With wage theft in the spotlight, carefully monitoring payroll compliance is more critical than ever. Here are five ways accidental underpayments can occur, and how to prevent errors like these slipping through the cracks.

Even with the best of intentions, accidental underpayments can befall organisations of any size, scope or sector, caused by anything from misinterpretations of awards to simple human error. 

“In an ideal world, being able to calculate the precise amount that an award requires an employee to be paid would be very straightforward and and completely unequivocal. But that’s not the case,” says Michael Byrnes, Partner at law firm Swaab.

With the criminalisation of wage theft set to come into effect as early as January 2025, and with a number of high-profile cases of underpayments in the news, it’s more crucial than ever for employers to understand the distinction between wage theft and accidental underpayment, he says.

“‘Wage theft’ is a term that [sometimes] gets applied to any underpayments of employees. But not all cases of underpayment are wage theft,” he says. “That’s not to condone or minimise underpaying staff, but a lot of them are inadvertent.”

Wage theft specifically involves intentional or deliberate acts to deny workers their rightful pay, such as withholding wages, refusing to pay overtime or intentionally misclassifying employees to reduce payroll costs, he explains, and this is the practice set to be criminalised next year.

While accidental underpayments will not result in criminal sanctions, there are still significant civil penalties that can apply, he says. 

To protect your organisation from the costly ramifications of an accidental underpayment, here are five common ways that underpayments can slip through the cracks, and the actions employers can take to prevent them. 

1. Failing to apply the relevant award or agreement

Failing to apply the correct industrial instrument to employees can cause a chain reaction of underpayments, impacting everything from minimum hourly rates to leave entitlements and superannuation.

For instance, in 2019, a major Australian airline discovered it had failed to apply the relevant industrial instrument to around 1000 current and former employees, leading to thousands of dollars in both underpayments and overpayments.

In this case, the employees had been engaged under individual contract terms rather than under the enterprise agreement between the airline and the Australian Services Union.

This resulted in around $7 million in underpayments, relating to both salary and missed entitlements such as overtime. Meanwhile, the overpayments caused by the error amounted to around $22 million, which the airline said the affected employees would not have to repay.

“Determining what award applies should be a simple threshold exercise, but it can be relatively complex,” says Byrnes. “You’re dealing with potentially competing awards, or more than one award that could conceivably apply to a particular employee or workplace.”

Some employers are also unaware of their obligation to apply an award in the first place, he says. 

“They don’t turn their mind to it, or they have a mistaken belief that you can contractually opt in or opt out of modern awards.”

Given that the payroll function is generally tasked with applying the relevant awards and classifications to employees, providing regular and comprehensive training to payroll officers is employers’ best line of defence against underpayments relating to awards.

2. Misclassification of employees

Another common legal pitfall that can lead to accidental underpayments is misclassifying an employee’s role or level. This is a grey area that it’s very easy to get lost in, says Byrnes. 

“Sometimes, not only do reasonable minds come to different views, but even the best legal and judicial minds can disagree on which classification an employee falls into,” he says.

“The classifications don’t necessarily neatly align with the position descriptions, job descriptions, or organisational levels within an [organisation], and sometimes they’re dealing in concepts that are outdated.”

To avoid this, ​​it’s crucial for businesses to regularly review job roles and ensure that classifications accurately reflect the work being performed.

“It needs to be a deep, thorough examination of the work that the employee actually does – not just the job description or position description, but what they actually do in practice.

“Reflect upon the level of autonomy that the employee might have, and whether or not, given the sophistication of the tasks that they’re doing, they might be properly classified at a higher level than they are presently.”

According to Sanam Ahmadzadeh Salmani, Founder at Law Lenz, employers can proactively mitigate the risk of misclassification by being vigilant during the hiring process. 

“Start with a clear, detailed job description that outlines each role’s duties. When hiring, make sure to thoroughly assess their [current] classification,” she says.

“Employers can implement a checklist or process during hiring to ensure payroll is set up correctly for any newcomers.”

If budget permits, she also recommends conducting a review or audit of your payroll system to prevent misclassifications slipping under the radar.

“This can help you spot any issues early on, especially before they become major problems down the line.”

3. Mishandling overtime and allowances

Unpaid overtime is a widespread issue in Australia and has long been a part of the conversation around underpayments.

Research published late last year by The Centre for Future Work at the Australia Institute found that employees in Australia work an average of 5.4 hours of unpaid overtime per week, adding up to more than seven weeks per year. 

Full-time, salaried employees reported the greatest incidence of unpaid overtime, working an average of 6.2 extra hours per week. 

“[Some] employers assume that because they’re paying a salary with a set-off clause, they don’t have to consider overtime,” says Byrnes. “But the premium in the salary might not be sufficient to cover the amount of overtime worked, so there ends up being an underpayment. A number of large, sophisticated employers have been caught out by this.”

The antidote to cases like this is carefully monitoring the hours worked by employees to ensure the levels of overtime are covered by the relevant set-off clause, or, if not, that overtime is appropriately compensated. 

