Page 16 Page 17 FOCUS HR | IR July Update 2026 FOCUS HR | IR July Update 2026 The Fair Work Commission reduced a long-serving employee’s redundancy entitlement after finding he unreasonably rejected suitable alternative employment involving relocation and additional allowances. What Happened The employee, a Warehouse Manager, working at the employer’s warehouse operations for approximately 18 years. When the employer decided to relocate operations, it offered the employee ongoing employment at a different site together with: • a 10% salary increase; • a $1,000 monthly car allowance; and • an additional petrol allowance. The change would have required the employee to drive an additional 30km a day. The employee rejected the proposal, describing the new location as a “sh-thole” and objecting to the increased commuting distance. The employer reconsidered the relocation because without the warehouse manager, it did not have a suitable employee to manage the facility and ultimately relocated elsewhere. They did not offer the employee a relocation to the new facility. Mcnaughtans then applied under s120 of the Fair Work Act to reduce the warehouse manager’s redundancy pay to zero, which the warehouse manager opposed. He told the Commission he believed the relocated role had been “a fake offer made to deny him his redundancy”, and had not been “real” because Mcnaughtans did not ultimately relocate to that location, and did not offer to relocate him to the new warehouse. He also said that Mcnaughtans failed to advise him that his redundancy payment would be at risk if he rejected the relocation offer, and he had relied on the managing director’s assurances that “he would be looked after”. The employee argued the original relocation offer was not genuine and believed he had effectively been promised a redundancy payment. The Decision The Commission concluded the employer had genuinely attempted to retain the employee through the proposed relocation arrangement. Importantly, the Commission found the additional commuting distance was not unreasonable when considered together with the financial incentives offered. Commissioner Connolly noted the warehouse manager had not provided the Commission any independent evidence to demonstrate why his age, health or other factors contributed to his objections, “apart from the inconvenience”, and on that basis he found the warehouse manager’s objections unreasonable. Why This Matters The decision demonstrates: • the importance of genuine redeployment efforts • objective assessment of alternative employment • the significance of procedural fairness during restructures and • the risks associated with inconsistent managerial communications MCNAUGHTANS PTY LTD V TERRANCE PAVITT [2025] FWC 1448 Few employment law decisions in recent years have sent a stronger message to Australian employers than the Federal Court’s decision involving Woolworths and Coles. What began as large-scale underpayment proceedings involving thousands of salaried retail managers ultimately evolved into one of the most significant payroll compliance cases Australia has seen. The decision examined the way employers use annualised salaries, contractual set-off clauses and payroll reconciliation processes, and has potentially reshaped how award- covered salaried employees must be paid moving forward. What Happened The proceedings arose from legal action commenced by the Fair Work Ombudsman (FWO) together with related employee class actions concerning salaried managers employed by Woolworths and Coles. The claims centered on allegations that thousands of award-covered managers had been underpaid despite receiving annual salaries above the minimum award rates. The underpayments largely arose because the salaries paid were insufficient to cover the overtime, penalty rates, allowances and other award entitlements that accrued due to the actual hours worked by employees. Both employers relied heavily on contractual set-off clauses contained within employment contracts. Those clauses were designed to allow above-award salary payments to satisfy award obligations. The employers argued that where employees received salaries above minimum award requirements, those additional payments could be used to offset overtime, penalties and other award entitlements that became payable over extended periods. Woolworths operated a six-month reconciliation model, while Coles relied on arrangements extending over an annual period. A major issue before the Court was whether those arrangements could lawfully operate across multiple pay periods. The FWO argued that employees must receive all award entitlements in full during each applicable pay cycle and that employers could not retrospectively use salary overpayments from one period to compensate for award shortfalls arising in another. The FWO also alleged that the employers had failed to maintain records in the manner required by the Fair Work Act and Fair Work Regulations. The Decision The Federal Court ultimately delivered a landmark decision regarding the operation of set-off clauses and payroll compliance obligations. Justice Perram found that contractual set-off clauses could only operate effectively within a single pay period. Why This Matters The Woolworths and Coles decision is one of the most significant payroll compliance developments in recent years. It places annualised salary arrangements and contractual set-off clauses under increased scrutiny, prompting many employers to reassess how they pay, monitor and reconcile salaried award- covered employees. The Fair Work Ombudsman has consistently emphasised that employers cannot take a “set and forget” approach to annual salaries and must actively ensure employees receive all entitlements under applicable workplace instruments. FWO V WOOLWORTHS & COLES [2025] FCA 1092 Employers could not rely on salary overpayments made during one pay cycle to offset award underpayments arising in later pay cycles. The Court held that employees must be paid their award entitlements in full within the relevant pay period in accordance with section 323 of the Fair Work Act and the applicable award provisions. In practical terms, this meant that where an employee worked overtime or became entitled to penalties or allowances during a particular pay period, those entitlements needed to be satisfied during that same period. The Court also rejected arguments that annual salaries removed the need to maintain detailed records of overtime and award-related entitlements. The Court found employers must continue keeping detailed and accessible records showing overtime worked, entitlement calculations and other information necessary to demonstrate compliance with award obligations. However, the Commission declined to reduce the redundancy entitlement to zero because: • the employee had lengthy service • the employee was not told that refusing the transfer would put his redundancy payment at risk, instead he was told he would be “looked after” and • the employee had not been consulted regarding later relocation alternatives The redundancy payment was ultimately reduced by 50%, with a final amount payable of $10,032.
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