In the payroll industry you’ll often hear the statement “no news is good news” – which essentially means that when we pay employees, we will only hear from them if there is a query about their pay, or an issue with their pay.

With the Fair Work Ombudsman releasing details on allegations and investigations into employers that have underpaid their staff regularly, it is not surprising that the first common workplace problem listed for employees is ‘My pay doesn’t seem right’ – and for employers ‘I’m not sure what to pay my employees’ or  ‘I think I’ve underpaid my employees.’ 

At Employment Innovations, we understand that fixing it quickly and getting right in the future is important. 

In this blog, our team of Payroll experts provides a step by step guide to effectively manage underpayments within your business


Types of underpayments

Underpayments can result from a number of factors such as:

  • Employees being incorrectly classified under their Modern Award or Employment Agreement;
  • Employers not ensuring that pay rates, allowances and penalty rates remain in line with Fair Work wage updates;
  • Payroll calculations, such as maximum hours within a day calculation being incorrect;
  • Employees not receiving their entitlements (such as annual leave that is paid out at the cessation of employment.


Is it illegal to underpay employees?

As underpayments occur as a result of the employee not receiving their entitlements – this is illegal and therefore must be addressed as soon as they arise.


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What happens if an underpayment has been identified?

Fair Work has put together steps on what employers should do when an underpayment has been identified:

  1. Calculate how long the employee was underpaid: Review the employee’s pay history to identify how long the underpayment has been taking place. This may include changes to their employment history, and conditions, or stem back to their first payment from your business.
  2. Calculate how much the employee was paid and what they were entitled to be paid: Calculate the amount the employee should have been paid against what they have received so far. This will enable your business to process the underpayment effectively. 


Some best practice tips include:

  • Comparison for each pay period identifying the total amounts (this includes superannuation calculations, and also PAYG calculations per pay period);
  • Categorising each type of payment separately – such as allowances or overtime payments – to allow for accurate superannuation and PAYG calculations to be made. Any adjustments when rectifying the underpayment will then be able to be processed in line with STP Phase 2 reporting guidelines.
  1. Calculate how much the employee has been underpaid: The next stage is to work out how much the employee has been underpaid. After completing step 2, using the comparisons between pay periods you can compare the totals for how much the employee has been paid against what they should have been paid. 
  2. Discuss with the employee and confirm back payment arrangements: Arrange to communicate with your employee the steps that have been taken to rectify the issue, along with providing any relevant calculations. Employers should aim to pay back the underpayment as a part of the next pay cycle or perform an out-of-cycle payment to the employee.


If your business cannot afford to pay the underpayment back in one payment, a payment plan can be worked out with the employee provided they agree to it. This must include:

  • The amount and frequency of the back payment
  • The method the payments will be made
  1. Keep up-to-date with future wage increases and changes to your relevant Modern Award: Be ready for any future changes in your relevant award by subscribing to Fair Work’s notifications on changes within the award or pay increases. 


Pro Tip: When there has been a calculation error with an employee’s pay, check to see if other employees may be affected and follow the same steps to rectify the situation, rather than wait. This will prevent underpayments from taking place for a longer period of time, having your payroll system rectified to prevent the risk of any future underpayments and also any discontent within your workforce.


Access your free Expert Guide to Outsourcing Payroll eBook and start using it within your business

Should an underpayment be reported to Fair Work?

In situations where underpayments have been happening on a large scale or over an extended period of time (greater than 12 months), it is best for employers to report underpayments by contacting Fair Work.

Where businesses self-report and rectify any underpayments, litigation and punitive action is less likely to take place. However, Fair Work may still issue an investigation, contravention letter or compliance notice.


How much is the penalty for underpayments?

Underpayments can carry high penalties for companies, however, the penalty is determined by what type of breach it is. Categories of what are considered serious breaches include:

  • the National Employment Standards;
  • a modern award;
  • an enterprise agreement;
  • a workplace determination;
  • a national minimum wage order;
  • an equal remuneration wage order;
  • method and frequency of paying wages;
  • the section that says an employer must not require employees to spend any of their money or pay back their wages if it is unreasonable (‘cashback schemes’);
  • guarantees of annual earnings;
  • record-keeping requirements, and pay slip requirements.


In addition, Fair Work may also choose to impose a penalty against individuals who are directly involved with one of the above breaches. Individuals that could be penalised include:

  • Company directors;
  • Human Resource Managers or other company managers;
  • An accountant;
  • A business involved within the supply chain.


The amount that a business or individual can be penalized varies depending on the type of breach itself, however, courts can impose penalties such as:

  • making a person pay an amount of money as a penalty for not doing what the law says (up to $16,500 per contravention for an individual and $82,500 per contravention for companies)
  • making a person pay a higher penalty for some ‘serious contraventions’ (up to $165,000 per contravention for an individual and $825,000 per contravention for companies)

Other penalties include making the employer pay the outstanding entitlements (plus interest), requiring training for individuals, ordering a payroll audit, restraining an individual from performing a role or paying compensation to the employee affected for the losses suffered.


Key takeaways

Taking into account the penalties for not paying employees correctly, along with time spent to rectify payroll calculations, can prove to be a costly exercise for businesses. When an underpayment is uncovered for an employee this could also be a strong indicator that other employees within your workforce may also be underpaid. 

To minimise the risk of this happening in your business, some steps that can be taken to address and avoid the occurrence of underpayments can include:

  • Reviewing how your workforce is being paid rather than just addressing the individual
  • Performing regular reviews on the setup of your payroll software, as well as calculations against award tools such as PACT or use of a third-party
  • Investing in Modern Award-specific training for your payroll administrators
  • Considering outsourcing your payroll process to reduce risk


About Employment Innovations

Employment Innovations is one of Australia’s leading providers of employment services designed to increase productivity and ensure compliance. Its services and solutions include all the tools that every Australian small to medium sized employer needs – including workplace advice, legal services, payroll solutions, migration, human resource management and HR software.



The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.