Annualised Salaries Under the Spotlight: What Employers Need to Know

Nov 11

Recent developments in Australian workplace law have placed annualised salaries firmly under the microscope. The recent Federal Court decisions against Woolworths and Coles highlight the importance of payroll compliance, and many employers are now asking:

“What does this mean for my business?”

The Back Story

The Woolworths case involved around 19,000 employees under the General Retail Industry Award 2010, with underpayments alleged over a four-year period.

Coles faced similar claims affecting 9,000 employees over three years.

These proceedings followed voluntary disclosures to the Fair Work Ombudsman (FWO), with the court ruling delivered by Justice Perram in September 2025. While appeals are likely, the principles established remain critical for all employers managing annualised salary arrangements. The key issues from these cases are:

Set-Off Clauses and Pay Periods

One of the most significant takeaways is the handling of set-off clauses. Previously, it was common practice to average payments across 52 weeks, relying on periods of higher hours to offset lighter weeks. Justice Perram clarified that this approach breaches Section 323 of the Fair Work Act.

Employers must ensure that each pay period independently satisfies award entitlements, including minimum pay, penalties, overtime, and allowances. This means that weekly or fortnightly salaries must fully cover the employee’s award entitlements for that period, without averaging or “pooling” across longer periods.

Better-Off Overall Test (BOOT)

Employers should regularly audit payroll data. Ensuring compliance under annualised salary arrangements now requires a careful review using a Better-Off Overall Test (BOOT). This involves checking that employees are not disadvantaged relative to their award entitlements in each pay period. High-risk employees; such as those working weekends, early mornings, or evenings; should be prioritised in this review.

Record Keeping and Burden of Proof

The Woolworths and Coles rulings also reinforced the importance of thorough record-keeping. Employers must maintain detailed records of hours worked, overtime, penalty rates, allowances, and entitlements for each employee – including salaried employees.

Relying solely on rosters is insufficient, as timesheets and payroll records must accurately reflect actual work performed, not just what was planned.

Incomplete or inconsistent records can shift the burden of proof onto the employer, increasing the risk of underpayment claims - even from former employees, who have up to six years to lodge a claim with the FWO.

Agreements and Award Variations

Justice Perram emphasised that award variations must be documented and agreed to in writing. Whether it’s taking time off in lieu of overtime or reducing rest breaks, employees must understand and consent to any adjustment. Verbal agreements alone are inadequate. Employers must ensure that any variation aligns with award provisions and is clearly recorded, and that the employees knows what entitlements they are agreeing to forgo.

Practical Steps for Employers

So, what should employers do now? First, review and update payroll systems to ensure each pay period independently meets award requirements. Keep timesheets, pay slips, and employment contracts accurate and accessible. Conduct regular mini-audits or BOOT assessments, prioritising high-risk employees, and establish an ongoing internal review program to maintain compliance.

Training and communication are also critical. Payroll teams, managers, and employees should understand award obligations, entitlements, and the organisation’s payroll processes. Connecting teams who write the rules with those who apply them ensures consistency and can reduce errors. Simplifying systems and processes can further reduce administrative mistakes and strengthen compliance.

Looking Ahead

Annualised salaries remain legal, but they must now be managed more rigorously. Each pay period stands alone, record-keeping is paramount, and employers must be able to justify how salaries and entitlements are calculated.

With wage theft now a criminal offence, boards and leadership teams must prioritise payroll compliance as a key business risk. Proactive reviews, clear records, and regular audits are no longer optional, they are essential to protect both employees and businesses.

By understanding these principles and embedding them into everyday practices, organisations can confidently navigate the evolving regulatory landscape and safeguard against costly compliance risks.