Everything employers need to know about recent Federal Court changes for payroll and award obligations

In the wake of the Federal Court ruling tightening award payment and payroll rules, a senior partner at Kingston Reid has broken down what employers and HR teams must do to stay compliant and follow best practice procedures.

In September, the Federal Court delivered a clear and decisive warning to Australian employers, reshaping payroll practices that many businesses have relied on for decades.

The court ruled against contractual annualised salary arrangements that allowed employers to offset employee entitlements across multiple pay periods – practices that could result in workers being underpaid.

The proceedings addressed alleged breaches of the Fair Work Act 2009 and the General Retail Industry Award 2010 (GRIA), in respect of salaried managers who worked in Coles and Woolworths stores, whose employment was covered by the GRIA.

Speaking to HR Leader, Duncan Fletcher, a senior partner at Kingston Reid, explained that this decision sent a strong message to Australian employers that “award entitlements must be fully paid in each pay period set by the award in question”.

Fletcher highlighted that the court’s ruling makes it unequivocally clear that employers cannot use annualised salaries under common law contracts as a loophole to delay or avoid paying irregular amounts.

“It means that employers cannot assume that annualised salaries in common law contracts will protect them from a requirement to pay irregular amounts, such as overtime, immediately when they are due. Annualised salaries are still an option for employers but must be strictly compliant with the applicable award requirements,” he said.

The ruling also placed strong emphasis on maintaining clear, detailed records of each employee’s “penalties, loadings, and overtime,” with Fletcher warning that incomplete or missing documentation could shift the burden onto employers to prove they “paid the correct amounts in any underpayment claim”.

How will employers be affected?

According to Fletcher, the Federal Court’s ruling on contractual annualised salary arrangements carries significant and far-reaching implications for employers.

“This shift has important implications for payroll design, contract drafting, and remuneration strategy. While an appeal is possible, the FWO, unions, and plaintiff firms will rely on the decision immediately, making it essential for employers to act now,” he said.

Fletcher explained that under the ruling, underpayments must now be calculated on a pay-period-by-pay-period basis, effectively ending the practice of offsetting overpayments against underpayments across multiple periods.

“Underpayments must now be assessed pay period by pay period. Employers cannot rely on the net offsetting of over-payments against under-payments across multiple periods,” he said.

While annualised salaries remain a valid option, Fletcher stressed that they “offer less protection unless carefully structured to adequately cover award entitlements without creating a pay cycle shortfall.”

For employers needing to adjust how they operate, Fletcher advised carefully reviewing the awards that apply to their workforce to determine whether any flexibility is available.

“Employers should review the relevant awards that apply to see if they offer any further flexibility,” he said.

“For example, some awards provide for annualised wage arrangements, the option to utilise monthly pay periods, an average ordinary-hours or limited pay-period-to-pay-period set-off. If you take advantage of these flexibilities, it’s important you align your payroll processes precisely to those provisions.”

He added: “Accurate, accessible records are now more critical than ever. If records of time, breaks, overtime approvals, and related data are incomplete, inconsistent, or do not readily show the entitlements owing to each employee each pay period, the burden may shift to the employer to disprove underpayment claims”.

What employers and HR need to do to stay compliant

For employers and HR teams uncertain about which best practice measures to adopt under the current state of the law, Fletcher advised acting immediately to:

• Be aware of award entitlements that must be paid within each pay period: “Employers should configure their payroll to match the applicable award’s pay cycle and be aware of the conditions that trigger payment of things like overtime, penalties, and allowances,” he said.

• Make annualised salary and set-off clauses legally clear: “Set-off clauses need to be drafted with extreme care and should be viewed as one of a number of measures to address the need for consistent payments. If drafted incorrectly, you could end up owing a significant amount in unpaid entitlements.”

• Keep audit-ready time and pay records: “Capture records required by the relevant awards and Fair Work Regulations 2009 (Cth), such as start and finish times, breaks, authorised overtime, time off in lieu agreements, public holidays, and the detail needed to show which penalties, loadings, and allowances were owed and paid each period. Remember to keep written evidence of an employee’s agreement wherever an award allows for variations ‘by agreement’.”

• Set clear overtime and rostering rules: “Amend your contracts and policies to define when overtime is required or authorised, train managers to apply the process consistently, and make sure rosters are built with an accurate understanding of the entitlement triggers under the relevant awards.”