The Material Financial and Operational Risks Facing Australia’s Big Two Supermarkets Amid Historic Staff Underpayment Scandals

Australia’s supermarket giants, Woolworths and Coles, face a perfect storm of financial and operational risks stemming from historic staff underpayment scandals. These risks, compounded by regulatory scrutiny and reputational damage, threaten long-term shareholder value and underscore the fragility of compliance frameworks in an increasingly litigious environment.

Financial Exposure: A Growing Liability

The scale of underpayments has forced both companies into a costly remediation cycle. As of September 2025, Woolworths has repaid $486 million and set aside $547 million for further obligations, while Coles has allocated $50 million for remediation after repaying $30.1 million to affected employees [1]. Federal Court Justice Nye Perram’s ruling that underpayments cannot be offset against overpayments in subsequent pay periods has eliminated a potential financial buffer, requiring full restitution to employees [1].

A rejected settlement in a separate class action—criticized for offering no direct compensation to workers—has further complicated resolution efforts [5]. With litigation ongoing and a case management hearing scheduled for October 27, 2025, both companies face the prospect of escalating costs. For context, Woolworths’ 2019 underpayment scandal alone ranged between $200 million and $300 million [4], suggesting the current crisis dwarfs previous incidents.

Operational Risks: Reputational Damage and Regulatory Scrutiny

The scandals have eroded trust among employees, consumers, and investors. Coles’ CEO described the court’s judgment as a “calamity,” while Woolworths’ repeated missteps have drawn sharp criticism from industry groups, including the Australian Retailers Association, which has called for simplification of the complex General Retail Industry Award [2]. This complexity, critics argue, has created systemic compliance challenges for both large and small employers [3].

Regulatory bodies are also intensifying their focus. The Fair Work Ombudsman (FWO) has taken legal action against Woolworths for underpaying managers, emphasizing the need for robust record-keeping [2]. Meanwhile, the ACCC’s parallel investigation into misleading pricing practices—paused until the underpayment cases conclude—adds another layer of operational risk [4].

Regulatory Compliance: A Shifting Landscape

The court’s emphasis on employer responsibility to disprove underpayment allegations when record-keeping fails has raised the bar for compliance. Justice Perram’s ruling that rosters and clock-in systems are insufficient for tracking award-based entitlements has forced retailers to overhaul payroll processes [1]. This shift, while necessary, is costly and time-consuming, diverting resources from core operations.

Industry observers warn that the scandals may catalyze broader regulatory reforms. The FWO has highlighted the need for clearer industrial awards, while the ACCC’s focus on pricing transparency suggests a broader regulatory crackdown on corporate misconduct [2]. For shareholders, this means heightened compliance costs and the risk of punitive penalties for non-adherence.

Shareholder Value Erosion: A Long-Term Concern

The financial and reputational toll is already evident in investor sentiment. While Coles’ parent company, Wesfarmers, saw its share price rise in early 2020 despite underpayment revelations, analysts now caution that the prolonged litigation could undermine confidence [4]. Morningstar analysts previously downplayed the long-term impact of underpayments, but the current scale of the crisis—spanning over 27,700 affected employees—suggests a more severe and enduring hit to valuations [1].

Moreover, the ACCC’s allegations of misleading pricing practices have further tarnished the brands’ credibility. If found guilty, both companies could face substantial fines and mandatory community service orders, such as funding charity meal deliveries [1]. Such penalties would not only strain cash flow but also damage brand equity, a critical asset in the competitive grocery sector.

Conclusion: A Call for Vigilance

The underpayment scandals at Woolworths and Coles represent more than a compliance failure—they are a systemic risk to shareholder value. With remediation costs climbing, regulatory scrutiny intensifying, and reputational damage compounding, investors must weigh these factors carefully. The companies’ ability to navigate this crisis will depend on their commitment to transparent governance, proactive compliance, and meaningful engagement with stakeholders. For now, the financial and operational risks remain acute, and the long-term outlook for both retailers hinges on their capacity to rebuild trust in a highly regulated and litigious environment.

Source:
[1] Woolworths, Coles underpayments scandal deepens [https://www.smh.com.au/business/companies/payroll-calamity-woolworths-coles-underpayments-scandal-deepens-20250905-p5msp5.html]
[2] Court decision on supermarket pay underlines need for award simplification [https://insidesmallbusiness.com.au/management/legal/court-decision-on-supermarket-pay-underlines-need-for-award-simplification]
[3] Brands Behaving Badly: Causes, Cases and Consumer Protections [https://www.researchgate.net/publication/387015794_Brands_Behaving_Badly_Causes_Cases_and_Consumer_Protections]
[4] ACCC takes Woolworths and Coles to court over alleged misleading prices [https://www.accc.gov.au/media-release/accc-takes-woolworths-and-coles-to-court-over-alleged-misleading-prices-dropped-and-down-down-claims]
[5] Settlement rejected in underpayments action against Woolworths [https://www.mauriceblackburn.com.au/blog/class-actions/settlement-rejected-in-underpayments-action-against-woolworths/]