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If you pay your employees a salary, now is the time to pause and double-check that your arrangements are working the way you think they are.

Recent Federal Court decisions and updates to how the Fair Work Act is being interpreted have sharpened the focus on salary offsetting arrangements and record-keeping obligations. For many employers, particularly those with salaried staff covered by awards, this has significant implications.

The key message from the courts is clear:
being “on a salary” does not remove the need to meet award entitlements each pay period — and employers must be able to prove it.

In September 2025, the Federal Court handed down several important decisions involving the Fair Work Ombudsman and large employers, including Woolworths and Coles. These cases closely examined whether salaried employees were being paid all of their minimum entitlements and whether employers had the records to demonstrate compliance.

 

While the obligation to pay minimum entitlements has always existed, these rulings have clarified and strengthened how the law is applied in practice — particularly for salaried employees.

The takeaway:
Employers can no longer rely on annual salary figures alone. Each pay cycle must independently meet or exceed the employee’s minimum entitlements under the relevant award or agreement.

Many businesses use annual salaries to simplify payroll and provide certainty for employees. However, there are strict rules about how salaries can offset award entitlements such as:

 

If you rely on a contractual offsetting arrangement, your employment contracts must clearly state:

 

Even with a well-drafted contract, employers must still:

 

Critically, overpayments in one pay period cannot be used to cover shortfalls in another.

If your business uses an annualised wage arrangement under an award or enterprise agreement, there are usually additional requirements, including:

 

These arrangements are not “set and forget”. Employers must actively monitor hours and pay to ensure ongoing compliance.

Historically, some employers assumed that paying a generous annual salary meant they could “average out” pay across the year — paying above the award in some periods and allowing it to cover shortfalls in others.

The Federal Court has now made it clear this approach is not acceptable.

Each pay period must stand on its own. That means:

the employee must receive at least their minimum entitlement in that specific pay cycle.

The courts have reinforced that payroll compliance is assessed period by period, not annually.

Good record-keeping is more than an administrative task — it’s your strongest protection if a compliance issue arises.

Employers must keep accurate records of:

 

Payslips for salaried employees must also clearly show their annual rate of pay.

In practice, this means:

If a salary does not fully cover the minimum entitlement in a particular pay period — for example, due to heavy overtime — the shortfall must be topped up immediately.

Building these checks into your regular payroll process is far safer than relying on end-of-year reconciliations.

To stay compliant and reduce risk, employers should:

These steps help ensure salary arrangements are fair, transparent and legally compliant — protecting both your employees and your business.

If you’re unsure whether your salary arrangements or record-keeping processes are compliant, now is the time to get advice.

At Explore Potential, we work with businesses to: