How Employers Can Identify, Calculate and Fix

Wage underpayments can happen in any small business - even when you’re trying to do the right thing.

A missed allowance, an outdated pay rate, a misclassified employee, or a payroll system that isn’t aligned with a Modern Award can quickly turn into an underpayment gross problem (meaning the shortfall calculated on the gross amount, before tax and deductions).

The good news is: if you act early, calculate carefully, and remediate properly, you can often contain the damage and get your payroll back on track. This guide walks you through what “underpayment gross” means in practice, how to spot wage underpayments, how to calculate what’s owed, and how to fix it in a way that reduces legal and commercial risk.

What Does “Underpayment Gross” Mean (And Why Do Employers Talk About Gross)?

When an employee is underpaid, the starting point is usually the gross underpayment - the difference between what they should have been paid and what they were paid, calculated before tax, super and any other deductions.

Small businesses often ask: “Shouldn’t we just pay them the net amount they missed?” In many cases, paying via payroll based on the gross shortfall is the safer approach, because it helps ensure records, withholding and reporting line up. However, the right remediation method can depend on the circumstances and you may also need tax or accounting input.

That’s because:

Pay rates and entitlements are generally set in gross terms (hourly rate, penalties, allowances, loadings).
PAYG withholding is calculated based on gross payments.
Superannuation is calculated by reference to an employee’s earnings (often ordinary time earnings (OTE), depending on the payment type and the rules that apply).
Payroll records and payslips typically reflect gross figures (and the Fair Work Ombudsman will look at these closely).

So when people search “underpayment gross”, they’re usually trying to understand the correct way to calculate and pay back wages without accidentally creating a second compliance issue (like incorrect tax withholding, incorrect super, or mismatched payslips).

Gross Underpayment vs Net Underpayment (A Practical Example)

Let’s say an employee should have been paid $1,200 gross for a week, but you paid $1,050 gross.

Gross underpayment = $150
Net underpayment will depend on their tax settings and withholding calculations - it won’t be a fixed number.

If you try to “guess” the net and pay that directly, you can end up with payroll reporting that doesn’t reconcile, and tax/super that doesn’t match what should have been withheld or contributed.

Common Causes Of Wage Underpayments In Small Businesses

Most wage underpayments aren’t caused by a business “not wanting to pay”. They’re usually caused by payroll complexity - especially where Awards and penalty rates apply.

Here are some of the most common causes we see in Australia:

1. Wrong Pay Rate Or Wrong Award Classification

If an employee is classified at the wrong Award level (or you’re applying the wrong Award entirely), every hour they work can be underpaid - sometimes for months or years.

This is one of the reasons businesses often invest early in Award compliance, even if payroll feels “simple” at first.

2. Missing Penalty Rates, Loadings Or Allowances

Common examples include:

Weekend or public holiday penalty rates not applied
Casual loading missed (or incorrectly applied)
Overtime not triggered correctly
Meal allowances, travel allowances, laundry allowances missed
Minimum shift engagement rules not followed

3. Time Records Don’t Match Reality

If rosters, timesheets, and actual hours worked are inconsistent (or not recorded properly), underpayments can happen without anyone noticing until later.

Even well-meaning “rounding” practices (like always rounding down to the nearest 15 minutes) can create systemic underpayment issues.

4. Salary Set-Off Problems

Paying an employee a salary does not automatically mean you’ve covered all Award entitlements.

If you’re relying on a salary to “absorb” overtime or penalties, you generally need to ensure the total salary paid is enough to satisfy the Award minimums over time (and this is where underpayment gross calculations often get complex).

5. Final Pay Miscalculations

Underpayments can also appear at the end of employment - for example, where unused annual leave isn’t paid correctly, or where notice periods are mishandled.

It’s worth having a clear final-pay process, because the end of employment is also when disputes tend to surface. Many employers use a checklist approach when calculating final pay.

How To Identify An Underpayment Gross Issue Early

If you suspect a wage underpayment, time matters. The earlier you identify the issue, the easier it is to contain (both financially and reputationally).

