Australian supermarket giants Woolworths and Coles now face the prospect of a combined bill exceeding A$1 billion^[1] in relation to the alleged underpayment of close to 30,000 staff over several years.

These alarming liabilities were raised in statements issued by each company to the Australian Securities Exchange (ASX) on Monday, with updates to their estimated costs in the wake of a key Federal Court ruling on Friday.

It’s been a long-running matter. In 2021, the Fair Work Ombudsman commenced proceedings against Coles and Woolworths in the Federal Court, alleging the supermarket giants had made a series of underpayments dating back to 2015.

Those proceedings were heard in parallel with two class action lawsuits, brought in 2019 and 2020, which also alleged underpayments for Coles and Woolworths staff as early as 2013.

On Friday, Justice Nye Perram of the Federal Court delivered a judgment^[2] dealing with a variety of issues within the dispute. One particular focus was the use of “set-off” arrangements in employment contracts – simply put, agreements to bundle certain entitlements (such as overtime pay and penalty rates) owed under awards into higher base rates of pay.

The matter remains ongoing, with a number of further rulings possibly still to come. A case management hearing will be held on October 27 to determine how the future steps in the matter will be conducted.

But this recent ruling contains lessons for other employers in ensuring their employees are paid in-full and in compliance with the applicable award.

A bundle of benefits

In Friday’s ruling^[3], Justice Perram noted the “basic problem common to each action” to be Coles and Woolworths’ use of what are called “set-off” arrangements.

Within such arrangements, employees are paid one salaried sum intended to fulfil their various entitlements under modern awards, including overtime pay and penalty rates. An employer “sets off” such entitlements by paying employees a higher base rate than is required under the relevant award.

Set-off arrangements are commonplace throughout Australia. In theory, they permit employers to streamline payroll processes and simplify the payment of worker entitlements.

Justice Perram found the supermarkets had, in implementing the set-off arrangements, failed to:

keep track of the entitlements of these employees under the award and hence, in many cases, did not pay entitlements which the employees properly had.

Record keeping

Under the Fair Work regulations^[4], employers are required to keep records of employees’ overtime and rates of pay.

Justice Perram held that the supermarkets could not satisfy this requirement only by relying on set-off arrangements and requiring employees to fill out timesheets. Such records fell short of proving when employees had actually arrived at work or had finished.

Perhaps the most controversial set-off clause was one used by Woolworths, which purported to satisfy, “as far as possible”, all award entitlements by reference to a set rate of annual pay, calculated over a 26-week period.

The intention of the clause was to allow Woolworths to “set-off” employees’ above-award base rate against any award entitlements they had acquired in the preceding six months. If an employee had worked overtime hours over Christmas, for example, the payment for those hours could be set-off against higher base payments provided to the employee in July.

As Justice Perram discussed, one notable issue with this is the fact the award required the supermarkets to pay employees on either a weekly or fortnightly basis.

Justice Perram ruled in relation to the Woolworths clause, as well as five other similar clauses used by Coles, that the only way for the supermarkets to meet their obligations was to make payments within the relevant two-week pay period.

Relying on above-award payments given months earlier to justify not paying penalty rates would not comply with the award.