Wage Underpayments, Payroll Audits and Employer Liability in Australia

Table of Contents

1. The direct answer
2. What is a wage underpayment?
3. Why payroll compliance is a legal obligation
4. Who is responsible when payroll is outsourced
5. The hierarchy of employee entitlements
6. Entitlement-mapping table
7. Identifying award coverage and classification
8. Casuals, part-time, juniors, apprentices and trainees
9. Ordinary hours, overtime and penalty rates
10. Allowances, loadings and reimbursements
11. Leave, public holidays and final pay
12. Superannuation, salary sacrifice and Payday Super
13. Annual salaries, set-off clauses and annualised wages
14. Individual flexibility arrangements and deductions
15. Payroll records, payslips and time-and-attendance
16. Common causes of underpayments
17. Common-error table
18. Scope of a payroll audit
19. Legal professional privilege and payroll investigations
20. Payroll-audit methodology
21. Quantifying underpayments, interest, tax and super
22. Remediation, communications and former employees
23. Remediation framework table
24. Self-reporting, regulator inquiries and notices
25. Civil liability, serious contraventions and accessorial liability
26. Franchisor and holding-company exposure
27. Intentional criminal underpayment
28. Voluntary Small Business Wage Compliance Code
29. Record alteration and false documents
30. Board and executive governance
31. Business acquisitions and due diligence
32. Contractor misclassification
33. Victorian long-service leave and Workforce Inspectorate Victoria
34. Common employer mistakes
35. Worked examples
36. When urgent legal advice is required
37. Conclusion
38. Frequently Asked Questions

What is a wage underpayment?

A wage underpayment is any failure to pay an employee the full amount the employee is legally entitled to receive for work performed. The amount owed is not confined to the headline hourly or salary rate. It includes base pay at the applicable classification, overtime, penalty rates, allowances, loadings, leave entitlements and leave loading, public-holiday entitlements, payment in lieu of notice or accrued leave on termination, and superannuation contributions. It also includes any entitlement created by the employee's contract that exceeds the statutory floor.

Underpayments include both deliberate non-payment and inadvertent shortfalls. Most underpayments uncovered in Australian workplaces are not deliberate; they arise from award classification errors, payroll-system configuration, missing or inaccurate time records, unenforceable salary set-off clauses, misreading of annualised-wage provisions, missed allowances or shift-loading rules, and changes to instruments that were not implemented in payroll. The legal label, and the legal exposure, do not depend on intent in the civil sphere.

Why payroll compliance is a legal obligation

Payroll compliance is sometimes treated inside organisations as a finance function — a calculation exercise that runs in the background. The Fair Work Act, the National Employment Standards, the modern awards and enterprise agreements treat it as something quite different: a statutory obligation, owed by the employer to each employee, breach of which carries civil and (in defined circumstances) criminal consequences. The relevant duties are not delegable in law.

The boards of medium and large Australian employers now routinely receive reporting on payroll compliance. That shift reflects three legal realities. First, civil penalties can be substantial and apply per contravention. Second, accessorial liability under section 550 of the Fair Work Act can expose individuals — including directors, executives, HR and payroll staff and external advisers — to personal penalties for knowing involvement in a corporate contravention. Third, the intentional underpayment offence in section 327A (commencing 1 January 2025) elevates the most serious conduct into the criminal sphere.

Who is responsible when payroll is outsourced

Outsourcing payroll to a bureau, an accountant or a software-as-a-service vendor transfers operational tasks, not legal responsibility. The employer remains the duty-holder under the Fair Work Act and is the party against which civil contravention proceedings are brought. A vendor service-level agreement, however carefully drafted, does not shift statutory responsibility to the vendor or remove the employer's obligation to ensure correct payment.

Practical consequences flow from this. The employer needs visibility of award and enterprise-agreement mappings used by the vendor, of how time and attendance data flows into payroll, of how exception reports are generated and reviewed, and of how the system handles changes to instruments and rates. Vendor reports that simply confirm that wages were paid on time do not confirm that the right amounts were paid. Effective oversight is documented, periodic and grounded in independent testing rather than reliance on vendor assurances.

The hierarchy of employee entitlements

Most Australian employees draw entitlements from several overlapping sources. The starting points are:

• National Employment Standards (NES) — minimum entitlements under Part 2-2 of the Fair Work Act covering maximum weekly hours, requests for flexible working arrangements, parental leave, annual leave, personal/carer's and compassionate leave, family and domestic violence leave, community-service leave, long-service leave (subject to state laws), public holidays, notice of termination, redundancy pay and the Fair Work Information Statement.
• Modern awards — industry or occupational instruments setting minimum rates, classifications, penalty rates, overtime, allowances, hours, leave loading and other entitlements.
• Enterprise agreements — agreements made under Part 2-4 of the Fair Work Act that may displace or supplement award terms, subject to the better off overall test.
• National minimum wage order — set annually by the Fair Work Commission Expert Panel, applying to award/agreement-free employees.
• Employment contracts — individually negotiated terms, including any salary above the award.
• State and territory long-service-leave laws — state regimes such as the Long Service Leave Act 2018 (Vic) continue to apply alongside the NES.
• Superannuation Guarantee legislation — Commonwealth obligations under the Superannuation Guarantee (Administration) Act 1992 (Cth), updated from 1 July 2026 by the Payday Super reforms.