Step 1: Define The Period And The Employee Group

Start by clarifying:

Which employee(s) may be affected?
What date range are you checking?
Is this one-off, or systemic (e.g. a payroll rule that applies to many staff)?

Be careful about assuming it’s isolated. Many underpayment gross issues are caused by settings in payroll systems, templates, or misunderstandings about an Award entitlement - which means other employees might also be impacted.

Step 2: Confirm The Governing Instrument

To work out what someone “should have” been paid, you need to know what applies to them, such as:

a Modern Award
an Enterprise Agreement (if applicable)
their employment contract (as long as it meets or exceeds minimums)

If you’re not sure whether the contract is aligned with your actual practices (hours, duties, classification, overtime expectations), it can help to sanity-check your Employment Contract and your position descriptions against what’s happening on the ground.

Step 3: Gather The Evidence (Before You Calculate)

Before you run calculations, collect:

timesheets / clock-in data
rosters
payslips
employment contracts and any variations
leave records
payroll reports (gross, tax withheld, super)

If the business records are incomplete, you may need to reconstruct hours worked using the best available evidence (and document your assumptions clearly).

How To Calculate Underpayment Gross (A Step-By-Step Method)

Calculating underpayment gross usually comes down to one principle:

Gross Underpayment = Correct Gross Entitlements − Gross Amount Actually Paid

However, the work is in determining what “correct gross entitlements” are for each pay period.

1. Recalculate What The Employee Should Have Been Paid

For each pay period, calculate gross entitlements including:

base hourly pay (or salary equivalent)
penalty rates
overtime
allowances
minimum shift payments
leave payments (if the underpayment involves leave)

Tip: Do this per pay cycle (weekly/fortnightly/monthly) rather than as a single lump sum. It makes reconciliation and payslip corrections much cleaner.

2. Subtract What Was Actually Paid (Gross)

Now compare the recalculated gross amount to the gross amount paid for that period.

Make sure you’re comparing like-for-like. For example, if a one-off bonus was paid in a period, check whether it was discretionary or whether it was intended to cover specific entitlements (and whether that’s legally effective).

3. Check Superannuation Impacts

Once you have the gross underpayment, consider the superannuation impact.

Superannuation treatment can vary depending on the type of payment (for example, whether it counts as ordinary time earnings (OTE) or not). In practice, remediation often involves:

processing the backpay through payroll so withholding and reporting are handled consistently, and
making any required super top-up for amounts that should have attracted super.

If you’re unsure how super applies to different components, it’s worth getting advice early - super mistakes can trigger separate liabilities.

4. Add Interest Or “Top-Up” Amounts (Where Appropriate)

Some employers choose to add an additional amount (for example, to cover interest or to acknowledge inconvenience), especially where the underpayment has been ongoing.

While not always strictly required in every scenario, it can be a practical risk-management step depending on the circumstances and the employee relationship.

5. Document The Methodology

Whatever your calculation approach is, write it down.

If the Fair Work Ombudsman (or a court) ever asks how you calculated the underpayment gross amount, you want to be able to show your workings clearly.

How To Remediate Wage Underpayments Properly (Without Creating New Compliance Issues)

Once you’ve identified and calculated the underpayment gross, the next step is remediation - meaning paying what’s owed and correcting payroll records in a compliant way.

1. Pay The Underpayment Through Payroll Where Possible

In many cases, it’s safer to process backpay through payroll rather than paying it as an off-system bank transfer.

Why?

PAYG withholding can be handled correctly
payslips and payroll records will reflect the correction
reporting (including Single Touch Payroll) is more likely to reconcile

If you do need to make a manual payment for any reason, document it carefully and ensure payslips/records still reflect what was paid and why. This article is general information only and isn’t tax, accounting or financial advice - if you’re unsure about PAYG or super, you may also want advice from your accountant or payroll provider.

2. Fix The Root Cause (Or The Problem Will Repeat)

Paying back wages is only one part of the process.

