Inadvertent wage underpayment – the employer nightmare

In just over 4 months (on 1 January 2025) the Fair Work Act 2009 amendments creating an underpayment of wages criminal offence comes into effect. There is not much time for employers to take any necessary steps needed to minimise the risk of wage underpayment, including inadvertent underpayment.

Doing nothing to manage the risk of inadvertent underpayment is far riskier. Doing nothing could, in certain circumstances, be deemed to be a deliberate underpayment and therefore, a criminal offence.

Employers’ risks

The first step in managing this risk is to consider the common issues that can result in inadvertent underpayments.

1. Applying the wrong enterprise agreement or modern award
   Employers need to review and check that they are applying the correct industrial instrument. Most often it will be a modern award, but it may be an enterprise agreement. Applying the wrong industrial instrument can have messy flow on effects.
2. Misclassifying your employees
   Minimum rates in instruments are determined by the classification. If an employee is misclassified at a lower classification and therefore paid a lower minimum rate than they should be paid, the underpayment can quickly add up. Employers must review and analyse the classifications they apply to each employee and match, not only the position descriptions against classifications, but what the employee does in practice.
3. Misapplying allowances, overtime, penalty rates, and other ad hoc payments
   Instruments often provide complex provisions on entitlements to allowances, penalty rates outside of ordinary hours and overtime. It is important to have clear and accurate pay rules for these various entitlements because incorrect application can lead quickly to significant underpayments.
4. Misunderstanding minimum engagement periods
   Most instruments provide for minimum engagement hours when an employee works overtime or works on a Saturday or Sunday. For example, in many cases, an employee working on a Saturday or Sunday must be paid for a minimum of 4 hours even if they work less than 4 hours. Not applying minimum engagement period can lead to a substantial underpayment.
5. Misunderstanding annualised salaries
   Many businesses pay employees an annualised salary that exceeds the relevant award minimum. The intention is that the annualised salary is paid in full satisfaction of all statutory entitlements. When determining the annualised salary, employers must ensure they pay sufficiently above the award to be able to set-off all award entitlements. So, when paying an annualised salary, employers still must consider the above factors that can contribute to an underpayment and ensure there is sufficient margin above the minimum rates to cover all award entitlements. Employers must also ensure the employment contract contains an effective set off clause or what is paid as salary may not be able to be set off against allowances, travel allowances, penalty rates or overtime rates, leading to significant underpayment claims by employees.

What employers need to do

We recommend that between now and 1 January 2025, employers review their payroll systems and payroll rules to satisfy themselves that employees are being paid correctly under and applicable industrial instrument.

Employers need to check:

1. that they are applying the correct award or enterprise agreement;
2. that employees are classified correctly (for example, are employees who are being paid as a level 1 or level 2 classification more properly a level 3 or a level 4 classification);
3. whether all applicable allowances or penalty rates are being applied and paid correctly; including, whether employees are taking their required meal breaks at the correct time; and
4. that accrued entitlements such as annual leave or sick leave are being accrued correctly.

There can be substantial benefit in employers undertaking any review in a way that gives them the benefit of Legal Professional Privilege. If there is a likelihood of underpayment, then documents produced in any payroll review may have to be disclosed, including to the authorities like the Fair Work Commission, if an underpayment claim is commenced. Undertaking a payroll review under Legal Professional Privilege means that until the employer understands what legal risk exist of an underpayment claim or prosecution, the employer can develop and implement a management plan without risking the review documents being disclosed in any court action or regulator investigation.

Acquiring a Business

For anyone acquiring a business, a payroll due diligence on the business being acquired is a must step. The purchaser otherwise may inherit a significant claim or become liable to criminal penalties for failing to act and ensure that the business they are acquiring has a compliant payroll.

Inadvertent underpayment is no longer a minor issue for fixing sometime down the track. Employers or business purchasers are urged to use this 4 month window to ensure that the business payroll is accurate.