It has become particularly important for employers to monitor hours worked since the proliferation of hybrid work and flexible work arrangements, which makes it easier for work to creep into employees’ personal time without their employer’s knowledge, says Byrnes.

“To ensure you pay the correct [amount] under the awards, it becomes crucial to have accurate records that fully reflect the hours employees work, and to actively monitor those hours. Despite the move away from a nine-to-five mentality, hours must be recorded on a proper system.”

“In an ideal world, being able to calculate the precise amount that an award requires an employee to be paid would be very straightforward and and completely unequivocal. But that’s not the case.” – Michael Byrnes, Partner at law firm Swaab

4. Overlooking the minimum engagement period

The minimum engagement period is an often-overlooked employee entitlement which has led to widespread underpayments at several high-profile organisations.

Most modern awards and enterprise agreements specify a minimum engagement period for casual employees, which is defined as the minimum amount of time an employee can work per shift. Minimum engagement periods vary by industry, but usually range from two to three hours.

This provision means employers are unable to engage workers for only one hour’s work or, if they do, they will need to pay employees for at least the length of the minimum engagement period for doing so. The provision exists to ensure that time worked is worth the commute time and costs for the employee.

After an Australian university was discovered to have underpaid staff around $22 million in wages between 2013 and 2021, a comprehensive review of the underpayments revealed that almost 60 per cent of them related to the minimum engagement period. 

As well as backpaying the affected employees, the discovery has also prompted the university to reevaluate its reliance on casual employees, stating that “Workforce structures which rely heavily on fixed-term and casual employment are neither desirable nor sustainable.”

To avoid underpaying casual staff, it’s essential that employers are aware of the minimum engagement period provisions in the relevant award or agreement and structure their rosters accordingly.

5. Overlooking long service leave

Managing long service leave entitlements is a common area of confusion, since each state and territory has its own laws for calculating and paying long service leave, including whether it needs to be paid in full on employee termination.

The importance of considering these requirements was highlighted in a recent case brought forward by the Wage Inspectorate Victoria, which uncovered $1.67 million in underpayments related to long service leave entitlements. The entities have been ordered to pay the employees the missing entitlements, along with fines of $18,000 each. 

Given the complexity of long service leave requirements, if an employee raises an issue regarding long service leave, it’s important to examine and resolve the matter on a case-by-case basis, says Byrnes. 

“Keep an open mind when you are [dealing with] employees who do have issues with underpayments, particularly in relation to a complex issue like long service leave, where the individual circumstances of the employee might not necessarily be visible on a payroll system,” he says. “That will enable individual cases to be examined and determined, and lessens the chances of a complaint being made to a regulator.”

If employers are unsure of their obligations related to long service leave, the Fair Work Ombudsman (FWO)’s website contains a hub for state specific requirements.

Fair Work guidance on fixing accidental underpayments

When instances of accidental underpayments are discovered, the response should be prompt and transparent to avoid the appearance of intentionality and resultant penalties.

To help guide employers in their response, the FWO has devised a five-step framework for rectifying an underpayment.

After gathering key information including wage records and the terms of the relevant enterprise agreement, the FWO recommends the following actions: 

1. Determine how long the employee was underpaid

Review the pay records to identify the specific pay periods in which the underpayment occurred. If you’re uncertain, examine the records for the employee’s entire employment period.

2. Work out how much the employee was paid and what they were entitled to be paid

Record the total amount the employee was paid during the underpayment period, noting that this is the gross amount before taxes.

Next, calculate what the employee should have been paid, considering their pay rate, hours worked and any applicable entitlements like penalty rates, overtime, allowances or leave payments.

Ensure entitlements are clearly separated in your calculations to help identify underpaid amounts. Also account for any taxes and superannuation your business should have paid during that time.

3. Calculate how much the employee has been underpaid

Calculate the underpayment amount by subtracting what the employee was actually paid from what they should have been paid.

4. Discuss with the employee and confirm back payment arrangements

Arrange a meeting to discuss the underpayment with the affected employee. Explain the cause, how it was resolved, and be transparent about the calculations showing the underpayment amount. 

Pay the owed amount as soon as possible, either in the next pay cycle or as a separate payment. If the total is too large for the business to afford as a single payment, agree on a payment plan with the employee and put it in writing, detailing the amount, frequency and method of payment. Ensure the back payment is recorded in the employee’s pay records.

5. Keep up-to-date with future wage increases

Prepare for future pay increases by reviewing the employment classifications in the relevant awards and keeping track of any other potential pay changes.

To avoid the potential legal, financial and reputation risks associated with underpayments, Byrnes suggests organisations turn their attention to empowering their payroll departments with the tools they need to protect the organisation.

“Payroll, who do great work, are often left with the job of classifying employees or establishing what award applies. And they’re not necessarily always equipped to do that,” he says.

“It’s always been considered something of an unglamorous, administrative function, but the payroll function is more important than ever. They should have the support of the HR function, good IT systems and internal and external legal advice as required.”

All information, content and materials available on this site are for general informational purposes only. The contents of this article do not constitute legal advice and should not be relied upon as such.

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