New wage theft laws criminalising intentional underpayments have now come into effect. A legal expert explains what HR needs to know to maintain compliance with the new legislation.

Headlines about wage underpayments have been common for some time now: “[Company] found to owe $X million in unpaid wages.” 

However, as of this year, Australia’s wage theft laws will now criminalise the intentional underpayment of wages. 

Businesses that haven’t adequately prepared for these changes risk getting caught off-guard, with the potential for significant penalties if found in breach of these laws. Here’s what HR and payroll teams need to know to ensure compliance.

What does the new legislation entail?

The new wage theft laws are part of the Closing Loopholes legislative changes, and include a significant amendment to the Fair Work Act 2009. Under the changes, the intentional underpayment of wages or entitlements is now a criminal offence.

To clarify, this law isn’t aimed at payroll errors or miscalculations. It focuses on intentional underpayments, where employers knowingly pay their workers less than they’re legally entitled to – whether it’s underpaying for hours worked, failing to compensate for overtime, or withholding entitlements. 

The key word is intentional. Honest mistakes will not be targeted, but businesses must still ensure they address underpayments promptly.

Small businesses with fewer than 15 employees are excluded from the criminal penalties for now. But in organisations with more than 15 employees, employers need to ensure watertight compliance.

The consequences of getting it wrong

Employers found guilty of intentionally underpaying employees could now face criminal charges. 

Previously, underpayment cases typically led to civil penalties, such as fines or repayment orders. Now, criminal charges could result in hefty fines or even jail time. Corporations could be fined $7.825 million or three times the underpayment amount, whichever is greater. For individuals such as directors or managers, fines could reach $1.565 million, or three times the underpayment amount. 

And it doesn’t stop there. Employers could face up to 10 years in jail for egregious instances of wage theft.

While criminal penalties apply to intentional wage theft, civil penalties for non-compliance, such as repeated payroll errors, have also increased. For corporations that are not small businesses, the maximum penalties for civil remedy provisions have risen to 1500 penalty units. This equates to $469,500, up from the previous 300 units, or $93,900. 

Alternatively, the penalty may be three times the amount of the underpayment if the applicant seeks this option. In the case of serious contraventions, penalties will escalate further. Employers could face penalties of up to 15,000 penalty units, equating to $4,695,000, up from the previous 3000 units, or $939,000. 

As of this year, the applicant also has the option to seek three times the amount of the underpayment in these cases.

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What about an honest mistake?

One of the biggest concerns for those in the payroll space is understanding the line between intentional and accidental underpayments. 

Intentional underpayments are deliberate actions intended to short-change employees. But in the fast-paced world of payroll, accidental underpayments often happen due to system errors, misinterpretations of awards or human error.

While accidental underpayments might not lead to criminal penalties, they can become risky when they’re repeated. The courts could interpret multiple accidental underpayments as intentional if they aren’t corrected once discovered, which could lead to penalties for negligence (which would be separate to wage theft laws).

So, even if underpayments aren’t deliberate, they could still land you in hot water if left unfixed. Take this example: imagine a business underpays its casual employees because its payroll system doesn’t account for weekend penalty rates. Initially, this is an accidental underpayment if the error is caught and fixed. But if the company fails to fix it after realising the mistake, it might lead to penalties.

The takeaway? It’s not enough to say that underpayment was an error. Businesses must show that they took immediate steps to fix the problem once identified.

Hence, it’s critical to be proactive about fixing errors as soon as you notice them.

“This law isn’t aimed at payroll errors or miscalculations. It focuses on intentional underpayments.” – Sanam Ahmadzadeh Salmani, Employment lawyer

HR’s checklist for compliance

It’s crucial to prioritise key compliance areas that will help safeguard against unintended breaches and align with evolving wage theft regulations. Take the following steps to protect your business against risk:

1. Review payroll systems

• Do you use payroll software that automates superannuation contributions, entitlements and pay rates, and helps avoid human errors?
• Are your systems accurately calculating wages, allowances, overtime and superannuation contributions? 
• Have you updated the system to reflect any award changes?

2. Check employment classifications

• Are all employees correctly classified under the appropriate award or enterprise agreement?
• Where applicable, have all casual employees received penalty rates for weekend and holiday work?

3. Train payroll employees

• Have your payroll employees recently had training on payroll or attended any workshops? 
• Does the payroll team subscribe to resources such as Fair Work Australia newsletters?  

4. Conduct regular audits 

• When was the last time the company conducted a payroll audit internally or via a third party? 

5. Timing

• Have you addressed any and all discrepancies immediately?

Effectively preparing your processes and audit systems not only ensures legal compliance with the new wage theft legislation, but also fosters a culture of accountability and transparency within your organisation.

A longer version of this article originally appeared in the December-January 2025 edition of HRM Magazine. All information in this article is general in nature and does not constitute legal advice.

Sanam Ahmadzadeh Salmani is an in-house lawyer at Employment Hero and podcast host of Law Lenz: Employment Law Done Right.