These instruments interact rather than operate in isolation. The award sets the floor for award-covered employees; an enterprise agreement (if any) may modify that floor subject to the better off overall test; the contract may add to it but generally cannot reduce it; and the NES sit underneath all of it as a guaranteed statutory minimum. Identifying the correct combination for each employee is the first task of any defensible payroll review.

Entitlement-mapping table

The table is a scoping aid, not a substitute for instrument-specific analysis. Each outcome must be qualified by the actual award or agreement language, the contract and the facts of the workforce.

Identifying award coverage and classification

Award coverage is the gateway question for most employees. It is determined by the coverage clause of each modern award, read with the classification structure and definitions, applied to the actual work performed and the business activities of the employer. Coverage is not determined by job title, payroll label, position level or what the employee or employer assumed when the contract was signed.

Classification within an award is similarly substantive. The level applicable to an employee depends on the duties performed, the skill and qualifications used, the level of supervision and the responsibility exercised — measured against the award's classification definitions. Promotions, internal restructures, the addition of new responsibilities, the supervision of others or the completion of qualifications can all move an employee to a higher level. A classification fixed on commencement and never reviewed is a frequent source of long-running underpayment.

Coverage and classification questions can be particularly difficult in mixed-industry businesses, multi-disciplinary professional practices, businesses that span clerical and operational work, hospitality and retail combined operations, healthcare and aged care, and businesses that use both employees and labour-hire workers in the same teams. Where there is real doubt, an employer can apply to the Fair Work Commission for coverage determinations or seek specialist legal advice.

Casuals, part-time, juniors, apprentices and trainees

Different categories of employee attract different rules. The principal categories include:

• Casual employees. Defined in section 15A of the Fair Work Act following the 2024 amendments, with associated NES provisions on casual conversion and the casual loading. Casuals are typically paid a loading in lieu of paid leave and notice — the rate and pay rules are set by the relevant award or agreement.
• Part-time employees. Most awards require agreed regular patterns of hours, with specified consequences if hours are worked outside the agreed pattern (often overtime or penalty rates).
• Full-time employees. Standard weekly hours under the NES and the applicable instrument, with overtime, penalty rates and shift-loading rules.
• Juniors. Where permitted by the award, junior rates apply by reference to age and classification — birthdate-driven rate changes must be tracked in payroll.
• Apprentices and trainees. Apprenticeship and traineeship rates and conditions are set by the National Training Wage and applicable awards, with progression rules based on stage and competency. Errors are common.
• Labour-hire and on-hire workers. Employed by the agency, but the host's instruments and Same Job Same Pay (regulated labour-hire arrangement) orders may apply in defined circumstances.
• Independent contractors. If a worker is in substance an employee under the Fair Work Act test (now strongly influenced by section 15AA from August 2024), entitlements may be retrospectively engaged.

A defensible audit identifies each employee's category, checks the entitlement rules for that category in the applicable instrument and confirms that the payroll system applies the right rules.

Ordinary hours, overtime and penalty rates

Ordinary hours, overtime and penalty rates frequently account for the largest dollar value of underpayments. Awards generally define the ordinary hours of work, the spread of hours, when overtime is triggered and the applicable rates for evening, night, weekend, public-holiday and shift work.

Several recurring problems arise. Payroll systems may calculate overtime by reference only to total hours per week, rather than the daily or shift-based triggers in the award. Penalty rates may be paid as a flat loading instead of by reference to actual hours worked at each penalty band. Time records may be absent, incomplete, rounded or recorded only by reference to scheduled (rather than actual) start and finish times. Off-the-clock work — early starts, late finishes, working through breaks, after-hours emails and remote work — frequently escapes the time-record entirely.

Employer arguments that overtime was unauthorised are generally weak. Where an employer requires, suffers or permits overtime, the entitlement to be paid for it generally arises under the relevant award or agreement. The right control is to manage authorisation prospectively (clear approvals, accurate records, workload-based rostering decisions), not to refuse payment retrospectively.

Allowances, loadings and reimbursements

Modern awards typically contain a substantial schedule of allowances — for tools and equipment, travel, meal breaks, vehicle use, first-aid duties, leading-hand responsibility, special clothing, height, heat or disability work, on-call and stand-by, and many other duties. Some allowances are flat amounts; some are percentages of a classification rate; some are time-limited or duty-specific.

Allowance errors are common in three forms: the allowance is not configured in payroll at all; it is configured but switched off (or not assigned to relevant roles); or its quantum is not updated when the award is varied. Each can produce small per-instance underpayments that aggregate to material amounts over time across an affected cohort. Reimbursements of actual expenses (such as kilometre rates or genuine tool replacement) are conceptually different but are also commonly missed where there is no clear claim process.

