How to pay salaried award employees correctly and avoid underpayments

When you put an award-covered employee on a salary, it’s easy to think in annual terms: agree a yearly amount, spread it over 12 months, and assume it “covers the award” overall.

But legally, that’s not how it works. For award-covered employees, minimum entitlements like overtime, penalty rates and loadings must be met in each pay period – weekly, fortnightly or monthly. If there’s even one pay period where the salary doesn’t cover what the award requires for that period, that’s an underpayment, no matter how the year looks overall.

Recent court action involving Woolworths and Coles has made this crystal clear and reinforced strict record-keeping obligations for salaried, award-covered staff. Even though those cases involved big retailers, the same principles apply to any business using salaries for award employees. That’s exactly what this article will step through. 

What happened in the Woolworths and Coles case?

In September 2025, the Federal Court handed down a decision in proceedings brought by the Fair Work Ombudsman and class action firms against Woolworths Group and Coles. The cases centred on salaried store managers who were covered by the General Retail Industry Award 2010 (GRIA).

Those employees were on annual salaries that were supposed to cover all award entitlements – overtime, weekend and public holiday penalties, loadings and allowances. The Court found that:

• The employers couldn’t rely on “overpayments” in some pay cycles to make up for shortfalls in others; and
• They had not kept adequate records of hours and entitlements to show that the salaries actually met award obligations.

The decision confirms the Fair Work Ombudsman’s long-held view: you have to meet minimum award entitlements in each pay period where they arise, not just on average over the year. 

Key takeaways for businesses using salaries for award-covered staff

1. Salaries must be sufficient in each pay period

If you pay an award-covered employee an annual salary and rely on a contract “offset” clause to say that salary covers all award entitlements:

• You must ensure that, in every pay period (weekly, fortnightly, monthly), the amount actually paid is enough to cover all the overtime, penalties, allowances and loadings that arose in that period.
• You cannot “average” entitlements over the year by overpaying in some pay periods and underpaying in others, even if the total over the year would have been sufficient.

If, in any one pay period, the employee would have earned more under the award than they actually received under their salary, that’s an underpayment.

This is particularly relevant for award-covered employees who regularly or occasionally work overtime, nights, weekends or public holidays.

2. You must keep detailed records, even for salaried employees

The decision also highlights that record-keeping obligations apply even where you use an annual salary:

• Under the Fair Work Regulations, employers must keep records of the award entitlements that arise in each pay period. For example, overtime that attracts a loading, weekend penalties or allowances, even if those entitlements are “absorbed” into a salary.
• If an employee is entitled to an overtime rate, you must keep a record of either:
  • The number of overtime hours worked each day, or
  • The start and finish times of overtime each day.
    

The Court found that simply having roster data and clock-on/clock-off times was not enough where the overtime periods were not clearly and readily identifiable from the records.

Failing to keep proper records can attract significant penalties and in disputes the Court can presume an employee’s version of events is correct if records are missing.

3. Some awards have “annualised wage arrangement” clauses, but they’re strict

Some modern awards contain specific annualised wage arrangement clauses. These clauses can allow you to:

• Pay a higher annual wage and
• Reconcile entitlements over a 12-month period, rather than strictly in each pay period, provided you follow the requirements set out in the award.

For example, many of these clauses require you to:

• Keep records of all hours worked each week;
• Have the employee agree in writing each week that the hours record is correct; and
• Conduct a formal reconciliation at least every 12 months, and on termination, and pay any shortfall within a specified time (often 14 days).
  

These arrangements are only available if your award actually contains such a clause and if you comply with all conditions in it. If you instead rely only on a contractual offset clause, the Woolworths/Coles ruling confirms that you must meet entitlements in each pay period.

What should businesses do now?

Every business is different, so you should seek professional advice for your specific situation. But in general, you may want to:

1. Identify who is affected
   
   • List all employees who are:
     • Covered by a modern award; and
     • Paid on an annual salary or “all-in” rate.

• Pay particular attention to employees who regularly work overtime, weekends, nights or public holidays.

2. Check how you’re paying them
   
   • Are you relying on a contractual offset clause (i.e. salary intended to cover all award entitlements)?
   • Or on an annualised wage arrangement clause in an award?
   • Do your contracts and internal processes actually line up with what the award requires?
     
3. Review your record-keeping
   
   • Do you have reliable records of:
     • Hours worked each day (including overtime)?
     • When overtime starts and finishes?
     • When penalty rates or allowances apply?
       
   • Are those records readily accessible if the Fair Work Ombudsman or an employee asks to see them? 

4. Assess pay-period by pay-period
   
   • Consider whether, in each pay cycle, the salary actually paid would have covered all award entitlements for that period (including overtime, penalties, loadings, allowances and leave loading).
   • If you identify potential shortfalls, seek advice on remediation.
     
5. Get HR advice where needed
   
   • Because the case turns on how specific award clauses, contracts and pay practices interact, tailored advice is important, especially if you’re looking at historical underpayments, large workforces or complex rostering patterns.

How Employment Hero can help today

Employment Hero already has features that can support better compliance and record-keeping:

• Award interpretation in payroll: Employment Hero’s payroll platform incorporates dozens of modern awards to help you interpret and configure award conditions correctly in your system.
• Timesheets and time and attendance: Employees can submit timesheets and managers can approve them, giving you a digital record of hours worked, including overtime.
• Rostering vs timesheet comparison: Rostering tools help you manage shifts, and the roster vs timesheet comparison report allows you to compare rostered hours to actual hours worked and view start and finish times, breaks and costs.
• HR Advisory: A HR advice service delivered by a team of experts who can provide tailored advice on your obligations regarding paying employees.

These tools can make it easier to:

• Capture the data you need on hours, overtime and penalties.
• Demonstrate that you’re keeping appropriate records.
• Understand where award entitlements might be triggered.

What we’re building next: pay-period salary checks and top-ups

We’re developing new functionality in Employment Hero Payroll to make it easier to manage annual salaries for award-covered employees.

This upcoming feature is designed to:

• Assess each pay period for salaried, award-covered employees, comparing what was paid against what would have been payable under the relevant award for:
  • Ordinary hours
  • Overtime
  • Penalty rates
  • Loadings and allowances
  • Leave loading
• Highlight any shortfalls where the salary does not fully cover the award entitlements in that pay period

Our goal is to give you a clear, repeatable process for testing whether your annual salaries are sufficient in each pay period and to help you action any required top-ups quickly and accurately.

We’ll share more details (including availability dates and how to enable the feature in your account) as we move closer to release.

Managing your employer obligations with Employment Hero

Employment Hero is purpose-built to help you navigate Australia’s complex regulatory landscape and is consistently innovating to meet changes and new requirements. With in-built modern award interpretation, a powerful payroll engine and a 1700+ strong team of employment experts, our Employment Operating System can help you confidently manage all your employer obligations. 

If you’re looking for additional help, our HR advisory service can help you with unique advice specific to your business. With a team of HR experts on hand who know the ins-and-outs of employment law, it means you can focus on the growth of your business rather than compliance.

With HR advisory, you can access HR and employment advice, compliance checks, plus approved tools and templates. HR Advisory is here to give you the confidence and peace of mind to manage your workforce, boost your compliance confidence and focus on what matters most – running a successful business.

If you’d like to learn more, get in touch with one of our business specialists today.

Disclaimer: The information in this article is relevant as at 8 Jan 2025, and has been prepared by Employment Hero Pty Ltd ABN (11 160 047 709) (Employment Hero). The views expressed herein are general information only and are provided in good faith to assist employers and their employees. The Information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising either directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article.