The Federal Court has just handed down one of the most important underpayment rulings in years in a 201-page decision spanning two class actions and two Fair Work Ombudsman prosecutions against Woolworths and Coles. While the spotlight is on the supermarket giants, the message is crystal clear for every employer in Australia.

  • Salaried employees are not “set and forget.”
  • All-inclusive salaries won’t protect you from underpayment claims.
  • Bad record keeping = legal liability.
  • Underpayment risk is now higher than ever, and criminal penalties exist.

Here’s what the case uncovered, and why this matter to every business, big or small.

Why this case matters

The central issue? 
Thousands of salaried store managers claimed their pay did not actually cover their Award entitlements, including overtime and penalty rates under the General Retail Industry Award. The Federal Court agreed. And while Woolworths and Coles may appeal, the new legal standards set by this decision will shape underpayment disputes across all industries. This case is a blueprint for how underpayments occur even in well-resourced companies and highlights the traps catching out employers every day. Let’s break down the biggest risks.

1. You can’t offset across pay periods

Even with a Salary. Many employers assume “If the annual salary is high enough overall, it covers busy weeks and quiet weeks.” The Court said NO. The key finding? Payment must satisfy entitlements in the same pay period.
Overpaying one period does not cure an underpayment in another.

Why this is dangerous

If your salaried employee worked overtime, earned penalties, or took annual leave with loading in a particular fortnight and the salary did not cover it, you’ve technically underpaid them, even if the annual salary seems generous.

What employers must do

  • Stop relying on broad set-off clauses.
  • Assess whether salaries cover actual entitlements every single pay cycle.
  • Review periods with high overtime or penalty activity.

2. “All-inclusive salary” does NOT remove record-keeping obligations

This is the part of the ruling that will shock many employers. Coles and Woolworths argued they didn’t need to keep certain overtime and penalty records because salaries were all-inclusive. The Court rejected that outright.

The law requires employers to keep:

  • Overtime records
  • Penalty rate hours
  • Loadings
  • Time worked that generates these entitlements

Clock-on / clock-off systems alone were not enough, especially if employees could modify them or they weren’t easily accessible to the regulator.

Why record keeping is essential

No records = no defence.
 Courts assume employees’ claims are correct unless you can prove otherwise.

What employers must do

  • Have a reliable, employer-controlled method of tracking hours.
  • Ensure overtime records are accessible and complete.
  • Audit your timekeeping system – don’t rely on self-reporting.

3. Employees must understand and agree if they’re forgoing entitlements

Some Award provisions allow employees to agree to alternative arrangements – for example, changed rosters or time-off-in-lieu. But the Court confirmed:

  • It’s not enough to have a policy.
  • It’s not enough to assume implied consent.

The employer must prove:

  • The employee knew the entitlement they were giving up.
  • The employee agreed, ideally in writing.

Without evidence, the arrangement is invalid – and the entitlement becomes payable.

What employers must do

  • Identify all Award clauses requiring employee agreement.
  • Obtain explicit, written consent.
  • Keep records of those agreements.

4. Overtime and penalties are NOT automatically triggered – but the burden is on employers

Two important clarifications came out of this case:

Overtime

Working outside a roster is not automatically overtime.
BUT
If extra hours were reasonably required by the workload, the employer must prove they weren’t required. That’s a tough burden.

Penalty-on-penalty payments

The Court rejected the idea that penalties never stack.
While the specific clause here didn’t require “penalty on penalty,” the Court made it clear that assumptions won’t save employers.

The bigger picture underpayment risk is skyrocketing

This decision lands at a time when:

  • Wage theft is now criminalised (from January 2025).
  • Class actions for underpayments are surging.
  • The Fair Work Ombudsman is aggressively targeting salaried roles.
  • General protections (adverse action) claims increasingly include underpayment allegations.

The key takeaway? This is not a compliance issue you can afford to ignore.

What employers should do now – Practical checklist

Here’s how to protect your business:

Audit all salaried roles – Check whether annual salaries actually cover Award entitlements each pay period.

Review (and rewrite) set-off clauses – Most current contracts don’t meet the Court’s standard.

Strengthen record keeping – Ensure overtime, penalties, and loadings are recorded clearly, consistently, and independently of employees.

Secure written employee agreements – Only when Award provisions explicitly allow for alternatives – and only with documented consent.

Implement real-time hours tracking – Use systems that give you transparent, employer-controlled data.

Train managers – Most underpayment issues stem from supervisors who don’t understand Awards, rostering obligations, or overtime rules.

Final thoughts

The message from the Federal Court is unmistakable:

Underpayments don’t just happen in big companies, they happen anywhere systems, salaries, and records don’t align. And now, with stricter laws and increased scrutiny, even small oversights can lead to large penalties, backpay orders, and reputational damage. If you haven’t reviewed your salaried arrangements in detail recently, now is the time.

Christine Howitz – Director

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