Quick Guide to Understanding Wage Theft and Underpayments

The underpaying of wages and entitlements continues to feature across a range of Australian workplaces, from small business to large corporations, leaving workers out of pocket and the reputations of employers in tatters.

On 1 August 2023, the Fair Work Ombudsman reported that it had recovered $509 million in unpaid wages and entitlements for more than 250,000 workers in the 2022-23 financial year.

This is the second largest annual figure ever recovered in the Ombudsman’s history and incredibly, over 50% of the errors came from universities and large corporate organisations (with large HR, payroll and compliance teams). Major litigation has also commenced against a number of entities.

Most recently, on the 15th of February 2024, the Ombudsman announced that it secured record penalties of $10.34 million against Commonwealth Bank and CommSec (formally known as Commonwealth Securities Limited). The penalties were imposed after CBA and CommSec admitted multiple breaches of the Fair Work Act 2009, including some ‘serious contraventions’ committed knowingly and systematically, which attract a tenfold increase in applicable maximum penalties.

The CBA case reiterates the importance employers should be placing on ongoing wage compliance; it cannot be a set and forget exercise. There is much room for error no matter your business size or industry, so the time to act is now and regular compliance activities should continue into the future as the wage compliance landscape continues to change.

Wage theft is already illegal in Victoria and Queensland, and the Australian Government has introduced legislation that will make intentional wage theft and non-payment of superannuation a criminal offence from 1 January 2025.

Under these provisions, employers will commit an offence if:

  • They are required to pay an amount to an employee, such as wages, or on behalf of or for the benefit of an employee, such as superannuation, under the Fair Work Act or an industrial instrument; and
  • They intentionally engage in conduct that results in their failure to pay those amounts to or for the employee on or before the day they’re due to be paid.

Note, that where a genuine error has occurred, we do not expect that these provisions will apply. The Fair Work Ombudsman will be responsible for investigating suspected underpayment offences.

A ‘Voluntary Small Business Wage Compliance Code’ will also be available to small business employers.

1. WHAT IS WAGE THEFT?

Wage theft occurs when an employer does not pay a worker their correct wages or entitlements in accordance with their relevant award, registered agreement and/or legislation.

This could mean:

  • paying a worker a lower rate than they should be paid;
  • withholding overtime payments, and not paying penalty rates;
  • not paying appropriate allowances;
  • paying a flat rate or salary that does not cover what the employee would earn under the award;
  • paying the employee at the incorrect award classification;
  • failing to make superannuation contributions;
  • deducting money from wages unlawfully;
  • not offering the correct annual leave entitlements;
  • not setting payroll profiles up correctly;
  • not regularly auditing payroll practices, and more.

Wage theft can occur both intentionally and unintentionally (by employers making honest mistakes), with wage theft only considered a criminal offence if it is thought to be occurring deliberately.

Additionally, as concerns are not usually investigated unless an employee makes an enquiry or complaint about their wages, it is thought to be even more common than most estimates would have us believe, and instances of wage theft appear to be on the rise.

We also should not be fooled by the statistics around large organisations and their issues – intentional and unintentional issues occur just as frequently in smaller organisations, but usually do not make the headlines.

2. WHAT IS AN UNDERPAYMENT? HOW DO THEY HAPPEN?

Errors result in both underpayments and overpayments and, unfortunately, both can be costly for business. Errors are often caused by:

  • Human / data entry error;
  • Incorrect system setup;
  • Inexperienced individuals attempting to interpret Awards and/or run payroll;
  • Misinterpreting Award provisions (for example classifications, ordinary span of hours, overtime rates, penalties, travel and allowances);
  • Multiple Awards applying to different employees within one employer;
  • Inadequate pre-processing approvals;
  • Issuing an Individual Flexibility Arrangement that does not meet the relevant award entitlements;
  • Failing to monitor work hours, changes to roster patterns and different allowances;
  • Payroll program being incapable of handling different payroll items;
  • Inadequate monitoring and auditing.

Often underpayments occur by several of these issues happening over a period of time. A snowball effect occurs and someone eventually realises the problem.

3. WHAT HAPPENS WHEN YOU GET IT WRONG?

Underpayments often happen because of a mistake or payroll error. Fixing it quickly and getting it right in future is important.

Not following the law can lead to serious penalties. Under the national wage theft legislation, the following penalties for a company will apply:

  • if the court can determine the underpayment, the greater of 3 times the amount of the underpayment and $7.825 million, or
  • if the court can’t determine the underpayment, $7.825 million.

For an individual, the fowling penalties will apply:

  • maximum of 10 years in prison;
  • if the court can determine the underpayment, the greater of 3 times the amount of the underpayment and $1.565 million, or
  • if the court can’t determine the underpayment, $1.565 million.

In determining penalties, the court will also look at the organisations culture around compliance (or lack thereof). Where there is deliberate wage theft with leaders/HR/payroll who knowingly engage in the conduct without making genuine efforts to improve it – such as in the case of CBA outlined earlier – we expect the harshest penalties and reputational damage for both individuals and organisations.

4. CASE STUDIES

There are plenty of examples of when large organisations have got it wrong in recent years, including names such as Coles, Subway, Super Retail Group, Qantas, Maurice Blackburn (yes, lawyers get it wrong too!), 7 Eleven, Grill’d and George Calombaris.

