If you’ve been paying your employees an annualised salary (or a loaded hourly rate) and thought,“We’re paying above Award, so we’re doing the right thing”, this article is for you.
Annualised salaries, set-off clauses and what employers need to pay attention to now
Annualised salaries are a very common and (previously widely accepted) approach in how businesses pay their employees - especially where roles are broad, hours can vary, and the priority is keeping things flexible, simple and fair for everyone.
That’s exactly why a recent Federal Court decision in late 2025 involving Coles and Woolworths has landed so heavily with employers across Australia. Not because it’s just about big retailers, but because it challenges assumptions and interpretations that lots of businesses (large and small) have relied on in good faith.
From a practical HR perspective, what makes this decision significant is that the Court hasn’t changed the law - it has clarified how Award wording and the Fair Work regulations were always meant to be interpreted, even though a different approach had become widely accepted over time.
That distinction matters - it means businesses that genuinely believed they were compliant may still need to take a closer look at how salaries, set-off clauses and record-keeping are working in practice.
What the court actually clarified
The Court was very clear on two key points that are particularly relevant for small businesses using salaries or loaded rates.
Set-off clauses can only operate within a single pay period.
In practical terms, that means you can’t rely on a higher salary in one pay period to make up for a shortfall in another. Even if the annual salary looks more than generous on paper, each individual pay cycle must still meet Award minimums.
This is where many well-intentioned arrangements fall down - it’s been common to assume that if things “evened out over the year”, compliance would follow. The Court has now said that this was never how the Awards were intended to work.
Paying an annualised salary does not remove record-keeping obligations (timesheeting).
Even where an employee is paid a salary, employers are still expected to keep records that can clearly show - pay period by pay period - how minimum entitlements have been met.
👉 For full details, you can read the Fair Work Commission's information on Offsetting and Record Keeping here.
Why this matters
From a HR and payroll perspective, these two points create a few very real pressure points.
A single underpaid pay period is enough to create non-compliance, even if the employee is well paid overall.
Set-off clauses haven’t disappeared, but they operate far more narrowly than many contracts suggest. Generic wording like “this salary includes all entitlements” is unlikely to provide much protection if a pay period is challenged.
Annualised salaries do not remove record-keeping obligations - poor or incomplete records can flip the burden of proof onto the employer.
Even where someone is paid a salary, employers are still expected to have records that can show, pay period by pay period:
hours worked (including start time, break times and finish time),
overtime,
penalty rates,
allowances, and
leave loading where applicable.
Under the Fair Work Act, if an employer can’t produce proper, accessible records, a court can accept an employee’s version of hours worked unless the employer can prove otherwise.
In practical terms, that means rosters or clock-in data on their own are often not enough if compliance needs to be demonstrated after the fact.
Common practices that now need careful review
Here are some common practices across different industries and organisations that need to be looked at
Annual salaries said to “include” leave loading, and therefore leave periods where pay unintentionally drops below Award minimums.
Allowances rolled into a flat salary without being clearly tracked.
Overtime covered by broad “outer limits” clauses.
None of these are unusual - but all of them now require closer attention on a pay-period basis, not just an annual one.
So what should employers do?
From an HR lens, this is about understanding your risk and being clear on where your current arrangements sit.
That starts with asking practical questions:
Do our salaries genuinely meet Award minimums in every pay period?
Are there periods (busy weeks, leave weeks, public holidays) where that might not be the case?
If we were asked to explain our payroll decisions, could our records stand on their own?
If you don’t know the answers to those questions, it’s time for a closer examination of your processes.
A practical next step
To help employers get clarity without jumping straight into a full audit, I’ve created a short Payroll and Set-Off Risk Check.
It’s a practical survey designed to highlight:
what level of risk you are currently facing in this space,
what areas it is worth taking a closer look at, and
where further review may be needed, or processes need adjustment.
👉 Complete the 5 minute risk check quiz here to get a clearer picture of where your current arrangements sit.
Need further support?
If your business needs support implementing these changes or you have questions, please reach out to discuss or Book a 15 minute meeting with me here.
