time records and make top-up payments if needed.

Background

In 2021, the Fair Work Ombudsman took Coles and Woolworths to the Federal Court after uncovering large-scale underpayments of their salaried managers. The problem? Even though these employees were on “all-in” salaries with set-off clauses, the pay didn’t actually cover overtime, penalty rates, and other entitlements under the General Retail Industry Award in each pay period. The Court agreed with the Ombudsman. It found that salaries must cover Award entitlements in full for every pay cycle (weekly or fortnightly), not just average out across the year. In other words, it doesn’t matter how generous a salary looks on paper — if it falls short in any single cycle, the employer is in breach. The Decision

Set off clauses don’t cancel Award obligations - employees must be paid their full entitlement in each pay pay cycle.

This means:

• Salaries must be checked against the Award in each pay cycle (weekly/fortnightly).

• Award obligations like overtime, penalties, and loadings must be actually paid, not just “absorbed” by contract wording.

• A set-off clause might work under contract law, but it doesn’t override the Fair Work Act requirement to pay in full.

What is an Offset Clause?

An offset clause is a contract term that says the higher salary you pay an employee includes and absorbs certain Award entitlements, such as:

• Overtime

• Weekend and public holiday penalties

• Annual leave loading

• Allowances (meal, travel, on-call, uniform)

• Shift loadings or higher duties.

The idea is to simplify payroll and stop “double dipping” (where an employee could claim both a higher salary and separate Award payments). After the Coles & Woolworths case, offset clauses are still valid — but only if they are well drafted and backed up by proper payroll checks each pay cycle.

What This Means for You

If you are a business paying annualised salaries that sit close to Award minimums, this decision could mean a shift away from salaries and towards paying staff hourly rates with overtime and penalties added on.

This may feel less flexible but it will ensure compliance without constant reconciliations. it may also be a sign to end ad hoc arrangements like “you stayed back tonight, so take a few hours off tomorrow”.

If this happens…

• You pay staff on salary with an offset clause.

• You don’t track hours for salaried staff.

• In a pay cycle, the Award entitlements for hours worked are more than the salary paid.

• You have staff close to Award minimums.

Then You Must…

• Check that, in every pay cycle, the salary is at least equal to their Award entitlements.

• Start keeping timesheets or electronic records.

• Make a top-up payment that pay cycle.

Consider hourly rates with overtime/penalties instead of offset salaries.

Examples

1. Annual Leave Loading – Clerks Award Scenario:

• An admin employee on a $65,000 salary takes two weeks of annual leave.

• Award entitlement: The Clerks – Private Sector Award requires 17.5% annual leave loading.

• Problem: Their fortnightly salary was $2,500, but under the Award they should have received $2,500 + $437.50 leave loading.

• Outcome: The offset clause doesn’t cancel the obligation. The business must pay the $437.50 top-up in that pay period.

2. Overtime – Manufacturing Award Scenario:

• A factory supervisor on $80,000 salary works 55 hours in one week.

• Award entitlement: Manufacturing & Associated Industries Award = overtime after 38 hours, paid at time-and-a-half for 3 hours, then double time.

• Problem: That week, their Award entitlements totaled $2,100, but the salary only delivered $1,538.

• Outcome: Employer must pay the $562 top-up for that week.

FAQ:

Can I just Change Pay Cycles to Monthly?

You can:

• Align pay cycles with your business’s cash flow and admin needs, provided you stay within Award rules.

• Move to the longest pay cycle allowed by the Award (e.g. fortnightly instead of weekly, or monthly where permitted). This reduces administrative pressure and gives annualised salaries more room to “do their job.”

• Agree with staff on a different cycle if the Award or an enterprise agreement allows it - confirm in writing.

• Use monthly cycles for award-free staff (e.g. senior managers).

But be mindful: Most Modern Awards require weekly or fortnightly pay and are very strict about this. You cannot unilaterally move staff to monthly pay if their Award doesn’t allow it. Even with a longer cycle the salary must still cover entitlements in full for that cycle.

What Should You Do Now?

1. Check your contracts – make sure offset clauses are clear and current.

2. Check the Award – confirm the maximum pay cycle you can legally use.

3. Where permitted, consult staff about moving to the longest lawful cycle to ease compliance.

4. Track employee hours – use timesheets or electronic systems.

5. Reconcile pay each cycle – top up if the salary doesn’t meet Award entitlements.

6. Watch risk areas – leave loading, weekends, overtime, on-call, higher duties.

7. Consider pay models – for staff close to Award rates, hourly + overtime may be safer.

How We Can Help : Karen’s HR can assist in reviewing your current employment agreements, record-keeping procedures and policies to ensure you comply with the restrictions on the use of set off clauses.

Contact me on 0402 104 448 or email karen@karenshr.com.au