Clifford Chance

The Federal Court ruled Coles and Woolworths’ salary practices non-compliant with modern awards, requiring entitlements be met each pay period and detailed records kept. This landmark decision affects all employers, heightens underpayment risks, and paves the way for further class actions.

Background

The Federal Court of Australia has delivered a stern decision in the ongoing class action and regulatory litigation involving Australia's largest supermarket operators, Coles and Woolworths. The decision means significant changes to modern award compliance in Australia and has widespread ramifications for all businesses with staff in Australia covered by modern awards. It also suggests a likelihood of further employment-related class actions in Australia.

The judgement calls into question common practices of relying on annualised salaries to satisfy modern award entitlements and sets a high threshold for compliance with record keeping obligations. There are two critical, practical items that all businesses should be considering:

1.  Are the salaries and contract terms in place in the business sufficient to ensure compliance in each pay period?
2. Is the business keeping appropriately detailed records?

Given the substantial value of underpayment claims, significant recent penalty decisions in Australia, and the risk of personal liability, all businesses in Australia should be giving this decision close consideration.

The use of annualised salaries and historical reliance on limited record keeping is widespread across Australia and impacts every sector. This judgment fundamentally challenges those widespread practices and paves the way for future Group Employee Claims in any sector that has relied on annualised salaries for any staff covered by a modern award.

Relevant judgment – Fair Work proceedings and Class Actions by employees

The Federal Court judgment was provided in respect of four matters heard together. Two of those matters are proceedings the Fair Work Ombudsman commenced against Coles and Woolworths in 2021, in respect of allegations of respective underpayments of employees with a combined value above $116 million. This followed each of these employers already having made significant payments to these same employees in excess of $300 million. The remaining two matters are class actions on behalf of employees of Coles and Woolworths.

Across all four matters, these employees were paid annualised salaries purportedly in satisfaction of all modern award entitlements. A key issue in this judgment was whether all modern award and enterprise agreement entitlements owed to the employees were in fact captured by this remuneration approach.

The issues

The judgment explored a range of issues, importantly including both set-off application and record keeping compliance. While distinct, accurate time-keeping records play a crucial role in preventing both underpayment and overpayment, since errors in tracking hours have a direct impact on entitlements.

Set-off clauses and annualised salaries

A focal point of decision were the retailers' set off clauses.

Contained in many Australian employment contracts, set-off clauses typically state that an employee's annual salary covers all Award or enterprise agreement entitlements owing, including minimum rates, penalties, overtime, and allowances.

In application, employers will often set-off underpayments in one pay period against overpayments made in other pay periods to achieve what they consider 'overall' compliance with Award entitlements. Woolworths were averaging these across a 26-week period for compliance, while Coles' employment contracts did not specify a time period.

In the decision, Perram J made clear that this protracted averaging approach across a 6- or 12- month timeframe is in fact not compliant, and compliance needs to be monitored across every pay period (in this case, fortnightly). Any set-offs can only be made within the same pay period and entitlements must be satisfied in each pay period.

Record-keeping

Record-keeping also came under the spotlight in the decision. Since 2017, the Fair Work Act includes a presumption in favour of an individual who makes allegations relating to failure to meet record-keeping or payslip obligations.

The decision clarified that an employer will not be able to prove compliance with working time obligations by simply relying on rosters and clocking in/out software. Instead, the employer must maintain specific and detailed records that, in effect, allow an employee to clearly identify their rights and entitlements to various payments under the applicable modern award or enterprise agreement.

What does this mean for businesses in Australia?

Complying with Australian modern awards is notoriously complex. Quantifying risks of underpayment, or actual underpayment, arises in almost every Australian transaction and, at some stage, for every Australian employer.

Given the high-profile nature of this decision and its widespread application, we anticipate an uptick in underpayment claims. For businesses in Australia, we recommend considering:

1. Are the salaries and contract terms in place in the business sufficient to ensure compliance in each pay period?
2. Is the business keeping appropriately detailed records?

This will likely require input from legal advisers and compliance professionals and possibly support from tech-based solutions as employers grapple with how to improve payroll and record keeping processes. Management should also consider broader workforce engagement and how to approach any remediation or improvements that may need to occur.

This decision may yet be appealed, and there is much still to be determined, including the quantum of payment and penalties.

We will continue to monitor developments in this litigation and to discuss with our clients practical ways to respond to the ever-evolving employment compliance landscape in Australia. Please don't hesitate to reach out to our team if you would like to discuss this with us.