When did your business last undertake an audit in relation to payroll practices and employee pay?
From January 1, 2025, employers will be facing the possibility of criminal sanctions including a jail term, where they are found guilty of wage theft. Even where there is no wage theft, there are significant civil penalties for underpayments.
The Employment Law team from our in-house legal practice Business Law WA (BLWA) explains what you need to know about wage theft and underpayments – whether intentional or not – and how to protect your business.
Criminal prosecution – wage theft
Wage theft is a new criminal charge which can be brought against employers. It requires both:
- Intention to underpay a person; and
- An underpayment of wages.
Wages include all payments employees are entitled to under the Fair Work Act 2009 (FWA), modern award or enterprise agreement. It must be proven beyond reasonable doubt.
If found guilty of wage theft, the following may apply:
- 10 years' imprisonment (for an individual); and/or
- 3x the amount of the underpayment; or
- 5,000 penalty units – $1.565 million for an individual; or
- 25,000 penalty units – $7.825m for a body corporate.
The Fair Work Ombudsman will investigate the criminal offence, and it will then be referred to either the Commonwealth Director of Public Prosecutions or the Australian Federal Police.
Even where there is no intention to underpay, any underpayment can lead to significant penalties.
Civil penalties – underpayment of wages
Contraventions of the FWA attract potential financial penalties. These can include (but are not limited to) breaches of the National Employment Standards, a modern award, an enterprise agreement, breach of the method and frequency of payment, and failure to keep employee records and pay slips.
The threshold for a serious contravention has been lowered, and is now for “recklessness” rather than a “systemic pattern of conduct”. Employers will need to ensure they have records proving that employees were paid correctly.
Recklessness could include:
- Not considering annual increases to pay rates;
- Not checking if employees are entitled to allowances/special rates;
- Assuming a rate covers all penalties/overtime without a robust calculation;
- Offering a salary without calculating the award entitlements;
- Not considering public holiday work;
- Paying the same rate regardless of changes in roster or shift.
It does not require an intention to underpay – rather, it can be characterised by failure to properly consider all relevant factors, or just assuming “we pay high enough – don’t worry about that!” without performing the necessary checks.
The significant penalties can apply as below:
| Contravention type | Penalty |
| Contravention – by individual | $93,900 |
| Serious contravention – by individual | $939,000 |
| Contravention – by body corporate | $469,500 |
| Serious contravention – by body corporate | $4,695,000 |
This is for each contravention. So, if an employer fails to pay public holiday rates for 10 employees, and instead just pays the ordinary rate, the employer may be found to have breached the Fair Work Act 10 separate times and face a penalty payment of 10x $469,500 = $4.695m.
Clearly, the longer that incorrect pay practices and underpayments go on, the larger the issue is to resolve.
How do you protect yourself?
Should employers underpay their employees, the consequences have been significantly raised. Therefore, it’s important to mitigate the risk of underpayment.
We commonly see issues where employers are not paying according to the applicable award – for example, offering a salary or a blended hourly rate, which intends to “offset” or capture all the entitlements of the award.
These rates commonly fail to capture applicable penalty rates, loadings and allowances, and can lead to an underpayment.
Alternatively, employers set a rate at the beginning of an employee's employment, and fail to update it throughout their employment, and it falls below the hourly rate in the award.
We therefore recommend that you audit your payroll practices and rates of pay at least annually.
You may be able to do this yourself, where you have the expertise to do so, and pay in accordance with the award.
However, where you pay in a way which differs to the award, or where you have concerns about how employees are being paid, we recommend you seek advice and assistance to ensure that your rate of pay captures the award entitlements.
How we can help
BLWA can assist with auditing your payroll practices, and checking to see that your rates of pay capture the award entitlements.
Additionally, employment contracts should be checked to ensure legislative compliance. BLWA is offering a complimentary Red Flag Review of documents including employment contracts (the terms of which can be accessed here).
If you have any questions about underpayments, including where you have discovered an underpayment, please contact our team at [email protected] or (08) 9365 7746.
