Small businesses hit with impossible payroll burden after Federal Court ruling

The Council of Small Business Organisations Australia (COSBOA) has warned that the recent Federal Court decision on contractual set-off clauses creates an impossible regulatory burden for small businesses, adding yet another layer of red tape to already complex workplace laws.

The Court ruled that employers can no longer use set-off clauses in employment contracts to balance out overpayments in one pay period against shortfalls in another. Instead, all entitlements must be paid in full within each individual pay period.

COSBOA Chair, Matthew Addison, said the ruling is a step backwards for flexibility and practicality in Australia’s workplace relations system.

“This is ridiculous. Annualised salary arrangements were already difficult enough for small businesses to manage, and this decision makes it near impossible,” Mr Addison said.

“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 — all just to avoid compliance risk. For many, this isn’t just a technicality; it’s a major compliance headache that could expose them to huge financial and legal risks.”

COSBOA highlights the key issues for small businesses:

• The decision limits contractual set-off clauses to a single pay period. Employers cannot ‘pool’ or ‘average’ payments across multiple cycles, even if annual salaries were designed to absorb entitlements such as overtime or penalty rates. Payments from previous or future periods cannot be used to balance shortfalls.

  
  

• The ruling also impacts annualised salary arrangements. Employers can no longer use these arrangements to absorb fluctuations in entitlements unless each pay period fully meets all award obligations.

  
  

• Even carefully drafted contracts are unlikely to provide protection. The Court questioned whether any wording could lawfully permit set-off across multiple pay periods, creating uncertainty for employers.

  
  

• The decision increases the risk of underpayment claims. Small businesses could face backpay liabilities, penalties, and regulatory scrutiny if they fail to meet award obligations within a single pay period.

  
  

• Record-keeping obligations have been reinforced. Employers must maintain accurate, detailed and accessible records of employee hours, overtime and entitlements for each pay period. Partial or incomplete records will not suffice.

“Small businesses want to do the right thing, pay their staff fairly and stay compliant, but the rules keep shifting under their feet,” Mr 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 is calling on the Government to pass urgent legislation to fix this issue and provide clarity to small businesses. Small Businesses have a disproportionate share of workplace compliance obligations and need protection from excessive regulatory burden.

For more information, visit www.cosboa.org.au.

-ENDS-

For media enquiries or interviews, please contact Matthew Addison, Chair, COSBOA on chair@cosboa.org.au or call +61 (0) 421 553 613.

About COSBOA

Established in 1979, The Council of Small Business Organisations Australia (COSBOA) is a member based not-for-profit organisation exclusively representing the interests of small businesses. The capability, representation, and reach of COSBOA are defined by a mix of over 50 national and state-based members. COSBOA's strength is its capacity to harness its members' views and advance consensus across policy areas common to many.

Our member organisations work with the COSBOA team to assist us with policy development and guide our advocacy - not just for small businesses but also for the benefit of the Australians they employ. In this capacity, COSBOA makes submissions and representations to the government, including its agencies, on issues affecting small businesses and to pursue good policy.