Legal Risks Of Underpaying Staff: Essential Australian Employer’s Guide

Underpaying staff is one of the most common - and costly - mistakes Australian businesses can make. Even if it’s accidental, incorrect pay can cause serious financial, legal and reputational damage.

If you employ people in Australia, paying them correctly isn’t just best practice - it’s a legal requirement. Regulators are ramping up compliance activity, and courts are ordering significant backpay and penalties for breaches.

In this guide, we’ll unpack what counts as underpayment, where things commonly go wrong, the legal risks for employers, and practical steps to fix and prevent issues. We’ll also cover how the process really works (including which bodies handle underpayment disputes) and where criminal “wage theft” laws currently apply.

What Does It Mean To Underpay Staff?

Underpaying staff means paying your employees less than their lawful entitlements. This can include failing to pay minimum rates, missing allowances or loadings, or not applying penalty rates or overtime as required.

Common examples of underpayment include:

• Paying hourly rates below the minimum set by the relevant Modern Award or the National Minimum Wage
• Not applying penalty rates for weekends, public holidays, evenings or overtime
• Incorrect job classification or level, leading to the wrong pay grade
• Missing allowances or loadings (e.g. travel, uniform, first aid, leave loading)
• Not paying for time worked before/after rostered hours, or underpaying trial shifts
• Administrative or payroll errors, especially after rate increases or roster changes

Intent isn’t the key issue - outcomes are. Even honest mistakes can amount to breaches and attract backpay orders and penalties.

Why Do Underpayments Happen?

Most underpayments start small and snowball over time. Here are the most frequent causes we see:

• Unclear Award Coverage: Many employees are covered by a Modern Award. If you pick the wrong Award or overlook Award conditions, you can underpay without realising. Getting Award compliance right early is critical.
• Wrong Classification: Each Award has levels or classifications with different pay rates. Misclassifying a role (e.g. Level 1 instead of Level 3) leads to systemic underpayment.
• Penalty Rates & Overtime: Missing penalties for weekends, late nights, public holidays, or overtime is a common error. If your rostering or payroll setup doesn’t capture these, you’ll likely underpay. A refresher on penalty rates in Australia can help.
• Law & Rate Changes: Minimum wage and Award rates typically increase annually, and rules can change during the year. If you don’t update your systems and budgets in time, errors creep in.
• System & Process Gaps: Manual timesheets, split shifts, allowances and higher duties can be missed. Growing teams, multiple sites, or irregular hours add complexity.
• Contractor vs Employee: Treating an employee like an independent contractor can result in unpaid entitlements. Always double-check the engagement model and documentation.

The takeaway: most issues are preventable with clear contracts, accurate classifications, robust payroll settings and regular checks.

Your Legal Obligations As An Employer

Australian employers must meet minimum standards under a mix of federal laws and industrial instruments. Key sources include:

• Fair Work Act 2009 (Cth) and the National Employment Standards (NES): These set non-negotiable minimum conditions for most employees (e.g. leave, notice, redundancy).
• Modern Awards: Industry- or occupation-based instruments that set minimum wages and conditions (including classifications, penalties and allowances). Most employees are covered by an Award, even if they also have an employment contract.
• Enterprise Agreements: If in place, these apply to your workforce, but cannot undercut the NES or the BOOT (Better Off Overall Test) compared to the relevant Award.
• Employment Contracts: Contracts must be consistent with the law and applicable Award or Agreement. They can provide more generous terms, not less.

You also have obligations around payslips and record-keeping, superannuation, and payroll tax/PAYG withholding. Super and tax rules are separate to employment law - speak with your accountant or tax adviser to make sure your superannuation, PAYG withholding and other tax obligations are up to date.

Two practical notes:

• Access to Award terms: You need to make sure the terms that apply (e.g. relevant Award or Agreement, classifications and rates) are identified and factored into your payroll. You don’t generally need to hand each employee a copy of the full Award, but employees must be able to understand and access the terms that apply to them.
• Where do underpayment claims go? The Fair Work Ombudsman (FWO) investigates and can issue compliance notices, infringement notices or commence court proceedings. Employees can pursue underpayment recovery through the courts (for example, the Federal Circuit and Family Court), including small claims processes. The Fair Work Commission (FWC) doesn’t generally determine underpayment recovery disputes.

What Are The Legal Risks If You Underpay Staff?

Civil Penalties And Serious Contraventions

The FWO can investigate and bring proceedings for breaches. Courts can impose significant civil penalties per contravention, which increase for repeated or deliberate breaches. “Serious contraventions” can attract much higher penalties.

Backpay, Interest And Compensation

Courts can order you to pay amounts owed with interest, and sometimes additional compensation. If underpayments span multiple years, liabilities can be substantial - especially with compounding penalties and interest.

Accessorial Liability

Individuals who are “involved in” a contravention - such as directors, managers or payroll officers who knowingly participated - can be personally liable. This is one reason it’s vital to train managers and keep payroll processes tight.

Compliance Notices, Enforceable Undertakings And Audits

The FWO may issue compliance notices or negotiate enforceable undertakings. These typically require backpay, revised systems, audits, training and public contrition statements. Non-compliance with a notice can itself lead to penalties.

Criminal “Wage Theft” Laws

Some jurisdictions (including Victoria and Queensland) have introduced criminal wage theft offences for deliberate underpayment. At the federal level, a new Commonwealth criminal wage theft offence has been legislated to commence in 2025, with a “reasonable steps” compliance defence. The specifics and timing vary by jurisdiction, so it’s important to get advice on how these laws apply to you.

