In September 2025, the Federal Court of Australia handed down a decision against Coles Supermarkets Australia Pty Ltd (Coles) and Woolworths Group Limited (Woolworths) relating to the historical underpayment of employee entitlements and a failure to comply with, applicable awards, resulting in escalating back-payment liability (the Decision1).
Two critical aspects of this Decision are (i) that Coles and Woolworths failed to fulfill their record keeping obligations for employee working hours and overtime, and (ii) employee salaries were not being paid in full for each pay period, despite the annual salary being paid correctly. This was due to erroneous contractual set-off clauses in the employment contracts which were not appropriate or effective.
This article is aimed at providing guidance to deal parties on effectively addressing employment risks in the context of a W&I insured transaction, in light of this Decision.
Employment risks, including underpayment of entitlements and award non-compliance, continue to remain areas of underwriting focus for W&I insurers in Australia. Australia has a notoriously complex legislative and regulatory landscape bearing on awards classification and employee entitlements. As a consequence, target businesses with a significant workforce are often rife with employment risks resulting in significant back payments relating to underpayment of entitlements. Where deal parties are looking to insure a transaction, W&I insurers expect that robust due diligence is undertaken to assess and mitigate this risk.
What does this recent Decision change?
This Decision may alter the risk profile of some target companies, particularly where employers may have relied on a set-off clause to adjust against payment for non-rostered overtime. This is likely more relevant where employees have flexibility over their own hours and are paid above (but relatively close to) their minimum entitlements, such as those working as supervisors at Woolworths or Coles. It may also impact businesses where employees’ annualised salaries are significantly higher than their minimum entitlements, and they are required to work excessive overtime which is treated as ‘reasonable overtime’ by the employer. An example may be administrative or finance staff who work far more than their contracted hours during certain periods of the year. Their above award annualised salary may not be sufficient to ‘set-off’ their employers’ obligations to them in any given weekly, fortnightly or monthly pay-period and they could be owed payment for the overtime worked in each relevant period.
The Decision also reinforces the importance of comprehensive and accurate record keeping, including for employees who are paid an annual salary that is above their minimum entitlements.
The Decision highlights the burgeoning and onerous obligations on businesses, leading to underpayment compensation and multiple civil penalties, and reiterates the critical requirement for robust employment due diligence on transactions.
How can this risk be addressed?
A W&I insurer expects that this risk is adequately diligenced by a buyer such that they can make an informed prudent assessment of the risk underlying the relevant warranties in the sale agreement. At a high level, this would include, but is not limited to, the Buyer understanding and assessing:
- The terms of engagement for employees and contractors.
- Application of awards or other industrial instruments, including under an EBA.
- How time is recorded and any systems or controls in place to review and ensure accurate recording.
- Typical working hours and how overtime is applied and calculated.
- If there have been any known payroll issues in the past, and whether these have been remediated.
- If the target processes are supported by external advice on related matters (including audit cycle reviews).
The findings of this exercise should be presented formally (typically within the legal DD report, or a standalone employment DD report). It is important to keep in mind that the assessment of this risk is subjective and varies from business to business. The items noted above are not exhaustive or prescriptive but are typically expected to be included within the scope of diligence by W&I insurers.
In some cases, a qualitative review may suffice in providing a W&I insurer underwriting comfort. This may be in circumstances where the target business’s employment risk is considered to be ‘moderate’ based on a combination of the following:
- a relatively small workforce; and / or
- high employee salaries relative to any applicable awards; and/or
- regular working patterns for employees in line with their contracted duties; and/or
- employee entitlements have a relatively small impact on target value.
Targets with a ‘high’ employment risk profile
Where a target company has a high employment risk profile, it is generally expected that a quantitative payroll sample review (in addition to the qualitative review) is undertaken to test paid wages against entitlements. The sample should be a representative cross-section of employees across three to five payments which had taken place in the past three years.
The sampling exercise should test:
- That the wages paid match the employee payslips.
- That the sampled payslips are correct as per the relevant employee entitlement.
- There has been correct payment of superannuation and accrual of long service leave, which may differ across states.
Notwithstanding the above, the size of the sample should be determined based on the size of the workforce. Though as a general guide for a large workforce, insurers would expect to see 5 per cent of employees covered by an award or EBA included in the sample. Practically speaking, a sampled payroll review could be undertaken by either the buyer or the seller. If undertaken by the seller, a W&I insurer would nonetheless expect that a Buyer tests the findings and conducts a qualitative review.
Closing thoughts
It is challenging for employers to be certain they are meeting all of their obligations to employees, and this Decision may further complicate compliance for some employers. In the context of a W&I-insured transaction, the Decision supports W&I insurers’ caution around this type of risk and highlights the importance of employment due diligence. Nonetheless, it is a risk that can be underwritten, demonstrating the value of W&I insurance as a powerful risk mitigation tool which provides a buyer with added protection against historic unknown risks.
Early engagement with the Bellrock Transaction (M&A) and Contingent Risks team will allow us to weigh in on the approach to mitigating this risk on a transaction and optimising coverage under the W&I policy.
