COSBOA launches campaign asking SME associations to contact Minister about Federal Court payroll compliance burden.
What’s happening: COSBOA has launched an urgent campaign asking member associations to contact the Minister for Employment and Workplace Relations about Federal Court payroll ruling impacts.
Why this matters: The campaign represents organised pushback against what small business groups describe as an “impossible payroll burden” that disproportionately affects SMEs.
A Federal Court decision stemming from Woolworths and Coles underpayment cases has created what industry groups describe as an “impossible payroll burden” for Australia’s small and medium-sized enterprises.
The ruling, delivered on 5 September 2025, fundamentally changes how employers can structure salary payments and manage award compliance, with implications extending across all industries that use annualised salary arrangements or set-off clauses covered by modern awards.
The set-off clause used by Woolworths purported to satisfy all Award entitlements, including minimum rates, penalties, overtime, and allowances, by reference to the annual remuneration, calculated over a 26-week period. However, the Federal Court rejected this approach.
The Court found that employers cannot offset underpayment of award entitlements in one pay period against overpayments made in a different pay period by relying on offset or averaging provisions in their employment contracts.
This means that if employees are entitled to weekly payments, each week must fully satisfy all award obligations independently, regardless of whether the employee receives more than required in other weeks.
Legal experts warn the decision has broader implications beyond the specific retailers involved. A contractual set-off clause does not absolve employers from their obligations under the Fair Work Act or relevant awards, with firms advising that legal advice should be sought to ensure such clauses are enforceable and correctly applied.
SME compliance nightmare
The Council of Small Business Organisations Australia (COSBOA) has warned the ruling creates particular hardship for smaller employers who lack the resources of major corporations.
“This is ridiculous. Annualised salary arrangements were already difficult enough for small businesses to manage, and this decision makes it near impossible,” said COSBOA Chair Matthew Addison in response to the ruling two weeks ago.
“Small business owners don’t have the payroll departments, HR teams or in-house lawyers that large corporates rely on. They now need to review every payroll process and employment contract to ensure set-off arrangements comply with the law, restructure salaries so each pay period meets all entitlements, and invest in robust timekeeping systems.”
The timing is particularly challenging given from 1 January 2025, intentional underpayment of wages by an employer is a criminal offence, raising the stakes significantly for compliance failures.
Key concerns for SMEs include:
- The Court questioned whether any contractual wording could lawfully permit set-off across multiple pay periods, creating uncertainty for employers about the effectiveness of existing employment contracts.
- The decision mandates full and timely payment of entitlements in each pay period without cross-period pooling or deduction, requiring detailed tracking of all entitlements for every pay cycle.
- Employers can no longer use these arrangements to absorb fluctuations in entitlements unless each pay period fully meets all award obligations independently.
- SMEs could be liable for backpay claims, penalties, and regulatory scrutiny if any single pay period does not meet award requirements.
Immediate action required
Legal and payroll experts recommend SMEs take immediate steps to assess their compliance:
- Review all employment contracts containing set-off clauses or annualised salary arrangements. Many standard templates may no longer be legally effective.
- Ensure payroll systems can track and calculate all award entitlements for each individual pay period, rather than relying on annual averaging.
- Implement robust timekeeping systems that capture detailed data on hours worked, overtime, penalties, and allowances for every pay cycle.
- Consult employment lawyers or payroll specialists to understand specific obligations under relevant awards and enterprise agreements.
Industry payroll providers report increased demand for compliance reviews following the decision. Automated systems now emphasise access to over 50 pre-defined Modern Awards and customisable rule sets to ensure compliance, highlighting the complexity SMEs must navigate.
The Fair Work Ombudsman has indicated it will continue scrutinising employer practices, making proactive compliance essential for avoiding regulatory attention.
Legislative fix needed
COSBOA is calling for urgent government intervention to restore practical flexibility for small employers while maintaining fair pay outcomes.
The industry body argues the current interpretation creates an unworkable regulatory framework that disproportionately affects smaller businesses without corresponding benefits for workers who may still receive fair annual compensation.
“Small businesses want to do the right thing, pay their staff fairly and stay compliant, but the rules keep shifting under their feet,” Addison said. “This ruling highlights the need for guidance and support to help small businesses adjust their systems and contracts, and for long-term reform to ensure workplace laws are achievable for all employers, not just large companies.”
COSBOA has prepared template letters for business associations to contact the Minister for Employment and Workplace Relations, seeking either regulatory guidance or legislative amendments to address the compliance burden.
For SMEs, the immediate priority remains understanding their current exposure and taking steps to minimise compliance risks while the broader policy debate continues. With criminal penalties now applying to intentional underpayment, the cost of getting payroll wrong has never been higher.
Note: Business owners should seek professional legal advice specific to their circumstances before making any changes to employment contracts, payroll systems, or compliance practices. The template letters and campaign materials referenced are provided by COSBOA and business owners should review these independently or with legal counsel before use.
Links:
- Read COSBOA’s full media release on this issue here.
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