A set-off clause is a term in an employment contract that lets you pay an above-award salary or rate and count the extra money towards specific award entitlements, like overtime, penalty rates and allowances. Since September 2025, that set-off only works inside each pay period. You can’t use a generous fortnight to cover a short one.
Most employers who pay a salary treat their set off clause as the thing that keeps them safe. For years it felt that way. After the Woolworths and Coles underpayment case, it works more like a seatbelt with one strap: still worth wearing, but it won’t save you if nobody checks the numbers each pay run.
- A set-off clause lets an above-award salary cover named award extras. Overtime, penalty rates, allowances and loadings, but only the ones the clause names and only if the money actually covers them.
- Set-off now works one pay period at a time. In FWO v Woolworths [2025] FCA 1092, the Federal Court held that overpaying in one pay period doesn’t fix an underpayment in another.
- You still need to record hours for salaried staff. Start and finish times matter. Rosters and clock-in data weren’t enough in the supermarket case.
- No clause can touch the National Employment Standards. Annual leave, personal leave, public holidays and notice of termination stay exactly where they are.
- Recheck your salaries every 1 July. Award minimums rose 4.75% on 1 July 2026, which can quietly push a once-generous salary below the line.
Get your Full Time Employment Agreement legal document for free.
What does set off mean in a contract?
To set off means to cancel one amount against another, so only the difference changes hands. You’ll also see it called an offset clause. Same idea, different label.
In a commercial deal, it looks like this. You owe a supplier $6,000 for an invoice. They owe you a $1,500 credit for a short delivery. A set-off clause lets you pay $4,500 and call it square, instead of paying in full and chasing the credit for weeks.
Suppliers know this, which is why so many supplier terms say the customer must pay “without set-off or deduction”. If you’re the one writing the terms, decide which side of that line you want before a dispute forces the question. A one-sided set-off right buried in standard form terms can also be attacked as an unfair contract term when you deal with other small businesses. Our Terms of Trade template sets out payment and credit rules clearly from day one.
Employment set-off works on the same logic but with far less room to move, because the other side of the ledger is a legal minimum. That’s the part that trips employers up, so it’s the focus of the rest of this guide.
How does a set-off clause work in an employment contract?
Every modern award sets a minimum base rate plus extra monetary entitlements that kick in depending on when and how someone works. Those extras include:
- Overtime pay for hours beyond ordinary hours
- Penalty rates for evenings, weekends and public holidays
- Allowances, such as meal, travel or tool allowances
- Loadings, such as annual leave loading
Rather than itemising all of that every pay run, many employers pay a single higher salary or “all-in” rate. The set-off clause is the wording that says the extra above the award base rate is paid in satisfaction of those named entitlements. Without it, an employee could argue the salary was just a generous base rate and claim the overtime and penalties on top. Lawyers call that double dipping.
Here’s the catch most people miss. Signing a contract doesn’t switch the award off. If the role falls under an award classification, the award is still the floor, and your salary has to beat it. Our guide on whether the modern award is part of your employment contract explains how the two sit together.
A worked example, pay period by pay period
Say you pay a café manager $2,600 a fortnight under a set-off clause. The figures below are illustrative, but the pattern is real. In fortnight one they cover two sick staff and rack up weekend and overtime hours. In fortnight two it’s quiet.
| Pay period | Salary paid | Award entitlement for hours worked | Result |
|---|---|---|---|
| Fortnight 1 | $2,600 | $2,850 | $250 short |
| Fortnight 2 | $2,600 | $2,300 | $300 over |
| Month total | $5,200 | $5,150 | $50 over across the month |
Old thinking said you’re fine because you came out $50 ahead. Under the current law, you owe $250 for fortnight one. The $300 surplus in fortnight two doesn’t reach back and fix it. Multiply that by a year, a few staff and interest, and you can see how a “generous” salary turns into a backpay bill.
What did the Woolworths and Coles case change about set-off clauses?
On 5 September 2025, Justice Perram of the Federal Court decided four linked cases: two brought by the Fair Work Ombudsman and two class actions, all about salaried store managers covered by the General Retail Industry Award. The judgment is Fair Work Ombudsman v Woolworths Group Limited [2025] FCA 1092.
Woolworths’ contracts tried to satisfy award entitlements across a 26-week period. Coles’ contracts had no time limit at all. The Court rejected both. Because the award required weekly or fortnightly pay, and the Fair Work Act 2009 (Cth) requires employees to be paid in full at least monthly, each pay run has to cover the award entitlements for that pay run.
Two further findings matter just as much for small employers:
- A set-off clause doesn’t excuse record-keeping. The supermarkets breached the Fair Work Regulations 2009 (Cth) by not keeping proper records of overtime hours for salaried staff. Rosters and clocking data weren’t detailed or accessible enough to count.
