Fixing Underpayments and Overpayments

Few things create stress in a small business faster than getting pay wrong. Sometimes it’s a simple admin error (a timesheet glitch, a wrong pay rate, an allowance missed). Other times it’s more structural - like being on the wrong award classification, misapplying penalty rates, or misunderstanding what a salary covers.

Either way, incorrect pay can quickly become a legal, financial and culture issue. If you underpay, you may need to back-pay, correct any flow-on impacts (like superannuation), and fix the root cause (and you may be exposed to penalties). If you overpay, you can’t always simply “take it back” - there are rules around deductions, employee authorisation, and fair processes.

The good news is that most payroll problems can be handled cleanly and professionally if you act quickly, communicate clearly, and document what you do. Below, we walk through what to do when you discover incorrect pay, how to fix underpayments and overpayments, and how to reduce the risk of it happening again.

What Counts As Incorrect Pay In Australia?

Incorrect pay is any situation where an employee’s pay does not match what they are legally entitled to (or what you agreed to pay them). That includes both underpayments and overpayments.

Incorrect pay isn’t limited to base hourly rates. It can involve:

Incorrect hourly rate (e.g. wrong award rate, wrong classification level, or casual loading not applied)
Penalty rates not applied (weekends, public holidays, late nights)
Overtime not paid correctly
Allowances missed (e.g. meal, travel, first aid allowance where relevant)
Incorrect leave payments (annual leave, leave loading, personal/carer’s leave, termination pay)
Incorrect superannuation calculations or omissions
Shift changes and cancellations not paid correctly under the applicable award or agreement

Many incorrect pay issues come from misunderstanding rosters and shift entitlements. If you’re regularly changing shifts, it’s worth having a clear process around minimum notice for shift changes so you’re not accidentally creating payroll liabilities.

There’s also a common “grey area” that trips businesses up: salary arrangements. A salary doesn’t automatically mean you can ignore overtime or penalty rates. If you’re using an annual salary to cover award entitlements, you generally need to structure it carefully and ensure the employee is still better off overall.

Why Incorrect Pay Happens (And Why It’s Risky For Small Businesses)

Payroll mistakes are common, especially in businesses with casual staff, fluctuating rosters, or multiple locations. The causes are usually practical rather than malicious, such as:

Using the wrong modern award or missing an award coverage issue
Incorrect classification level (especially after promotions or role changes)
Payroll software setup errors (rates, rules, public holiday settings)
Timesheet approval issues or late changes to rosters
Misunderstanding what allowances apply
Manual processing errors during busy periods

Even when it’s an honest mistake, incorrect pay can carry serious consequences. Underpayments can lead to:

Back-pay liabilities (sometimes over long periods)
Employee disputes and loss of trust
Compliance action from the Fair Work Ombudsman
Civil penalties in serious cases

Overpayments have their own risks. If you handle an overpayment poorly, you can create:

Cash flow issues (if you don’t recover it)
Employee relations problems (if you demand repayment unfairly)
Legal issues if you make unauthorised deductions

As a general rule, when you discover incorrect pay, treat it like a compliance incident: confirm the facts, stop the issue continuing, rectify it quickly, and keep records of what you did.

What To Do Immediately When You Discover Incorrect Pay

When you discover incorrect pay, your first goal is to stop the error continuing. Your second goal is to work out the correct position. Your third goal is to fix it in a way that is lawful and fair.

1. Confirm The Details (Before You Communicate A Final Figure)

It’s tempting to send a quick message like “we’ll fix it next pay run,” but it’s best to confirm the exact issue first. Check:

hours worked (timesheets, clock-in data, rosters)
pay rate applied (base rate, casual loading, classification)
penalty rates / overtime rules
allowances
leave records and leave payments

If the issue is connected to leave, make sure your calculation method matches legal requirements. For example, annual leave payouts and loadings can be tricky, especially on termination. Having a clear understanding of annual leave payments helps you avoid compounding the problem.

