Employment law update: what the recent Woolworths and Coles decision means for employers

In a recent case involving Woolworths and Coles, the Federal Court clarified the rules around how employers should be paying salaried staff and reiterated that employers are required to comply strictly with employee record keeping obligations.

Background

The Fair Work Ombudsman (FWO) alleged that both Woolworths and Coles had been underpaying salaried managers and department heads over several years. Specifically, it alleged that 8,767 salaried managers were underpaid by Coles, and that 19,000 store-based managers and department heads underpaid by Woolworths.

All of the impacted employees had been covered by the General Retail Industry Award 2010 and had contracts which contained set-off clauses. These clauses purported to permit the employer to pay a higher salary and aggregate all above-award payments within an annual salary (Coles) or over six months (Woolworths), then offset Award entitlements (hourly rates, penalties, overtime, allowances and loadings) against the higher salary during that period.

Coles and Woolworths relied on the employment contracts to argue that there was no underpayment, as the overall salaries paid were above the employees’ entitlements under the Award.

Decision

The Court rejected Coles and Woolworths’ arguments and found that properly drafted set-off clauses can only lawfully set-off an employee’s award entitlements within a single pay cycle adopted by the employer. Further, that the employers could only meet their obligations to pay entitlements under the Award by making payments in the same pay period they became due. This means that if an employer underpays overtime in one pay cycle, they cannot offset it against a different pay period where a higher amount was paid.

For instance, if an employee works overtime in a particular pay period, their employer must pay all required overtime and penalty rates within that same pay period. The employer cannot delay payment or try to balance out any underpayment in a pay period, by paying extra in a future pay period. Each pay period’s entitlements must be paid as they become due, without offsetting across different pay cycles.

The Court also determined that Coles and Woolworths breached their record keeping obligations under regulations 3.33 and 3.34 of the Fair Work Regulations 2009 (Cth).

Under the Regulations, employers must keep employee records that include:

• the rate of remuneration paid to the employee;
• the gross and net amounts paid to the employee; and
• any deductions made from the gross amount paid to the employee.

Record keeping obligations expand if the employee is entitled to be paid additional amounts on top of their base salary, or if they are a casual or irregular part-time employee. Records must be made and kept for these employees which include the specific hours worked, along with details of additional payments including:

• incentive-based payments;
• bonuses;
• loading;
• penalty rates;
• if paid overtime, the hours worked by the employee during each day or when the employee started and ceased working overtime hours; and
• any other monetary allowance or separately identifiable entitlements.

The Court found that just because a contract had a set-off clause did not mean Coles or Woolworths’ were relieved of their record keeping obligations. Further, it found the roster records and clocking data did not meet record keeping requirements because they were not easily accessible or detailed enough.

Takeaways for employers

The decision places a significant burden on employers and highlights the risks associated with annualised salary arrangements. An all-inclusive salary arrangement may not be sufficient to meet industrial award requirements and employers must be cautious if they are using this arrangement.

If employers are relying on a set-off clause to meet entitlements under an award or enterprise agreement, it is important to note that such clauses are only effective within each pay period. Where a set-off clause seeks to operate beyond this, it may not be valid.

It may be that this case is considered by a higher court. However, in the meantime employers who are relying on set off clauses should seek advice about whether the contractual clause is valid or should be redrafted considering this decision.

Other actions employers should take include:

• Audit payroll and timekeeping systems to ensure award compliance is per pay period and that sufficient detail is captured to accurately remunerate employees. This could also be done by reviewing a sample of employee payslips over an annual period to determine whether they have been adequately paid.
• Review record keeping systems to ensure records are strictly compliant with the regulations. To comply with the Fair Work Regulations, employers need to ensure their records are accessible, include details of higher rates of pay and detail overtime hours actually worked and that the records are kept for seven years.
• Train HR and payroll teams in record keeping obligations and how to keep detailed, readily accessible records that accurately track employees’ pay including incentive-based payments, bonuses, loading, penalty rates and any overtime worked.
• If a pay dispute arises, reconsider and seek legal advice before relying upon any offset clauses within contracts, as the enforceability of these clauses is currently in doubt.

If you are not sure whether your contracts or workplace procedures comply with the current standards, we recommend you consult an employment lawyer who can assist in reviewing your procedures and provide advice as to your options.