Leave, public holidays and final pay

Leave entitlements engage both the NES and the applicable award or agreement. Common error points include accrual on a partial-year basis, leave loading on annual leave (where the award provides for it), calculation of leave payments at the correct ordinary-time rate (not the base rate), the treatment of allowances and loadings during leave, public-holiday pay where an employee would otherwise have worked, and the cashing-out rules where they apply.

Final pay on termination requires the employer to calculate accrued but untaken annual leave, any long-service-leave entitlement on termination under the relevant state Act, notice or payment in lieu, accrued personal leave (where the contract or award requires payment on termination — usually not), redundancy pay (where applicable under the NES, with the small-business employer exception) and any contractual entitlements. Termination errors are common where notice periods interact with public holidays, annual leave is taken during notice or the employee elects to be paid in lieu.

Superannuation, salary sacrifice and Payday Super

Superannuation guarantee obligations are governed by the Superannuation Guarantee (Administration) Act 1992 (Cth) and ATO administration. Contributions are calculated on ordinary time earnings as defined by the Act and the Commissioner's rulings — which is not the same as taxable income, gross wages or all hours worked. Errors commonly arise around overtime, certain allowances, leave payments and bonuses.

Salary sacrifice arrangements engage additional rules, including the requirement that sacrificed amounts are paid to a complying fund and the protections introduced in 2020 ensuring that salary sacrifice contributions do not reduce the employer's superannuation guarantee obligation. Salary-sacrifice amounts must also be reflected accurately on payslips.

Payday Super (commencing 1 July 2026). The Payday Super reforms commence on 1 July 2026 and alter how and when superannuation guarantee is calculated and paid. From that date, super guarantee is to be paid on payday and generally received by the employee's fund within the applicable statutory timeframe, with new contribution-timing tests and updated administrative consequences for late or shortfall amounts. Employers should check current Australian Taxation Office guidance and the enacted legislation for the precise timing rules, transitional arrangements, treatment of stapled funds, clearing-house processes and revised superannuation guarantee charge consequences. Payroll, clearing, fund-validation and error-resolution processes will need to be capable of meeting the new framework.

Late payment of superannuation generally cannot be corrected by paying the employee directly. Late or shortfall amounts engage the superannuation guarantee charge, must be reported and paid to the ATO, and attract administrative consequences quite separate from ordinary wage repayment.

Annual salaries, set-off clauses and annualised wages

High annual salaries do not, by themselves, displace award entitlements. Two distinct mechanisms can absorb award entitlements into a single salary, and both must be implemented properly to be effective.

Set-off clauses. A contractual set-off clause may allow a salary that exceeds the award to be applied against specified award entitlements arising in the same period. Effectiveness depends on the wording of the clause (which entitlements it covers, the period of reconciliation), the actual reconciliation evidence and consistency with the award. Narrow set-off clauses cannot absorb entitlements they do not mention; broad clauses may still be inadequate if no reconciliation is performed and the salary in fact falls short.

Annualised-wage clauses. Several modern awards include detailed annualised-wage clauses with notification, outer-limit, record-keeping and annual reconciliation requirements. A failure to give the required notice, exceeding the outer limits, failing to record actual hours or failing to reconcile annually usually means the employer cannot rely on the clause — and the employee remains entitled to the underlying individual entitlements.

Our guide to annualised salaries under modern awards sets out the framework in more detail. For payroll audit purposes, salaried employees should be tested against the underlying award entitlements that would otherwise apply, with set-off and annualised-wage mechanisms treated as questions of fact and law rather than assumed effective.

Individual flexibility arrangements and deductions

Awards and agreements include model individual flexibility arrangements (IFAs) that allow individual employees and the employer to vary specified terms where the employee is better off overall and the formal requirements are met. IFAs require written records and comply with strict termination rules. Many IFAs in practice are deficient — incomplete records, no BOOT analysis at the individual level, or arrangements not actually implemented in payroll.

Deductions from wages engage section 324 of the Fair Work Act. To be lawful, a deduction must generally be authorised in writing by the employee, principally for the employee's benefit, or permitted by the award, agreement or another law. Unauthorised deductions, or deductions that are not principally for the employee's benefit, can themselves constitute contraventions and are an area of regulator focus. Cashback or "tip-out" arrangements imposed on employees, recovery of till shortfalls or breakages and deductions to cover employer costs are common problem areas.

Payroll records, payslips and time-and-attendance

Record-keeping and payslip obligations are set out in sections 535 and 536 of the Fair Work Act and the Fair Work Regulations. Employers must make and keep employment records covering employee details, pay, hours, leave, superannuation, individual flexibility arrangements, annualised-wage arrangements, guarantees of annual earnings and termination, and must issue payslips containing specified information within one working day of payment. Records must be kept for seven years and must be true and accurate.

