DISCLAIMER:
This information is current as of December 2025. This article does not constitute legal advice and does not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.
Understanding set-off clauses
Employers often rely on set-off clauses to offset wages paid against the award entitlements, or enterprise agreement if one applies.
Meridian Lawyers regularly advises on set-off clauses, typically used when employees are paid a higher, all-inclusive set hourly rate or a salary.
They provide a consistent regular wage, without separately applying overtime rates or penalty rates for all, or some, of the
time worked.
Sometimes set-off clauses are used as a fallback when award coverage is uncertain.
While not a defence to a technical breach of the award or the Fair Work Act 2009 (the FW Act), they have been useful
in the defence of claims for unpaid wage entitlements.
The usefulness of set-off clauses is now in question following the recent case of Fair Work Ombudsman (FWO) v Woolworths Group Limited & Ors [2025] FCA 1092.
In that case, the Federal Court of Australia considered set-off clauses in contracts of employees receiving a salary and covered by the General Retail Industry Award. The set-off clauses were drafted to cover all award entitlements over a 26-week period.
Justice Perram considered the set-off to be an “accounting abstraction” and determined that excess (over award) pay in one pay period could not be used to offset shortfalls in another pay period. Even if the salary was sufficient to match or better the award rates over the full 26 weeks, the set-off clause did not remove the employer’s obligation to pay the full amount under the award in each pay period.
In reaching that decision, the judge noted the employer’s record keeping obligations and the requirement to comply with the FW Act. The FW Act requires employers to pay their award — or where applicable, enterprise entitlements — either weekly, fortnightly or monthly. Employers are also required to keep records of hours worked, including any hours where penalty rates, overtime, loadings, and similar entitlements apply.
Relying on a set-off clause now
Set-off clauses now have extremely limited utility. They may still enable an employer to defend an underpayment claim for a specific entitlement in a given pay period. This is possible if the hourly rates paid during that period were sufficiently higher than the relevant award rate to cover the entitlement. Each pay period will stand alone.
Consider other options
Employers in Australia relying on set-off clauses will need to consider whether they have any use for them at all.
An annualised salary made in compliance with an award clause may offer protection against underpayment claims.
It is a fixed yearly amount that includes compensation for ordinary hours, overtime, and penalty rates, calculated to ensure the employee is better off overall.
An individual flexibility agreement can also offer similar protection if award-compliant. This is a written agreement between an employer and employee that varies certain award conditions to better suit individual needs and can include all-up rates.
Both options require careful drafting and ongoing administrative review to ensure that records of hours are kept. It also helps demonstrate that the employee was better off (and paid the same or more) under the arrangement than under the award.
Record keeping
Employers must keep detailed records for each pay period, showing hours worked and the loadings and penalties payable for the relevant hours of work.
Even when award-compliant annualised salary provisions are used, the employer must ‘do the maths’ and calculate in advance the total number of hours the annual salary will cover, including overtime.
They must also keep a record of those calculations and share it with the employee. In the event the salary is not sufficient, the employer must pay the shortfall.
High income employees
Another option, for award-covered employees earning over the high-income threshold ($183,100 as at 1 July 2025), is a guarantee of annual earnings. This must be provided in accordance with the requirements of the FW Act.
A guarantee of annual earnings must be in writing, state the annual rate of the guarantee, and specify the period for which the guarantee applies.
If a guarantee of annual earnings is properly drafted, the award will cease to apply. The employer must inform the employee of the effects of the arrangement.
Although the award no longer applies to the employee under this arrangement, the employee remains covered by it. This means, amongst other things, the employee is not prevented from making an unfair dismissal claim, even if their salary exceeds
the high-income threshold.
Key take-aways
Employers can no longer rely on set-off clauses in contracts and should consider which salary options are best suited to their business needs.
If you would like advice on employment law or contracts, please contact our team.
About Meridian Lawyers
Meridian Lawyers advises employers across Australia on employment contracts, award compliance, and workplace entitlements. For more information about salary arrangements, set-off clauses, or other employment law matters, please contact:
Sharlene Wellard
Principal Lawyer | Workplace Relations & Safety
Level 16, 25 Martin Place, Sydney NSW 2000
p: +61 2 9018 9939 | f: +61 2 9018 9900