2. Identify The Legal “Source Of Truth”

Incorrect pay often comes down to applying the wrong rule. The “source of truth” could be:

the Fair Work Act and National Employment Standards (NES)
a modern award
an enterprise agreement
the employment contract (so long as it’s not providing less than the minimum legal entitlements)

If you’re not sure which industrial instrument applies, or you have mixed duties roles, it’s worth getting advice early rather than guessing. Fixing a payroll error incorrectly can create a second compliance issue.

3. Document What You Found

Keep a short file note (or email to yourself) explaining:

what went wrong
what period was affected
how you calculated the correct amount
what you’re doing to fix it

This is useful for internal controls, and it’s helpful if the employee has questions later.

4. Communicate Calmly And Clearly

Once you’ve confirmed the figures, communicate in a professional, human way. Keep it simple:

acknowledge the incorrect pay
explain what the correction is
confirm when it will be processed
invite questions

Your tone matters here. Employees usually care about two things: (1) will it be fixed quickly, and (2) can they trust it won’t happen again.

How To Fix Underpayments (Back Pay, Super, And Payroll Corrections)

If you’ve underpaid an employee, you generally need to pay the shortfall. In many cases you’ll also need to correct related items like superannuation and leave accruals (depending on what went wrong).

Step-By-Step: Handling An Underpayment

Calculate the shortfall for each pay period affected (not just a rough estimate).
Check whether superannuation is impacted (for example, if ordinary time earnings were underpaid, super may also need to be topped up).
Process back pay as soon as possible (either as an out-of-cycle payment or next pay run, depending on urgency and amount).
Provide a clear payslip record showing the back-pay component.
Fix the underlying cause (rates, classification, payroll rules, rostering practices).

Do You Have To Pay Back Pay Immediately?

Practically, the faster you fix an underpayment, the better. If the shortfall is significant, delaying payment can increase the risk of disputes and complaints.

If cash flow is tight, you might consider agreeing to a short repayment plan to clear back pay quickly - but be cautious and get advice. You don’t want to “solve” incorrect pay in a way that creates a new problem.

Check The Contract And Award Settings

Underpayments often trace back to contract terms not matching real working patterns. For example, a casual employee might be treated like permanent staff in practice, or a salaried employee may routinely work hours that make their salary non-compliant.

Having a properly set-up Employment Contract (and ensuring it aligns with the correct award coverage) can significantly reduce incorrect pay issues.

Be Careful With “Set-Off” Assumptions

Some businesses assume that because an employee is paid above an award base rate, that extra pay automatically “covers” penalties, overtime and allowances. This isn’t always safe. Whether you can set-off amounts depends on how the contract is drafted, whether it clearly identifies what the above-award component is intended to compensate, and whether the employee is still receiving at least their minimum entitlements overall.

If you rely on a set-off style arrangement, make sure it’s drafted clearly and checked for enforceability.

How To Handle Overpayments (And When You Can Recover Them)

Overpayments happen too - sometimes because of duplicate pay runs, incorrect timesheets, roster changes, or a payroll system error.

When you overpay, it can feel straightforward: “they weren’t entitled to it, so we’ll deduct it next pay.” But in Australia, you need to be careful. You generally can’t make deductions from wages unless they’re authorised and lawful.

Step-By-Step: Handling An Overpayment

Confirm the overpayment amount and why it occurred.
Tell the employee promptly, and explain the calculation.
Request repayment and propose options (lump sum repayment, or a repayment plan).
Get written agreement if you plan to recover by payroll deductions.
Document the arrangement and keep it on file.

Can You Deduct The Overpayment From Future Wages?

Often, you can recover an overpayment via deductions if the employee agrees in writing and the deduction is reasonable. The safest approach is to have a clear written agreement that sets out:

the total overpayment amount
the deduction amount per pay period (or dates for repayment)
confirmation the employee agrees to the deductions
what happens if employment ends before repayment is complete

If you don’t have authorisation, or the deduction would cause financial hardship, you should pause and get advice. An aggressive recovery approach can damage trust and may expose you to wage compliance issues.

What If The Employee Refuses To Repay?

Not every overpayment dispute is simple. In many cases, employees will repay once they understand the error and see a reasonable repayment plan.