Brand And Reputation Damage

Underpayments often make headlines and can deter customers, partners and talent. Transparent, proactive remediation can help - but prevention is far better than a public remediation program.

What Should You Do If You Discover An Underpayment?

Find an issue? Move quickly and transparently. A structured approach helps limit legal and reputational fallout.

1. Stop The Underpayment: Immediately correct rates and settings so future pay runs are compliant.
2. Scope The Issue: Identify impacted employees, time periods, classifications, allowances and penalty triggers (e.g. weekends, overtime, public holidays).
3. Calculate Arrears Accurately: Recalculate wages owed, including penalties, overtime, allowances and leave loading where applicable. Cross-check against the relevant Award or Agreement and the NES. Using the Fair Work Pay Calculator can be helpful; here’s a practical walkthrough on how to use the Fair Work Pay Calculator.
4. Document The Method: Keep a clear record of how you calculated backpay. This supports transparency with staff and regulators.
5. Communicate With Affected Staff: Notify employees in writing, acknowledge the error, set out the remediation approach, and give a realistic timeframe for payment. Invite questions and provide a contact point.
6. Pay Promptly: Make backpayments as soon as practicable, including interest if appropriate.
7. Consider Regulator Engagement: For systemic or serious issues, consider proactively contacting the FWO. Cooperation can be a factor in outcomes if enforcement action follows.
8. Fix The Cause: Review classifications and Award coverage, update payroll settings, and strengthen your processes so the issue can’t recur. Where needed, seek legal advice on Award compliance and documentation.

If the issue is complex or spans multiple years, it’s wise to get help early from an employment lawyer and your accountant (for superannuation and tax impacts).

How To Prevent Underpayments Going Forward

Prevention is always cheaper than remediation. Put practical safeguards in place and check them regularly.

1. Confirm Coverage And Classification

• Determine the applicable Modern Award (if any) for each role and confirm the correct classification/level.
• Record classifications in each employee’s file and within your payroll system, and review when duties change.
• For roles with mixed duties or higher duties, specify how higher duties are triggered and paid.

2. Use Clear, Tailored Contracts

• Issue a tailored Employment Contract to every employee, aligning with the Award/Agreement and NES.
• Include hours, overtime triggers, allowances and how penalties are handled. Avoid ambiguous clauses.

3. Set Up Payroll To Capture Penalties Automatically

• Use reputable payroll software configured to apply Award rates, penalty rates and overtime.
• Audit your settings after every rate increase and whenever your rostering pattern changes.

4. Build Strong Rostering And Timekeeping

• Make sure rosters and timesheets capture actual start/finish times, meal breaks and variations.
• If your team works nights or weekends, build a simple checklist for common penalty triggers. This guide to legal requirements for employee rostering is a useful reference.

5. Train Managers And Conduct Regular Audits

• Train managers on Award basics, penalties, overtime and approvals.
• Run an annual payroll health check, plus a targeted review when your business grows, restructures or introduces new shift patterns.

6. Keep Records And Payslips Accurate

• Maintain complete time and wage records, payslips and classification notes. Inadequate records are themselves a breach and make remediation harder.

7. Use Policies To Drive Consistency

• Adopt a Staff Handbook and relevant workplace policies to clarify timekeeping, overtime approvals, leave and complaint handling.
• Ensure your team knows where to find policies and who to contact with questions.

Essential Documents And Policies

Robust documentation reduces mistakes and helps you demonstrate compliance if you’re audited. Core documents to consider include:

• Employment Contract: Sets out role, classification, pay, hours, overtime and allowances, aligned with the applicable instrument. A tailored Employment Contract is your frontline protection against misunderstandings.
• Workplace Policies: Clear, written guidelines for timekeeping, overtime, leave entitlements, expenses and complaints. If you need a starting point, a packaged Workplace Policy suite can help you standardise processes.
• Staff Handbook: A single source of truth for employees on entitlements and expectations, often combining key policies and procedures. See the Staff Handbook option to keep everything in one place.
• Rostering & Timekeeping Procedures: A simple procedure or checklist that covers approvals, breaks and how to handle variations - critical where penalties apply.
• Record-Keeping And Payslip Templates: Ensures you consistently meet statutory record and payslip requirements.
• Award/Agreement Mapping: A brief internal document noting the correct Award, classification and key conditions for each role, helping managers make day-to-day decisions.

Depending on your business, you may also need documents covering performance management, confidentiality and post-employment restraints, or commission structures. If your people, shifts or allowances are complex, it’s worth booking a short session with an employment lawyer to sense-check your setup.

Key Takeaways

• Underpaying staff - even by mistake - creates significant legal and financial risk for Australian employers.
• Most underpayments stem from Award coverage or classification errors, missing penalty rates or outdated payroll settings.
• The FWO investigates and can seek penalties and backpay in court; employees can recover wages through court processes (the FWC generally doesn’t decide underpayment recovery claims).
• Deliberate underpayment can be a criminal offence in some states, with a federal criminal wage theft offence commencing in 2025.
• Act fast if you find an issue: correct future pay, calculate arrears, communicate openly and remediate promptly, then fix the root cause.
• Prevention is about clarity and consistency: the right Employment Contracts, Award-aligned payroll settings, accurate rostering and workplace policies, plus regular audits.
• Don’t forget superannuation and tax - check with your accountant to ensure your PAYG, super and payroll tax obligations are also in order.

If you’d like a consultation on preventing or rectifying underpayments in your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.