- The ruling isn’t limited to retail. It applies the pay-frequency rules in the Act, so any award-covered salaried employee is in scope.
Media reports put the combined remediation bill for the two supermarkets at up to $1 billion. Penalties were still being worked out in 2026, and an appeal has been widely expected. Until a higher court says otherwise, pay-period set-off is the law you have to work with.
Why this matters more since 2025
From 1 January 2025, intentionally underpaying wages or entitlements became a criminal offence under the Fair Work Act. Honest mistakes aren’t included. Still, a contract that promises a top-up while nobody actually checks the hours is a hard story to tell a regulator. A simple, documented pay-period check is your best evidence that any shortfall was a genuine error.
Are you looking to hire an employee?
Use our ‘Hire an employee’ workflow to complete and check off all your legal requirements.
Start nowIs a set off clause still worth having in 2026?
Yes, keep it. Just stop treating it as the plan.
Drafted well, a set-off clause still does one important job: in any single pay period, it lets you point to the above-award money and say it was paid for the named entitlements. That defeats a double-dipping claim. What it can’t do is average pay over time, cover NES entitlements, or replace timesheets.
Some law firms now say employers can’t rely on set-off clauses at all. That’s a fair warning for anyone using one as an averaging device. For a small business paying a manager comfortably above award rates, with hours recorded and checked each pay run, the clause remains a sensible safety net. Which tool fits depends on your situation:
| Your situation | Best fit | Watch out for |
|---|---|---|
| Salary well above award, hours fairly steady | Set-off clause plus pay-period checks | Busy periods that blow out overtime |
| Award has an annualised wage clause and hours swing across the year | The award’s annualised wage arrangement | Strict written notice, outer-limit hours and reconciliation rules |
| Employee wants a different pay structure that leaves them better off | Individual flexibility arrangement | The better off overall test, in writing |
| Salary at or above $190,100 (from 1 July 2026) | Guarantee of annual earnings | Must be in writing and state the period it covers |
| Hours are unpredictable and margins are tight | Pay the award itemised each pay run | More payroll admin, but the lowest risk |
What are the alternatives to a set-off clause?
Annualised wage arrangements under the award
Several awards, including the Clerks and Hospitality awards, contain their own annualised wage clause. It lets you pay a fixed annual amount that covers named entitlements, provided you follow the award’s steps. Those steps include putting the arrangement in writing, stating which entitlements it covers, setting outer limits on the overtime and penalty hours it absorbs, recording start and finish times, and reconciling at least once a year.
Because the award itself sets up the arrangement, commentators see it as sturdier than a contractual set-off clause. It’s also far more prescriptive. Miss a step and you lose the protection.
Individual flexibility arrangements
Every modern award includes a flexibility term that lets you and an employee vary certain conditions, including pay structures, through an individual flexibility arrangement. It must leave the employee better off overall than the award, and it must be genuinely agreed, not a condition of getting the job. Keep your working that shows the better off test was met.
Guarantee of annual earnings for high earners
For award-covered employees earning at or above the high income threshold, which rose to $190,100 on 1 July 2026, a written guarantee of annual earnings means the award stops applying to them. Get the paperwork right and the pay-period problem disappears for that employee. Get it wrong and the award still bites, however large the salary.
How to draft a set-off clause that still works
Vague wording is the fastest way to lose a set-off argument. Build your clause around these elements:
- Name the award and classification. “Any applicable award” gives a court nothing to hold onto.
- List the entitlements being set off. Overtime, weekend and public holiday penalty rates, specific allowances and loadings. If it isn’t listed, assume it isn’t covered.
- Tie the set-off to each pay period. Drop 26-week, quarterly or annual averaging language. That’s the exact approach the Court rejected.
- Promise a top-up and mean it. If the salary for a pay period falls short of the award amount for the hours worked, you pay the difference promptly.
- Carve out the NES. State plainly that nothing in the clause reduces National Employment Standards entitlements.
- Commit to records. Say you’ll record hours worked, including start and finish times, so the check is possible.
Example set-off clause (illustrative only)
Use this as a starting point to discuss with a lawyer, not as final wording for your business:
“The Employee is covered by the [name of Award] at [classification]. The Salary exceeds the minimum rate payable under that Award and is paid in satisfaction of the following Award entitlements, to the extent permitted by law: overtime, weekend and public holiday penalty rates, [named allowances] and [named loadings]. The Employer will apply the Salary against those entitlements in each pay period only. The Employer will record the Employee’s hours of work, including start and finish times. If the Salary paid in a pay period is less than the Employee’s Award entitlements for that pay period, the Employer will pay the difference no later than the next pay day. Nothing in this clause reduces any entitlement under the National Employment Standards.”