Make sure you also correct the underlying issue, such as:

updating Award rates in your payroll software
changing classification levels
adjusting rules for overtime and penalties
improving timekeeping practices
updating contracts and policies to match operational reality

3. Review Your Approach To Notice, Termination, And Final Pay

Underpayments sometimes come hand-in-hand with termination mistakes - especially where notice is not paid correctly or where the business tries to “backdate” an exit.

If you need to end someone’s employment while fixing payroll issues, make sure you also understand payment in lieu of notice and how it should be handled in payroll and documentation.

4. Communicate With Employees Clearly (And Keep It Factual)

How you communicate about an underpayment matters.

A good approach is to provide a simple written explanation covering:

that you identified an error
the period affected
the gross underpayment amount (and how it was calculated, at a high level)
when it will be paid
any superannuation top-up details
what you’ve done to prevent it happening again

Keeping it factual and transparent often helps preserve trust - especially in small teams.

5. Know When A Problem Has Escalated

If an underpayment has been ongoing, affects multiple employees, or involves complex Award coverage, the business can quickly move from “administrative fix” to “legal risk”.

Common escalation flags include:

an employee has threatened a complaint or claim
records are missing or inconsistent
you suspect multiple entitlements were missed (not just one pay item)
the underpayment amount is significant
the issue relates to termination, redundancy, or adverse action concerns

If the underpayment issue is already turning into a dispute, it helps to understand the broader legal context around an employer not paying wages and how these matters are commonly approached.

Preventing Future Underpayment Gross Problems: Systems, Contracts, And Compliance

The best way to handle underpayment gross is to avoid it happening in the first place - or at least reduce the likelihood and the scale.

1. Get The Right Employment Documents In Place

Your contracts and policies won’t replace Award compliance, but they can reduce ambiguity and help ensure everyone is aligned on hours, duties, and expectations.

Depending on how your business operates, useful documents can include:

Employment Contract (tailored to the role and engagement type)
Workplace policies (timekeeping, overtime approvals, breaks, rostering)
Contract variation letters (when duties or hours change)

2. Run Regular Payroll Health Checks

A simple internal audit cadence can pick up issues before they become expensive.

For example, quarterly or biannual checks of:

employee classifications against duties
base rates against updated Award rates
penalty and overtime triggers
super calculations against relevant earnings categories (including OTE where applicable)

If you want a more structured approach, you can treat this like a “compliance review” process similar to broader Legal Health Check thinking - the goal is to catch small issues before they compound.

3. Be Careful With Role Changes And “Informal Promotions”

In small businesses, people often grow into roles quickly. That’s great - but it can create underpayment gross risks when:

their duties change but their classification doesn’t
they begin working extra hours that trigger overtime rules
they move from casual to part-time/full-time without paperwork catching up

When someone’s role changes, treat it as both an operational and legal update.

4. Plan For Big Events That Trigger Pay Complexity

Underpayments often spike around “busy” business moments, such as:

seasonal trading periods
public holidays
staff shortages
business restructures
redundancies

For example, redundancies can involve multiple pay components (notice, redundancy pay, leave balances). If you’re heading into a restructure, it helps to understand your obligations early, including how to estimate entitlements with a redundancy calculator and then confirming the exact figures for your situation.

Key Takeaways

Underpayment gross usually means the shortfall calculated on the gross amount (before tax and deductions), and it’s typically the correct starting point for remediation.
Most wage underpayments in small businesses come from Award classification errors, missing penalty rates/allowances, timekeeping gaps, or salary set-off mistakes.
To calculate underpayment gross, recalculate the correct gross entitlements per pay period, subtract what was actually paid, and then address any related superannuation shortfalls that apply to the relevant payment types.
Remediation is often best processed through payroll so PAYG withholding, payslips, and reporting are corrected consistently (and consider accounting/payroll advice where needed).
Fix the root cause (rates, classifications, payroll rules, records, contracts) so you don’t repeat the same underpayment issue next pay cycle.
Regular checks and strong documentation reduce the risk of underpayments and help you respond quickly if an issue is identified.

If you’d like help reviewing an underpayment gross issue, setting up compliant pay practices, or fixing your employment documents, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

How Employers Can Identify, Calculate And Fix Wage Underpayments