Time and attendance data is central to wage compliance for award-covered and shift-based workforces. Employers should be able to demonstrate when each employee started and finished work each day or shift, the period of any breaks, scheduled rosters and approved variations. Practical records can include electronic time-and-attendance systems, signed timesheets, badge or login data, telematics or geolocation data (where lawful and privacy-compliant), email and system access logs and manager approvals.

Section 557C presumption. Where an employer was required to make and keep a record or issue a payslip and failed to do so without a reasonable excuse, section 557C may shift the evidentiary burden in proceedings about an alleged contravention. In practical terms, the employer can find itself trying to disprove an employee's account of hours and entitlements without contemporaneous records of its own. This is not a presumption that every allegation is automatically true; it is a structural disadvantage that arises from record failure.

Common causes of underpayments

The recurring causes of large-scale underpayments are well-recognised and predictable. Most fall into one or more of the following categories:

• Wrong award or no award identified at the outset;
• Wrong classification, often based on job title rather than duties;
• Salary above award assumed to absorb all entitlements without reconciliation;
• Annualised-wage clauses applied without compliance with the clause requirements;
• Overtime calculated on weekly aggregates instead of daily or shift triggers;
• Penalty rates applied as flat loadings rather than to the actual time worked at the penalty rate;
• Allowances missing or switched off in payroll;
• Leave entitlements calculated at the wrong base or accrual;
• Public-holiday rules applied incorrectly;
• Awards or agreements updated without payroll-system change management;
• Payroll-system migrations or upgrades that drop accruals or rules;
• Manager-approved off-the-clock work;
• Contractor arrangements that were in substance employment;
• Superannuation calculated on the wrong earnings base, or paid late;
• State long-service-leave obligations missed or miscalculated.

Common-error table

Each outcome should be qualified by the applicable instrument and facts; the table identifies typical risks, not predetermined conclusions.

Scope of a payroll audit

A defensible payroll audit is not a spreadsheet reconciliation against payroll codes. It is a structured review of the legal entitlements owed to the workforce and the systems and records that delivered (or failed to deliver) those entitlements. The scope question should be settled in writing at the outset, with the ability to expand if material issues are identified.

Scope decisions include the entities to be reviewed, the workforces or cohorts covered, the periods covered, the instruments to be mapped, the depth of system and control testing, whether the work is led by internal or external resources, whether legal advice is to be obtained and how, the treatment of former employees, communication with regulators, and the governance forums to which the audit will report. Scope creep during the audit is normal — initial findings often indicate a need to broaden the review — and the scoping framework should accommodate that.

Legal professional privilege and payroll investigations

Where a payroll review is likely to expose legal risk, employers commonly instruct lawyers to scope and lead the work. Done properly, this can attract legal professional privilege over legal advice and certain analyses prepared for the dominant purpose of providing that advice. Done loosely, it does not. Key points to keep in mind:

• Pre-existing payroll records, system extracts and operational documents are not privileged simply because they are given to a lawyer.
• The dominant purpose for which a document is created determines whether it is privileged — operational remediation files and communications are often created for mixed purposes.
• Where accountants or other advisers are engaged through lawyers as part of providing legal advice, privilege may extend in defined ways; engagement structures matter and should be planned at the outset.
• Privilege cannot be used to conceal a contravention or obstruct a regulator, and asserting privilege over ordinary business documents tends to attract regulator scrutiny rather than deflect it.
• External legal advice may be important before interviews, regulator engagement, communications that characterise intention or material decisions about scope.

No employer should assume that simply involving a lawyer creates a privileged ringfence around an audit. Equally, no employer should structure work in a way that surrenders privilege unnecessarily.

Payroll-audit methodology

The precise methodology depends on workforce size, records, the number of applicable instruments, payroll systems, historical periods under review, employee turnover, suspected intent, regulator involvement and privilege strategy. A staged methodology that scales across employer size includes the following steps:

1. Establish the audit scope and governance — entities, workforces, periods, reporting lines and confidentiality protocols.
2. Consider obtaining legal advice and structure the engagement to support legal professional privilege where appropriate.
3. Preserve source records and system extracts — payroll, time and attendance, rosters, contracts, policies, system configuration, change logs.
4. Identify employing entities and affected workforces — group structure, labour-hire, contractor populations, intra-group secondments.
5. Determine legal coverage and classifications — applicable awards, agreements, NES, contract and policy entitlements for each cohort.
6. Map every relevant entitlement — base rates, overtime, penalties, allowances, loadings, leave, super, IFA and annualised arrangements.
7. Reconcile rosters, timesheets, payroll and payments — identify rounding, gaps, off-the-clock work and approval anomalies.
8. Test system rules and manual overrides — sample transactions, exception reports, change logs, manual journals.
9. Quantify potential shortfalls — by employee, period, instrument and entitlement type, with audit-trail.
10. Validate assumptions and employee-specific exceptions — IFAs, contracts varying default rules, salary sacrifice arrangements.
11. Calculate superannuation, tax and related corrections — including ATO super guarantee charge implications and PAYG adjustments.
12. Identify current and former affected employees, including tracing strategy for former employees.
13. Prepare a remediation and communication plan — payment mechanism, employee communications, FAQ, support channels.
14. Consider regulator, union and disclosure issues — Fair Work Ombudsman, ATO, ASIC (where relevant), listed-entity disclosure.
15. Correct root causes and system settings — classification, payroll rules, configuration, control testing, training.
16. Establish recurring assurance and governance review — periodic testing, board reporting, change management for instrument and system updates.