If an employee refuses, you’ll need to consider your options carefully. The “best” option depends on the amount, the circumstances, and the relationship. This is where tailored advice can be crucial - particularly before you escalate, make deductions, or threaten legal action.

Superannuation, Tax And Payroll Reporting (Don’t Forget The ATO)

Incorrect pay can also create tax and reporting issues, especially if you need to correct past pay events. Depending on what happened, you may need to:

review whether superannuation needs to be corrected (including any timing issues)
update payroll records and provide corrected payslip information
amend Single Touch Payroll (STP) reporting, if applicable
consider whether penalties, interest or charges can apply if super hasn’t been paid correctly and on time

Sprintlaw can help with the employment-law side of incorrect pay (like award interpretation, contracts, deductions and processes), but we’re not accountants or tax advisers. If you’re unsure about STP, PAYG withholding or super reporting/corrections, it’s a good idea to speak with your accountant or payroll provider as well.

Preventing Incorrect Pay: Systems, Contracts, And Ongoing Compliance

Incorrect pay is often a symptom of a system that needs tightening. Prevention is usually cheaper than fixing back pay (and far better for morale).

1. Make Sure Your Rostering Practices Match Your Pay Rules

If your workplace regularly changes shifts, cancels shifts, or uses on-call arrangements, double-check the award obligations. Many businesses run into incorrect pay because the roster changes trigger minimum payments, penalties, or notice requirements they didn’t anticipate.

Having a clear shift cancellation policy can help align rostering decisions with payroll outcomes.

2. Keep Records (Timesheets, Rosters, Variations)

Good record-keeping makes it easier to identify and correct incorrect pay quickly. It also helps you explain the calculation to an employee in a way that feels transparent.

As a baseline, keep:

timesheets and roster records
employment contracts and any role changes/variations
classification decisions (and why you chose that level)
leave requests and approvals
notes of any pay disputes and how they were resolved

3. Review Your Employment Contracts And Policies

One of the best “prevention tools” is simply having documents that match the reality of how work is performed.

For example, if you’re paying above-award to simplify payroll, it’s important you understand what above award wages do (and don’t) protect you from.

You should also ensure you have clear permission and processes around deductions and adjustments. It’s worth understanding the rules on withholding pay so you don’t accidentally create a compliance issue when trying to fix an overpayment.

4. Be Careful With Final Pay

Incorrect pay is especially common at the end of employment - when you’re paying out unused leave, calculating notice, and wrapping up entitlements.

Final pay often includes multiple components, and mistakes can happen easily. If you need to terminate employment or pay out notice, make sure you understand how payment in lieu of notice works in practice, including what should be included and how it interacts with other entitlements.

5. Consider A Regular Payroll Health Check

If you employ staff under awards (especially in retail, hospitality, health services, trades, or any business with shift work), a periodic check can help you catch small errors before they become large underpayment events.

This might include:

confirming award coverage and classifications
spot-checking payslips against rosters
reviewing salary arrangements (including any set-off clauses)
checking allowances and penalty rate triggers

If you’re scaling quickly, adding new roles, or expanding into new trading hours, it’s particularly important to revisit your pay settings.

Key Takeaways

Incorrect pay includes both underpayments and overpayments, and it can involve more than base rates (penalties, overtime, allowances, leave and super can all be affected).
If you discover incorrect pay, act quickly: confirm the facts, identify the correct legal rules (award/NES/contract), document your findings, and communicate clearly.
For underpayments, you’ll generally need to back-pay the shortfall and consider flow-on impacts like superannuation, leave calculations, and (where relevant) payroll reporting corrections.
For overpayments, be cautious: you generally can’t make wage deductions unless they’re authorised and lawful, so written agreement is often key.
Prevention matters: strong employment contracts, consistent rostering practices, good record-keeping, and periodic payroll reviews can significantly reduce incorrect pay risks.

If you’d like help reviewing your payroll practices or putting the right employment documents in place to reduce incorrect pay issues, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Incorrect Pay: What Employers Must Do When Staff Are Underpaid or Overpaid