Underpayment of Wages

Recently, an increasing number of employers have been caught out by the Fair Work Ombudsman, for underpaying employee’s wages.  Despite legislation changes, instances of underpayments still remain a pressing concern amongst various industries and sectors.  With this challenge ongoing, it is crucial for employers to address underpayment of wages to uphold ethics and mitigate legal and reputational risks. Further to this, the Closing Loopholes Act 2023 introduced by the Australian Government will see to criminalise wage theft as of 1 January 2025.

Underpayment of wages causes:

Underpayment of wages can stem from various factors, many of these factors are simple yet avoidable.  An administrative or payroll related mistake can result in underpayments, particularly when errors occur during processing employee’s wages.  These errors may stem from incorrect data entry, software glitches or misinterpretation of employment agreements or award rates. 

In addition to this, not paying appropriate allowances or penalty rates can significantly affect an employee’s take-home pay.  Allowances, overtime and penalty rates are often stipulated in employment agreements or modern awards, on how employers are to compensate employees for additional hours or for working weekends, nights or public holidays etc.  Failure to pay allowances, overtime and penalty rates, will lead to serious consequences for employers.  Employers may face severe penalties (including financial penalties) and employees may feel undervalued or demotivated.  Moreover, if employers fail to keep up to date with the National Minimum Wage or minimum award rate increases, this can also result in an underpayment.

A lack of understanding of what creates fair pay for the employee’s position can also result in an underpayment of wages.  Misalignment between position titles and duties the employee will be performing and misinterpretation of classification levels and pay progression provisions under specific modern awards are factors which may contribute to underpayments. To avoid these factors, it is important for employers to regularly review Position Descriptions and consult relevant classification definitions and pay progression provisions, as per the appropriate modern award.  HRBA are able to assist with this, through providing modern award interpretation and classification advice as part of our Premium and Partnered HR subscriptions or on an ad-hoc basis. 

Moreover, paying an “all-inclusive” or “flat” rate which does not actually cover what the employee would earn under the award, may also result in underpayments. If employees are paid an “all-inclusive” or “flat” rate, things such as loadings, allowances, penalties must be included in the rate of pay.  Where an “all-inclusive” or “flat” rate is paid, we recommend conducting regular assessments to ensure employees are compensated correctly.   HRBA are able to assist with this, through conducting a ‘fat test’ or wage assessment.

Failure to accurately record hours worked can lead to underpayments and compliance issues.   If hours are not properly documented, employees may not receive the correct compensation for the time they have worked.  In addition to this, employers are required to keep time and wage records for seven (7) years.  These records must be readily accessible to a Fair Work Inspector, legible and in English.  In addition to this, if time and wage records are not kept or are incorrect, fines can be issued per instance. 

Severity and consequences of underpayment of wages:

Underpayment of wages may diminish a company’s reputation and result in negative publicity.  Additionally, there are significant financial penalties (fines) associated with not paying or underpaying wages if it is determined that there has been wage theft.  Employers found to be deliberately stealing from  their workers can be prosecuted with a crime and sentenced to up to 10 years in jail.  However, underpayments brought on by an honest mistake or delay may not attract criminal penalties. 

If an underpayment has been found, it is important to provide back payments as soon as you can.  We recommend seeking expert advice to ensure correct payments are made.  HR Business Assist can provide further guidance and assist in conducting wage assessments should an issue of wage underpayment arise.

Criminalising intentional wage underpayments:

From 1 January 2025 as part of the Closing Loopholes Act 2023, intentional underpayments of wages by employers will become a criminal offence with serious consequences. There are new maximum penalties that courts may impose for certain contraventions associated with intentional underpayment.  It is important to note, these penalties apply to companies and individuals involved.

Ways to avoid underpayment of wages:

To safeguards themselves from underpayments, employers may wish to consider the following actions:

• Stay informed of industry and occupational awards relevant to your company;

• Accurately record ordinary hours, overtime, and any additional entitlements (i.e. penalty rates or allowances);

• Conduct regular reviews of Position Descriptions and relevant classification levels followed by wage assessments (if paid an all-inclusive rate);

• Stay informed of the Annual Wage Review and National Employment Standards (NES).

 If you require further information or assistance, contact the team at HR Business Assist!