Wage theft and underpayment
Compliance Alert: Changes introduced through the Closing Loopholes legislation have made intentional underpayment a potential criminal offence under the Fair Work Act.
From 1 January 2025, intentionally underpaying an employee’s wages or other entitlements can be a criminal offence. The offence applies to intentional conduct and does not cover honest mistakes.
The consequences can be significant. Depending on the circumstances, a conviction can result in substantial fines, imprisonment, or both.
For eligible small business employers, the Voluntary Small Business Wage Compliance Code provides protection from referral for criminal prosecution where the Fair Work Ombudsman is satisfied the business has complied with the Code. Civil penalties can still apply.
What does criminal underpayment mean?
The criminal offence is aimed at intentional underpayment, rather than genuine mistakes.
An employer may commit an offence where they are required to pay an amount to an employee, or on their behalf or for their benefit, and intentionally fail to pay it on or before the day it is due.
This can include deliberately underpaying minimum wages, penalty rates, overtime, allowances or other employee entitlements.
Payroll errors can still create serious compliance issues even when there was no intention to underpay. Employers remain responsible for identifying and correcting underpayments and ensuring employees receive their minimum entitlements.
Don't overlook contractor and employee arrangements
Payroll compliance risks can also arise when a worker is incorrectly classified as an independent contractor.
Sham contracting occurs when an employer represents an employee as an independent contractor, including where this is done to avoid employee entitlements or obligations.
The label used in a contract is not enough to determine whether someone is an employee or contractor. The real substance, practical reality and true nature of the working relationship need to be considered.
Incorrect classification can result in unpaid employee entitlements and penalties, as well as potential taxation and superannuation consequences.
Read Contractor or Employee? Understanding Your Workplace Obligations >
What can employers do to reduce payroll compliance risks?
Underpayments can arise from incorrect award classifications, outdated pay rates, missed allowances, incorrect penalty rates, overtime or payroll system errors.
To manage payroll compliance, employers should:
Review payroll transactions and award classifications regularly.
Check that employees are receiving the correct minimum rates and applicable penalties, allowances and overtime.
Review payroll and HR processes when employment laws or awards change.
Keep accurate employee and payroll records.
Make sure HR and payroll staff understand the awards and agreements that apply to the workforce.
Review contractor arrangements to make sure workers are correctly classified.
Investigate and correct identified underpayments promptly.
Regular payroll reviews can help identify errors before they become larger compliance problems.
What if an employee has been underpaid?
If an underpayment is identified, employers should act promptly to establish what went wrong, calculate the amount owed and correct the underpayment.
Underpayments can be complex, particularly where multiple award provisions, classifications, allowances or overtime arrangements are involved.
For employers, the priority should be to understand how the error occurred as well as correcting the amount owed. Reviewing the underlying payroll process can help reduce the risk of the same issue occurring again.
Read Overpayment and Underpayment of Wages: Employer Guide >
How can Workplace Plus help?
Employees must receive at least the minimum pay rates and entitlements that apply to them.
Workplace Plus can help employers identify and address payroll compliance risks through:
For support or more information, contact us today.
