The $1 Billion Supermarket Ruling That Changed Pay Compliance for Every Australian Employer

If Australia’s two biggest supermarket chains couldn’t get pay right for years, what does that mean for your employer?

In September 2025, the Federal Court handed down a ruling that sent shockwaves through every payroll department in Australia. Woolworths and Coles — two of the country’s largest and most sophisticated employers — were found to have underpaid thousands of salaried managers and supervisors over multiple years. The combined remediation bill now exceeds $1 billion.

The mechanism at the centre of this case was something most workers have never heard of: a set-off clause. Understanding what it is, how it was misused, and what the ruling means for you could be worth thousands of dollars.

What Is a Set-Off Clause — and Why Does It Matter?

A set-off clause (sometimes called an “all-in rate” provision) is a term in an employment contract that allows an employer to argue that a higher-than-minimum salary “absorbs” or offsets any additional entitlements — such as overtime, weekend penalty rates, or other allowances — that would otherwise be owed under a Modern Award.

Here is a simplified example of how it works in practice:

A Modern Award might require a retail manager to be paid base rates plus overtime loadings, penalty rates for weekend shifts, and other entitlements.
Instead, the employer pays a flat annualised salary that is higher than the base rate, and includes a clause in the contract stating that the salary “covers” all award entitlements.
If the employee works significant overtime or weekend shifts, the flat salary may not actually cover what the award would have required — but the employer argues the set-off clause means they owe nothing extra.

For years, this was treated as a legitimate compliance strategy. The Federal Court’s September 2025 ruling changed that fundamentally.

What Went Wrong at Woolworths and Coles?

The core of the Federal Court’s ruling was this: you cannot retrospectively use a set-off clause to cover underpayments that occurred during a pay cycle. Pay must be correct at the time it is paid — not topped up at year-end.

Both Woolworths and Coles had implemented annualised salary arrangements for salaried managers and supervisors covered by the General Retail Industry Award 2020. These workers were paid a flat annual salary on the basis that it would cover their award entitlements including overtime and penalty rates.

The problem was systematic. When these workers were rostered for extended hours, weekend shifts, or public holidays, their actual award entitlements for those specific pay periods regularly exceeded what their flat salary provided. The employers argued the set-off clause meant they could average this out — that a higher-paying week in one period offset a lower-paying week in another.

The Federal Court rejected this reasoning. The Fair Work Act’s annualised salary provisions require employers to ensure workers are not worse off under an annualised arrangement than they would be under the Award — and that calculation must be made at each pay cycle, not across the year as a whole.

The result: years of underpayments across thousands of salaried workers, with combined remediation now exceeding $1 billion. Legal analysis published in early 2026 by firms including Lexology, BDO, Norton Rose Fulbright, and The Conversation confirmed this ruling reshapes how annualised salary arrangements must be structured and monitored going forward.

Are You a Salaried Worker Covered by a Modern Award?

This is the question most Australians on an annual salary have never thought to ask — and the answer may surprise you.

Many workers assume that because they are paid a salary, they are not covered by a Modern Award. That is often incorrect. A large number of full-time salaried positions in Australia — particularly supervisory and managerial roles in retail, hospitality, healthcare, manufacturing, and logistics — remain covered by Award provisions, even if the worker is paid an annualised salary above the minimum.

If your employment contract includes language like any of the following, you may have a set-off clause in your agreement:

“The salary paid is in full satisfaction of all award entitlements” — This is the classic set-off clause. It purports to have your salary cover any overtime, penalty rates, or other loadings you might otherwise be owed.
“Your annualised salary absorbs all amounts payable under the applicable Modern Award” — Same mechanism, different wording.
“No additional payments will be made for overtime, weekend work, or public holidays” — This effectively operates as a set-off, preventing you from claiming award entitlements on top of your salary.
“Your remuneration package includes all loadings, allowances, and penalty rates” — Again, this is an attempt to have one salary figure cover all potential entitlements.
“Any overtime or additional hours worked are covered by your total remuneration” — A common variation in professional and supervisory roles.

If any of these clauses appear in your contract, and you regularly work overtime, weekend hours, or shifts attracting penalty rates, you may be in exactly the same position as the Woolworths and Coles workers at the centre of this ruling.

Why the Ruling Matters Beyond Supermarkets

The Woolworths and Coles case is the largest and most visible example — but the Federal Court’s reasoning applies to every employer using annualised salary arrangements to offset Award entitlements.

The ruling is significant for three reasons:

1. Pay cycle by pay cycle accuracy is now mandatory. Employers cannot argue that a year-end top-up satisfies the obligation. If your pay was short in any given fortnight, that shortfall is an underpayment — regardless of what happens over the rest of the year.

2. The set-off mechanism has strict legal requirements. Under the Fair Work Act’s annualised salary provisions, employers must document the arrangement, specify the maximum hours to be worked for the salary to remain compliant, and conduct regular reconciliations. Many employers using set-off clauses have not met these requirements.

3. You may not know it is happening. The nature of a set-off arrangement is that you receive a single salary figure on your payslip. Unless you actively compare your award entitlements for each pay period against what you were paid, you may never notice the gap. That is precisely how both Woolworths and Coles managed to underpay workers for years without many of those workers realising.

What Salaried Workers Should Do Now

The Federal Court ruling is a signal, not just a headline. Here is what workers in salaried roles should do:

1. Check your employment contract for set-off or all-in rate clauses. Look for the language described above. If it is there, find out which Modern Award applies to your role.

2. Determine whether you are award-covered. The Fair Work Ombudsman’s Pay and Conditions Tool (PACT) at fairwork.gov.au can help you identify whether a Modern Award covers your position. Many salaried workers in retail, hospitality, warehousing, and allied health remain award-covered.

3. Compare your actual pay against what the Award would require. For any pay period where you worked overtime, weekend shifts, or public holidays, calculate what your Award would have required — base rate, applicable penalty rates, and any allowances — and compare that to what you were paid.

4. Keep records of your hours. If you regularly work beyond your contracted hours, document it. Rosters, timesheets, and communications about work hours will be critical evidence if you ever need to make a claim.

5. Review your payslips against your hours worked. A payslip that shows one flat salary figure tells you very little about whether you are being paid correctly under the Award. The relevant question is whether that figure covers everything the Award requires for the hours you actually worked.

If this sounds complex, it is — by design. Annualised salary arrangements and set-off clauses are legally intricate, and the Woolworths and Coles case shows that even large employers with dedicated HR and legal teams got it wrong for years.

The Billion-Dollar Lesson for Australian Workers

The story of Woolworths and Coles is not just about two companies that miscalculated. It is a reminder that the system relies on workers knowing their rights — and that most workers do not.

The salaried managers and supervisors at the centre of this case did not suspect they were being underpaid. They had employment contracts. They were paid above the Award minimum. They received payslips. And yet, when the hours they actually worked were compared against what the Award required to be paid for those hours, a billion-dollar gap emerged.

You do not need to be a casual worker on minimum wage to be underpaid. Salaried workers with set-off clauses in their contracts face exactly this risk — particularly those who work in industries with complex penalty rate structures.

The question is not whether this happens. The Federal Court has confirmed it does. The question is whether it is happening to you.

Know your worth. If you are a salaried worker with a set-off clause in your contract, Justiico’s automated wage audit can compare your actual pay against your award entitlements — pay period by pay period. Find out in minutes what it took Woolworths and Coles workers years to discover.

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