Quantifying underpayments, interest, tax and super

Quantification is a discipline in itself. Reliable outputs depend on reliable inputs — clean source data, instrument-accurate calculation rules, careful treatment of edge cases and conservative assumptions where evidence is weak. The principal components are:

• Base entitlement shortfall: amount owed under each instrument minus amount paid, for each employee and pay period.
• Overtime and penalties: applying the correct trigger (daily, shift, weekly) and rate band for actual hours worked.
• Allowances and loadings: applying instrument-specific rules to actual duties and locations.
• Leave-related amounts: leave loading, leave taken at incorrect rate, termination payments at incorrect rate.
• Interest: depending on the source of the entitlement and where the matter is determined; often included voluntarily as a matter of fairness for long historical periods.
• PAYG and tax: prior-year amendments may engage payment summaries, income statements, lump-sum E treatment and ATO administration.
• Superannuation: SGAA calculations on the correct earnings base and corrected through the SGC and ATO processes for late or shortfall amounts.

Assumptions, exclusions and limitations should be documented as part of the quantification, with version control as the model is refined. Regulators and litigation opponents commonly probe the assumptions rather than the arithmetic.

Remediation, communications and former employees

Once the population, period and amounts are sufficiently identified, the employer must implement a remediation that addresses current and former employees and reflects the legal character of the amounts owed. Repayment to current employees alone is not a defensible response where former employees are also affected; partial remediation of long historical periods rarely satisfies the underlying liability; and uncontrolled ad hoc payments before a clear plan is in place tend to create both legal and operational problems.

Communications with affected employees should be accurate, timely and consistent. Misleading or incomplete preliminary figures undermine trust and create separate issues if later corrected. Many employers provide a written individual statement setting out the underpayment, the calculation methodology and the payment, together with broader workforce communication where the issue is systemic. Aggressive release demands or conditioning payment on broad waivers carry real risk and should be considered with legal advice. Limited acknowledgements of receipt are commonly used and are conceptually different from full releases.

Former employees require active tracing through last known contact details, professional networks and employee-tracing services where appropriate. Where amounts ultimately remain unclaimed, state or territory unclaimed-money obligations may apply. Failure to make genuine efforts to locate former employees does not extinguish liability and creates additional regulator exposure.

Remediation framework table

Self-reporting, regulator inquiries and notices

The Fair Work Ombudsman encourages self-reporting of significant or systemic underpayments and operates a self-reporting pathway, but there is no universal rule requiring every payroll error to be self-reported. Self-reporting may be strategically and ethically appropriate where issues are serious, systemic or already in the public domain. Cooperation does not necessarily prevent civil enforcement, and inaccurate or incomplete regulator communications can themselves create additional contravention risk.

Compliance notices. A Fair Work Inspector may issue a compliance notice under section 716 of the Fair Work Act where the Inspector reasonably believes a person has contravened a designated provision. Notices commonly require the employer to calculate and back-pay underpayments and to provide evidence. Failing to comply without reasonable excuse is itself a civil contravention.

Enforceable undertakings. The Ombudsman may accept enforceable undertakings under section 715, typically combining remediation, independent assurance and governance commitments. These are negotiated instruments that can avoid litigation in appropriate cases but require careful drafting and ongoing compliance management.

Civil litigation. The Ombudsman, an employee, an employee organisation or an inspector may commence civil proceedings under Part 4-1. Most employees can also choose the small claims procedure under section 548 for amounts within the cap, with simplified procedures and limited costs exposure for both sides.

Civil liability, serious contraventions and accessorial liability

Civil contraventions of the Fair Work Act do not require fault. An employer that genuinely intended to comply but underpaid because of a classification error, payroll-system misconfiguration or misunderstood instrument can still face civil penalties, repayment orders, compensation orders, compliance notices and other regulator action.

Serious contraventions. Section 557A provides for an elevated category of contravention, with higher maximum penalties. A serious contravention requires knowing or reckless conduct in defined circumstances; the precise statutory test and the current maximum penalty should be checked against the in-force compilation of the Act before relying on any figure.

Accessorial liability. Section 550 extends civil liability to a person involved in a contravention — including persons who aid, abet, counsel or procure the contravention, induce it (by threats, promises or otherwise), are in any way knowingly concerned in or party to it, or conspire with others to effect it. Accessorial liability can attach to directors, executives, HR and payroll staff, external advisers and other related entities. Mere execution of payroll tasks without knowledge of underlying contraventions is different in character from active involvement; deliberate manipulation of records, knowing implementation of unlawful decisions or sustained refusal to remediate identified errors can materially change the analysis.

