Overpayment and Underpayment of Wages: Employer Guide
Paying employees correctly is one of the most important payroll compliance responsibilities for employers.
Both overpayments and underpayments can occur due to payroll errors, incorrect interpretation of employment conditions, outdated systems or misunderstandings about employee entitlements.
While genuine mistakes can happen, employers have a responsibility to identify errors, correct them promptly and take steps to prevent them from happening again.
Failure to manage payroll errors appropriately can expose organisations to:
back payment obligations
employee disputes
compliance breaches
penalties under workplace laws
reputational damage
Understanding how to prevent and respond to payroll errors is essential for maintaining compliant and trusted employment practices.
Overpayment of wages
An overpayment occurs when an employee receives more pay or benefits than they are entitled to.
Overpayments can happen for a range of reasons, including:
payroll processing errors
incorrect interpretation of employment entitlements
incorrect classifications or pay rates
inaccurate leave balances
rostering or timesheet errors
system or administrative mistakes
While overpayments are generally less harmful to employees than underpayments, they still need to be managed carefully.
Can employers automatically deduct overpayments from employee wages?
No. Employers cannot simply deduct money from an employee’s pay to recover an overpayment.
The Fair Work Act 2009 and applicable awards, enterprise agreements and employment contracts set out when deductions can be made. In many cases, employers and employees need to agree on a repayment arrangement.
Any repayment arrangement should be discussed with the employee, documented clearly and implemented in accordance with workplace laws.
If an agreement cannot be reached, employers should seek professional advice before taking further action.
How to fix an overpayment
The process for managing an overpayment generally involves:
Confirming how the overpayment occurred and the period affected.
Reviewing what the employee was paid compared with their correct entitlements.
Calculating the amount that has been overpaid.
Discussing the issue with the employee and agreeing on a repayment arrangement.
Documenting and implementing the agreed repayment process.
Reviewing payroll processes to prevent similar errors occurring again.
Employers should also consider whether the error highlights broader payroll, classification or system issues.
Underpayment of wages
An underpayment occurs when an employee receives less than their minimum legal entitlements.
Employees must receive at least the minimum entitlements that apply under relevant workplace laws, including:
minimum wage requirements
modern award rates
enterprise agreement entitlements
overtime and penalty rates
allowances
leave entitlements
superannuation obligations
Underpayments commonly occur due to:
incorrect award interpretation
incorrect employee classification
missed overtime or penalty rates
incorrect allowance payments
payroll system errors
outdated employment agreements
failure to apply wage increases
What are the risks of underpaying employees?
Employers who identify underpayments must act quickly to correct errors and prevent recurrence.
Intentional underpayment of wages is a criminal offence under the Fair Work Act 2009 from 1 January 2025.
Even where underpayments are accidental, employers may still face significant consequences, including:
repayment of outstanding employee entitlements
penalties for workplace law breaches
employee claims and disputes
investigation by regulators
damage to organisational reputation
Criminal wage theft laws
From1 January 2025, intentional underpayment of wages became a criminal offence under the Fair Work Act 2009.
The criminal offence targets employers who intentionally underpay employees. Honest mistakes, where employers act responsibly to identify and correct payroll errors, are treated differently under the law.
Small businesses that comply with the Voluntary Small Business Wage Compliance Code have additional protections designed to encourage early identification and correction of genuine payroll mistakes.
The reforms reinforce the importance of regularly reviewing payroll systems, employee classifications and award interpretation to ensure employees receive their correct minimum entitlements.
How to fix an underpayment
The process for correcting an underpayment generally involves:
Identifying affected employees and the period of underpayment.
Reviewing what employees were paid compared with their correct entitlements.
Calculating the amount owed, including any applicable interest or additional entitlements.
Communicating with affected employees and confirming back payment arrangements.
Processing payroll corrections and maintaining accurate records.
Reviewing systems, processes and training to prevent future errors.
Employers should also consider whether the underpayment indicates a wider compliance issue requiring a payroll audit or broader review.
How can employers prevent payroll errors?
Preventing payroll mistakes requires regular review of employment practices, payroll systems and compliance processes.
Employers should consider:
regularly reviewing modern award and enterprise agreement obligations
checking employee classifications and pay rates
reviewing payroll system settings
ensuring wage increases are implemented correctly
auditing overtime, allowances and penalty rates
maintaining accurate employment records
providing payroll and manager training
seeking advice when employment arrangements are complex
Regular payroll compliance reviews can help identify issues early and reduce the risk of costly corrections.
When should employers conduct a payroll compliance review?
There are several times when employers should review their payroll practices, including:
before or after annual wage increases
when modern award changes occur
when introducing new roles or classifications
following changes to payroll systems
when expanding into new locations or industries
when concerns are raised about employee payments
The start of a new financial year or calendar year can also be a useful opportunity to review HR systems, payroll processes and employment documentation.
How Workplace Plus can help
Workplace Plus supports organisations to identify and resolve payroll compliance risks through practical workplace relations advice, payroll reviews and training.
Our consultants can assist with:
Payroll compliance reviews
We review payroll processes, employment arrangements and workplace entitlements to identify potential compliance risks and provide practical recommendations.
Award interpretation and compliance support
Our workplace relations specialists help employers understand complex modern award obligations, including classifications, pay rates, allowances, overtime and penalty rates.
SCHADS Award compliance support
For organisations covered by the Social, Community, Home Care and Disability Services Industry Award 2010 (SCHADS Award), we provide specialist support with Award interpretation, payroll compliance and training.
Workplace relations advice
We help employers respond to complex employment issues and implement compliant solutions that support both employees and organisations.
Frequently asked questions
What should an employer do if they discover an underpayment?
Employers should investigate the issue, calculate the correct entitlements, communicate with affected employees, make back payments and review processes to prevent the error happening again.
Can an employer deduct an overpayment from an employee’s wages?
Employers cannot automatically deduct overpayments from employee wages. Any deductions must comply with workplace laws and may require employee agreement or another lawful basis.
Are payroll mistakes illegal?
Not all payroll mistakes are intentional, but employers have an obligation to correct errors and ensure employees receive their correct entitlements. Intentional underpayments are illegal can result in significant penalties.
How can employers avoid underpaying employees?
Employers can reduce risk by regularly reviewing awards and agreements, checking employee classifications, auditing payroll processes and ensuring managers understand their obligations.
Need support reviewing your payroll compliance?
Workplace Plus provides practical payroll compliance advice, Award interpretation support and training to help organisations confidently meet their workplace obligations.
Contact Workplace Plus today.