What to leave out
Don’t use the set-off clause as a back door for deductions. Clawing back an overpayment or unreturned laptop from wages is a deduction, and section 324 of the Fair Work Act has its own rules, including written authorisation that states the amount. Mixing the two concepts in one clause is how good contracts end up in disputes.
Skip the catch-all line that the salary covers “all entitlements under any award or law”. Broad wording like that gets read down or ignored. A Lawpath employment agreement template gives you a solid base to build the right remuneration clause into, without starting from a blank page.
Your set-off clause audit: a six-step payroll check
Already have salaried staff on a set-off clause? You don’t need to panic. Work through this list once, then build the checks into your pay cycle.
- Confirm award coverage and classification. Check the award and level for every salaried role. Managers who spend most of the day on the floor are still award-covered more often than employers expect.
- Start recording start and finish times. A simple timesheet app is enough. Rosters alone won’t cut it.
- Test a busy pay period. Pick the worst fortnight from the last year and calculate the award amount for the hours actually worked. Lawpath’s free pay calculator covers the most common awards.
- Re-test after every 1 July. Award minimum wages rose 4.75% on 1 July 2026. A salary that cleared the bar in June can fall under it in July.
- Fix shortfalls fast and write it down. Pay any gap, note how you found it, and change the process so it doesn’t repeat.
- Update old contracts properly. If your clause uses averaging language, agree a variation with the employee in writing rather than quietly swapping the wording.
Where employers get caught out with set-off clauses
Assuming a big salary means no award. Pay level doesn’t decide award coverage. The duties do. Unless you have a valid guarantee of annual earnings, a manager on $110,000 can still be owed overtime.
Reconciling quarterly or yearly. Plenty of guides still recommend a quarterly true-up. That advice predates the September 2025 ruling. A quarterly review is fine as a second check, but the top-up obligation sits with each pay period.
Copying a clause from a template you found years ago. Older precedents were written when averaging looked defensible. If yours mentions a 26-week or 12-month period, it’s due for a rewrite.
Forgetting that time off in lieu has rules too. Offering time off in lieu instead of overtime is only lawful where the award allows it and the steps are followed. It doesn’t sit inside a set-off clause by default.
Frequently asked questions
What is a set off clause?
A set off clause lets an employer pay an above-award salary and apply the extra towards named award entitlements such as overtime, penalty rates and allowances. In commercial contracts, it lets one party deduct money it’s owed from money it has to pay.
Are set-off clauses legal in Australia?
Yes. Set-off clauses are lawful, but they only work within each pay period, must identify the entitlements being covered, and can’t reduce National Employment Standards entitlements. The salary still has to meet or beat the award amount for the hours actually worked in every pay run.
Can I average an employee’s pay over a year with a set-off clause?
No. The Federal Court’s 2025 decision against Woolworths and Coles held that overpayments in one pay period can’t cover underpayments in another. If you need annual averaging, look at whether your award has an annualised wage clause and follow its rules exactly.
Do I still need to record hours for salaried staff?
Yes, if they’re award-covered and overtime or penalty rates could apply. The Court found a set-off clause doesn’t remove record-keeping duties, and that rosters and clocking data weren’t sufficient. Record start and finish times so you can check each pay period.
What’s the difference between a set-off clause and an annualised salary?
A set-off clause is contract wording you draft. An annualised wage arrangement is a mechanism inside certain awards, with mandatory steps like written notice, outer-limit hours and annual reconciliation. The award mechanism is more prescriptive but gives firmer footing when followed correctly.
Can a set-off clause cover annual leave or public holidays?
It can’t reduce NES entitlements like paid annual leave, personal leave or public holidays off. It can cover monetary award extras, such as penalty rates for working on a public holiday or annual leave loading, if the clause names them and the salary is high enough.
What happens if the salary doesn’t cover what the award requires?
You owe the difference for that pay period, and repeated shortfalls can lead to backpay, interest and civil penalties. Since 1 January 2025, intentional underpayment can also be a criminal offence. Fix gaps promptly and keep a record of how you found and corrected them.
Is an offset clause the same as a set-off clause?
Yes. “Offset clause” and “set-off clause” describe the same thing. Both let one amount be applied against another. In employment contracts, both refer to applying above-award pay against named award entitlements.
Do I need a set-off clause if I pay exact award rates?
No. If you pay the award base rate and itemise overtime, penalties and allowances every pay run, there’s nothing to set off. The clause only earns its place when you pay above the award and want that extra to count towards specific entitlements.
Get your set-off clause right, then get back to running the business
If you’ve just realised your contracts use averaging language, you’re in good company. Two of the biggest employers in the country had the same problem. Catching it now, with a clean clause and a simple pay-period check, puts you well ahead of where they were.
Unsure whether your current wording holds up? A fixed-fee review from an employment lawyer costs far less than one backpay claim. Or start with the right foundation today: create your Employment Agreement with Lawpath in minutes.