Franchisor and holding-company exposure

Sections 558A and 558B of the Fair Work Act extend responsibility to responsible franchisor entities and holding companies in defined circumstances. Where a franchisor or holding company knew or could reasonably have been expected to know that a contravention by a franchisee or subsidiary was likely to occur, and could reasonably have taken steps to prevent it, the franchisor or holding company may itself contravene the Act.

Practical implications include the franchise system's duty to put in place reasonable measures (training, monitoring, audit, response protocols), to act on repeated reports of franchisee non-compliance and to document the steps taken. Holding companies should consider the analogous duty in respect of subsidiary operations they control.

Intentional criminal underpayment

Section 327A of the Fair Work Act creates a federal criminal offence of intentionally underpaying an employee's entitlements. The offence commenced on 1 January 2025 and operates alongside the civil regime. The statutory elements (to be verified against the current compilation) require the employer to be required to pay an amount to or for the benefit of an employee under the Fair Work Act, a fair work instrument or a transitional instrument, and to engage in conduct intentionally that results in a failure to pay that amount in full on or before the day when it is due.

Intention is directed to the conduct that results in the failure to pay, not to a belief that a particular award clause has been breached. Honest mistakes are not within the offence. The Fair Work Ombudsman has stated that intentional underpayment may be criminal, while honest mistakes are not included in the offence. Corporate attribution rules apply, and individuals may be liable in defined circumstances under general criminal-law principles for involvement in a corporate offence.

The Ombudsman has investigative powers and may refer matters for possible prosecution by the Commonwealth Director of Public Prosecutions. Cooperation agreements may be available in defined circumstances. Penalty amounts (for both individuals and bodies corporate) should be checked against the current compilation because penalty units and maximum amounts have changed and continue to change.

Several important qualifications follow:

• Negligence alone does not, on its own, establish the criminal offence;
• Repayment does not automatically prevent prosecution, although it is relevant to characterisation and to discretionary decisions;
• A payroll-system error does not eliminate civil liability and may or may not be relevant to intention in a criminal context, depending on facts;
• Directors are not automatically criminally liable merely because they hold office;
• An internal payroll audit is not proof of guilt, and conducting one is a sensible governance step;
• Document alteration or retrospective reconstruction after an issue is identified creates serious additional risk, including the risk of separate offences.

Voluntary Small Business Wage Compliance Code

The Voluntary Small Business Wage Compliance Code is declared under the Fair Work Act and is used by the Fair Work Ombudsman in assessing whether a small business employer that has underpaid an employee did so intentionally for the purposes of the section 327A offence. The Code is directed at the criminal referral pathway; it is not a defence to civil liability, an immunity from repayment or a complete compliance checklist.

Key features include:

• Who qualifies. A small business employer is defined by reference to the current employee-counting rules in the Fair Work Act, which include associated entities and apply at the relevant time.
• Reasonable efforts to identify correct entitlements. The Code expects the employer to have made reasonable efforts to ascertain the correct entitlements, including obtaining reliable advice and using available regulator guidance.
• Reliable advice. Sources may include the Fair Work Ombudsman, a registered employer organisation or qualified legal or HR professionals.
• Accurate employee information. The Code expects the employer to have kept accurate information about employees, hours and pay.
• Correction of identified errors. The Code expects errors identified to be corrected, including back-payment and adjustment of related amounts.
• Cooperation with inquiries. The Code expects cooperation with regulator inquiries about a failure to pay.

A small business employer that complies with the Code in relation to a failure to pay is not to be referred by the Ombudsman for criminal investigation or prosecution under section 327A in relation to that failure. That is a significant protection for eligible employers, but it is not an immunity from civil contravention liability, accessorial liability for individuals, repayment, compliance notices or enforceable undertakings, and it does not protect deliberate underpayment. Employers above the small-business threshold are not within the Code at all.

Record alteration and false documents

Once an underpayment is identified, the integrity of the underlying records is critical. Retrospective alteration of payroll data, timesheets, contracts, classifications or system configurations after the issue is identified creates serious additional risk — including, depending on conduct, separate criminal exposure for falsifying records, obstructing a regulator or perverting the course of justice.

Practical controls include immediately preserving current records (electronic and physical), suspending routine deletions, applying a documented hold notice, keeping any necessary corrections in a clearly labelled and dated remediation layer rather than overwriting historical data, and restricting access to systems that could be used to alter records. Employees and managers should be told clearly not to alter records and to preserve communications.

