SKY UPDATE | FEDERAL COURT CLARIFIES OPERATION OF CONTRACTUAL SET-OFF CLAUSES

01 October 2025

A recent judgement in the Federal Court involving Woolworths and Coles has provided new clarity on how set-off clauses in employment agreements operate.  

Many employers have historically relied on contractual (“Set-off” or “Offset”) clauses stating that an employee’s annual salary is intended to cover award entitlements such as overtime, penalty rates and allowances.  

The Federal Court has found that whilst such clauses are legally valid, they only work within each pay period. This means that employers cannot: 

  • Average out entitlements over time (eg quarterly, bi-annually or annually); or 
  • Use later “overpayments” or bonuses to offset earlier underpayments. 

The judgement means that an employer must be able to show that in every pay cycle, the salary paid was at least equal to what the employee was entitled to under the award. 

This changes the long-held understanding of how set-off clauses in employment agreements operate.   

There is a good chance this matter will be appealed.  However, until then the Federal Court’s decision stands and employers need to act accordingly. 

Following the decision, the Fair Work Ombudsman has updated their guidance and are recommending that employers review their arrangements to ensure that they are compliant. 

Additionally, employers should consider whether using formal annualised wage arrangements may be an option.   

Many awards allow the use of annualised wage arrangements in certain situations.  These arrangements provide a clearer legal framework for paying fixed salaries that cover multiple entitlements across a year. 

Annualised wage arrangements are not available in all situations and come with strict requirements. However, in-light of the Federal Court judgement, they may soon become much more popular.  

If you need assistance to understand how your arrangements are affected by the Federal Court’s judgment, please get in touch

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