Federal Court Blurs the Lines on Annual Salaries, But Should Employers Be Worried?

Author: Tim Dive, Founder & Director.

In a recent decision involving Woolworths and Coles, the Federal Court has ruled that annual salaries cannot be averaged across the year to offset award entitlements, they must be assessed pay period by pay period.

This has stirred up confusion, frustration, and understandably, a lot of employer anxiety.

Employers trying to simplify complicated Awards with annual salaries need to pay attention to this ruling.

What did the Court say?

The judgment, led by Justice Perram, focused on contractual offset clauses and concluded that it’s not lawful for an employer to rely on over-award payments made in one pay period (say, March) to cover shortfalls in another (say, July).

Each pay period stands alone. So even if you’ve paid someone “more than enough” over the year to satisfy the Award, that doesn’t matter if they were underpaid in a particular week or month.

This ruling means businesses will need to reconcile award entitlements every single pay period, not annually, to avoid falling foul of the law. That’s a huge compliance and admin burden, especially for small to medium businesses who thought they were doing the right thing by paying good annual salaries.

But here’s the kicker…

There’s a serious flaw in applying this ruling as a blanket standard.

Why?

Because many Modern Awards already include provisions that allow for averaging of ordinary hours, sometimes annually.

Take the Clerks Private Sector Award, which literally covers millions of Australian workers. It has built-in mechanisms for annual averaging of hours. So do others, with provisions to average weekly, fortnightly, or even over a four-week cycle.

So the big question becomes:

How can a court ruling override what the Award itself allows?

That’s the legal blind spot we need to watch carefully.

What Employers Should Be Asking Now:

• Why is the law saying I can’t average hours when the Award literally lets me?

• Am I now expected to reconcile every week or fortnight, even if the contract is clear and pay is generous?

• Is my offset clause still valid—or is it meaningless under this ruling?

• Should I ditch annual salaries altogether and just move to strict award compliance?

And above all else:

• Why are our courts and tribunals so disjointed? AND

• Why is our workplace relations system so difficult to operate within, compliantly?

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Bottom Line

This decision has created more ambiguity, not less, and it’s a huge blow to businesses trying to balance flexibility, good pay, and compliance.

If we don’t push back on applying this logic across the board, especially when it contradicts Award provisions, we risk losing one of the most useful tools for attracting and retaining good employees: a predictable, stable, and competitive annual salary.

Employers: don’t panic, but don’t wait either.

Now’s the time to review contracts, salary structures, and record-keeping. And above all, make sure you're interpreting the law through the lens of your Award, not a one-size-fits-all case decision.

This is getting technical - you need to get advice, which includes firm assessment of ALL Award provisions, resulting in tailored contract clauses for your business. Don't accept anything less, and speak to The HR Cartel. .

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