You can read a summary of these cases and more here.

Note that this article was published by Employment Hero – we do not have any affiliation with them.

5. TOP TIPS FOR PAYING CORRECTLY

As you are aware, not meeting your obligations as an employer is a serious and very real issue.

Below are some tips on how to pay employees correctly, mitigate risk and save future headaches. Feel free to print this section and use it like a checklist:

Payroll/HR Team
  1. Trained & Qualified: Ensure the individuals who process payroll and advise on entitlements are appropriately trained and/or qualified to do so. Review team skill sets and gaps at least annually.
  2. Ongoing Training: Remember, the rules change regularly. Consider up-skilling employees through Edwards HR’s Training Workshops, particularly our module “Employment Relations Foundations” – find out more here.
Awards
  1. Coverage: Ensure the correct award coverage and classification level for each employee, remembering that more than one award may apply to your employee group (if the employee is not covered by an Enterprise Agreement or is award free). You can access the Modern Award List by clicking here;
  2. Pay Guides: Every Award has a separate Pay Guide that provides all the pay rates applicable to every type of employee covered by that Award. This includes permanent employees, casuals, juniors, and what to pay when employees work overtime, weekends, public holidays etc. To find the Pay Guide for your Award click here. These should be read in conjunction with the Award.
  3. PACT Tool: Another way to find out the minimum pay rate is by using the P.A.C.T – Pay and Conditions Tool – which is found on the Fair Work Ombudsman website. You can find the P.A.C.T here
  4. Not Just Pay Rate: While it’s imperative employees receive at least the minimum pay rate for their classification, it is likely that other entitlements will apply, that also need to be paid when they apply (eg. allowances, overtime rates, penalty rates, annual leave loading, casual loading, travel time). 
  5. Auditing: We strongly recommend all employers thoroughly read and understand the Award/s that apply to their team and periodically audit their payroll practices to ensure compliance with each relevant Award. This should also be considered when drafting contracts of employment and Individual Flexible Arrangements (IFAs) for employees. More on this below under ‘HR & Payroll Practices’.
  6. Wage Increases: Keep up to date with future wage increases, which generally occur each July.
Deductions

You’re not allowed to make deductions from an employee’s pay, except in specific circumstances. You can only deduct money lawfully in specific situations, such as if it’s allowed by law or a court order, or it’s allowed under the employee’s award. An example of a legal deduction is a salary sacrifice arrangement. You can read more about when deductions are permitted here.

Tax & Superannuation
  1. Make Contributions: All employers have tax and superannuation obligations. You must make employer superannuation contributions as required by the ATO. Super has to be paid at least every 3 months into the employee’s nominated account.
  2. Apply Increases: Ensure you action of the annual increases each July until 2025.
  3. Check the Award: Some awards, enterprise agreements and other registered agreements have extra terms about superannuation.
HR & Payroll Practices
  1. PD’s: Ensure all employees have an up-to-date position description which will allow you to correctly match the role to the relevant Award classification (and will also support a range of other functions).
  2. Internal Auditing: Undertake spot-check auditing internally at least quarterly to assess your payroll practices and ensure everything is above board. You can use this list to help get you started.
  3. Independent Auditing: Engage an external party to undertake an audit of your payroll practices at least annually – speak with the team at Edwards HR if you require support.
  4. IFA’s: If any employees have agreed to an IFA, conduct rolling audits of what they have earned vs. what they would have earned under the Award to ensure they are better off. Ensure your IFA template has been drafted by a professional and covers all applicable Award clauses.
  5. Corporate Compliance Culture: Build a strong compliance culture within the organisation where leaders and HR/payroll teams understand their obligations and are driving towards positive compliance culture, and employees are aware of their entitlements and have a safe space to ask questions/raise concerns.
When There Has Been a Mistake
  1. Move Quickly: If you think you made a mistake, try to fix as soon as possible – work out how long the employee was underpaid, how much the employee was paid and what they were entitled to be paid, and the difference (how much the employee has been underpaid). Discuss with the employee and confirm back payment arrangements, remembering that you should allow yourself sufficient time to investigate properly and fix any issues.
  2. Assess Others: Simultaneously assess whether any other employees are also affected.
  3. Engage Experts: Consider engaging external support to ensure that any calculations and rectifications being made are correct.
6. HOW TO GET HELP

While paying employees correctly can be a complicated and daunting task, and the fact that employers can be liable for not holding a positive corporate compliance culture, the good news is that there is help out there.

The team at Edwards HR advises every week on award coverage, minimum entitlements, calculating salaries and flat rates, drafting employment contracts and Individual Flexible Arrangements (IFAs) against various award provisions.

We also complete many projects relating to auditing, payroll system setups and testing, and remuneration benchmarking. If you would like to chat with our team about wage compliance, auditing and commercial protection initiatives that are both cost effective and tailored specifically to your business, please contact our team on 07 3568 0866.

Stay up to date with all the upcoming changes via our LinkedIn Newsletter below.

For more guidance about this update, or to find out how Edwards HR can support your business, contact our team today on 07 3568 0866.

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