Board and executive governance

Boards and executive teams have moved from treating payroll as a finance back-office matter to treating it as a governance and assurance issue. Useful elements of an effective governance posture include:

• Clear ownership at executive level (typically with the CFO or COO) and a documented escalation path to the board or audit committee;
• Employment-law input into significant payroll, classification, contract and remuneration decisions;
• An award and instrument library, with change-monitoring and a change-management process for payroll updates;
• Documented classification decisions for new and changed roles;
• Onboarding checks (right-to-work, payroll setup, classification, super choice, IFA where applicable);
• Time-record controls and management of overtime authorisation;
• Payroll exception reports and salary-versus-award reconciliations for salaried award-covered employees;
• Manager training on overtime, allowances, leave and approvals;
• Independent periodic testing (internal or external);
• Change-management controls for payroll-system upgrades, integrations and migrations;
• Employee query channels (HR, payroll, EAP, anonymous reporting) and clear remediation escalation criteria;
• Board or executive reporting on payroll compliance, including any open findings and the status of remediation;
• Audit-trail preservation, including for vendor-managed systems;
• Targeted reviews after acquisitions, large enterprise-agreement changes or system migrations.

Business acquisitions and due diligence

Wage compliance is now a standard workstream in acquisitions of Australian businesses with employees. The risks differ between transaction structures.

• Share acquisitions. Historical liabilities (including underpayment exposure) transfer with the target company. Diligence should test award coverage, classifications, salary set-off, annualised-wage practice, accruals, super and long-service-leave exposure.
• Asset acquisitions. Liabilities generally do not transfer automatically, but transfer-of-business and successor-employment rules may engage entitlements, leave accruals and recognition of service. Warranties, indemnities, retention and escrow can allocate risk.
• Restructures, insourcing and outsourcing. Movement of workforces between entities or to or from labour-hire arrangements engages award and agreement coverage, accruals and notice/redundancy issues.
• Franchise purchases. Historical underpayment within a franchise network, and franchisor responsibility under section 558A, can affect both the franchisor and franchisees and should be tested.
• Corporate-group transfers. Intra-group transfers may engage transfer-of-business rules and create accidental coverage or instrument-stacking issues.

Our guide to buying a business in Victoria and our guide to business due diligence in Australia address transaction structuring and diligence more fully. For payroll-specific risk allocation, warranties, indemnities and retention should be tailored to identified exposures rather than left as generic boilerplate.

Contractor misclassification

A worker engaged as an independent contractor who is in substance an employee under the Fair Work Act may generate retrospective entitlements to wages, leave, superannuation, payroll tax, workers' compensation coverage and (depending on facts) long-service leave. Section 15AA of the Fair Work Act, introduced in 2024, re-orients the analysis to the whole of the working relationship, not just the written contract, with specific provisions for opt-out arrangements and sham-contracting protections.

This article does not reproduce the full worker-status framework; for that, see our guide to whether a worker is an employee or contractor. For payroll-audit purposes, the key point is that misclassification is a wage-underpayment risk, not just a tax or commercial risk, and a contractor population that was set up some years ago without periodic review commonly requires reassessment.

Victorian long-service leave and Workforce Inspectorate Victoria

Victorian employers face additional state-based exposure that operates alongside the federal regime.

Long Service Leave Act 2018 (Vic). The Victorian regime continues to apply to eligible employees, including accrual, eligibility, payment on termination, recognition of continuous service across transmissions of business, cashing-out rules and enforcement. Long-service-leave underpayments are not a Fair Work Act contravention; they are a Victorian statutory obligation enforced through Wage Inspectorate Victoria (commonly referred to as Workforce Inspectorate Victoria) and the Magistrates' Court.

Wage Theft Amendment Act 2025 (Vic). Victoria's earlier wage-theft offences under the Wage Theft Act 2020 (Vic) were affected by the Wage Theft Amendment Act 2025, which addressed the relationship between the Victorian regime and the Commonwealth intentional underpayment offence that commenced on 1 January 2025. Employers should not rely on summaries of the former Victorian offences as though they remain current; the current status should be confirmed against the authorised version of the relevant Acts.

Importantly, the repeal or modification of state offences does not remove:

• Federal criminal exposure under section 327A;
• Civil wage liability under the Fair Work Act;
• Victorian long-service-leave obligations;
• Record-keeping obligations under the Fair Work Act and Regulations;
• Regulator powers under other Victorian and Commonwealth legislation, including occupational health and safety, workers' compensation and equal-opportunity laws.

Common employer mistakes

The following mistakes recur across employers of all sizes:

• Assuming payroll software guarantees compliance;
• Outsourcing payroll without retaining oversight;
• Using job titles to determine classification;
• Relying on a high salary without entitlement reconciliation;
• Ignoring overtime because it was not pre-approved;
• Failing to record start and finish times;
• Treating allowances as discretionary;
• Overlooking former employees;
• Correcting only the employee who complained;
• Using a narrow sample despite evidence of systemic error;
• Backdating contracts or records;
• Altering payroll descriptions after discovery;
• Delaying repayment while debating fault;
• Treating repayment as a complete legal release;
• Requiring employees to sign broad waivers before payment;
• Forgetting superannuation, tax or leave consequences;
• Communicating inaccurate preliminary figures;
• Assuming honest error prevents civil penalties;
• Assuming intention because an error is large;
• Self-reporting without legal and factual preparation;
• Relying on the small-business Code as complete immunity;
• Failing to correct the system that caused the error;
• Failing to brief the board or owners on material exposure.

Worked examples

The following examples are illustrative only. They are not decided cases or guaranteed outcomes. They show how the principles in this article apply to common employer fact patterns.

• Professional employee on a high salary. A senior employee paid a salary well above the award works regular evening and weekend hours servicing interstate clients. The set-off clause in the contract refers only to "ordinary hours under the Award". On reconciliation, the salary does not absorb the unpaid overtime and weekend penalties.
• Title-based classification. A "supervisor" is paid at a level that matches the title but, on duties analysis, the employee actually performs leading-hand functions within a higher classification. A multi-year underpayment results across the cohort with similar duties.
• Casual weekend penalty. A casual employee in hospitality is paid the casual base plus a flat 20 per cent loading on all hours. Saturday and Sunday work attracts higher penalty rates under the award; the loading is not a substitute.
• Switched-off allowance. A travel allowance under a clerical award is configured in payroll but is disabled by default for a particular cost centre. Field staff in that cost centre have been underpaid the allowance for several years.
• Off-the-clock work. A manager directs team members to start fifteen minutes early to prepare for shift handover but only records rostered start times. Across a workforce of several hundred, the cumulative underpayment is material.
• Payroll migration. During a payroll-system migration, leave-loading rules are not carried over. Annual leave taken after migration is paid at the base rate without leave loading until an audit catches the issue.
• Five-year systemic error. An award classification error identified through a complaint is shown on investigation to have affected a defined cohort over five years. Remediation requires identifying current and former employees, calculating amounts and addressing super, PAYG and interest.
• Untraceable former employees. A subset of affected employees from earlier in the period cannot be contacted on their last-known details. The employer documents tracing efforts, makes payments where possible and treats unclaimed amounts under the applicable unclaimed-money regime.
• Small business with prompt correction. A small business employer identifies a misclassified employee, obtains advice from a registered employer organisation, back-pays the employee in full, corrects the system, keeps records of each step and cooperates with the Fair Work Ombudsman. The employer relies on the Voluntary Small Business Wage Compliance Code in respect of the criminal referral pathway, while accepting that civil obligations have been met through repayment.
• Directed suppression of overtime. A senior manager directs payroll not to pay recorded overtime to reduce reported labour costs. The conduct is materially different in character from system error and engages both civil contravention and potential criminal exposure under section 327A.
• Franchisor pattern. A franchisor receives repeated reports about franchisee underpayments through its internal complaints channel but takes no preventative action. Franchisor exposure under section 558A may engage in addition to franchisee liability.
• Contractor reclassification. A long-standing contractor arrangement is reassessed in light of section 15AA and the totality of the working relationship and is found to be employment. Wage, leave, super and tax consequences flow.
• Super on wrong earnings base. Contributions are calculated on a definition of "ordinary time earnings" that excludes a regular allowance that should be included. SGC consequences and ATO process apply.
• Audit after a regulator notice. A Fair Work Inspector issues a notice to produce records covering a defined period. The employer's audit is constrained by the notice timeframe and conducted alongside, not in place of, regulator engagement.
• Records altered after discovery. After an underpayment is identified, a payroll team member edits historical timesheets to "tidy" the records. The alteration is later discovered and significantly increases the legal and regulatory exposure.

When urgent legal advice is required

Early legal advice is generally far more useful than late advice. Situations that ordinarily warrant urgent advice include:

• A credible internal report or whistleblower complaint of systemic underpayment;
• A Fair Work Ombudsman investigation, notice to produce, compliance notice or proposed enforceable undertaking;
• A media enquiry or anticipated public disclosure;
• A material underpayment finding from an internal or external audit;
• Identification of conduct that could engage the section 327A offence (deliberate withholding, suppression of hours, instructions to not pay known entitlements, fabrication of records);
• Acquisition or disposal of a business with employees;
• Payroll-system migration in a workforce with significant award exposure;
• Significant enterprise-agreement change or contested coverage question;
• Director or executive concerns about personal exposure under section 550 or section 327A;
• Communications to employees, the regulator or the market about underpayment.

Conclusion

Wage underpayments are rarely the product of bad intent; most are systemic, hidden inside payroll settings and instrument complexity, and are detected only when somebody actually compares what was owed against what was paid. Australian law expects employers to do that comparison — to identify the instruments that apply, to test actual hours and classifications, to remediate carefully and to fix the systems that caused the error. It also draws a clear line between honest error and intentional conduct, with civil and criminal regimes that operate separately and require separate analysis.

An employer that builds payroll compliance into the way work is paid — and then keeps reviewing it — is in a materially stronger position than one that relies on payroll software, outsourced bureaus or after-the-event reactions to complaints. Our employment law team for employers, working alongside our commercial & business law team, can advise on payroll audits, remediation, regulator engagement, accessorial-liability risk, the intentional underpayment offence and the Voluntary Small Business Wage Compliance Code, and represent employers in Fair Work Ombudsman and court proceedings.