Authored by: Kirsten Hartmann, Principal IR Consultant
Employers have had to pay out $473 million to employees for underpayments and pay a further $21.2 million in court ordered penalties.
A recent media release from the Office of the Fair Work Ombudsman (FWO) announced that employers have had to pay out $473 million to employees for underpayments in the last financial year (2023/2024) and pay a further $21.2 million in court ordered penalties.
This takes the back-payments value alone to $1.5 billion for the last three years.
This leads to two questions:
What exactly has triggered these underpayments?
How do employers ensure underpayments do not occur in the future?
The short answer is to ensure that the company engages in regular compliance checks to ensure that sufficient checks are in place to prevent errors in the first place.
The main ‘triggers’ of underpayments
An analysis of the 2023/2024 FWO Enforceable Undertakings (approximately 40) and the FWO underpayment litigation (cases leading to the $21M fines imposed) revealed that employers failed to comply with many different legal obligations owed to their employees.
The most common areas of non-compliance included (but were not limited to) the following areas:
Industrial instrument errors
- Incorrect award versus award free decisions (i.e. award covered employees treated as award free)
- Failure to pay allowances, errors in the calculation of ordinary hours of work, rest breaks, overtime and penalty rates (either wrong and/or not paid)
- Incorrect awards applied or award level chosen
Administrative / record keeping errors
- No time and attendance records (or contained errors)
- Award/ Enterprise Agreement wrongly interpreted (e.g., roster requirements, incorrect calculation of penalties /overtime or wages not paid on time
- Incorrect application use of ‘off-setting’, i.e., using what appears to be an overpayment in one expense category (e.g. payment of penalty rates) to cover cost of a clothing allowance)
- Payroll system calculations – e.g., incorrect formulas or payroll rules, errors and omissions
Annualised wage/salary arrangement errors relating to the correct timing. - Incorrect input from instruments into payroll and HR system
Insufficient HR documentation and practices
- Inaccurate position descriptions
- Inaccurate contracts
- Inaccurate and out of date policies
- Unsupported managers who are out of their depth in this space
The analysis also revealed that most, if not all these errors, could have been prevented, thereby saving the affected business owners millions of dollars and loss to brand reputation and culture.
It is worth repeating that the ultimate responsibility for ensuring payment of the correct legal entitlements to employees falls under the Directors and the owner’s purview.
Employers also need to be aware of a practice that has been frequently observed in underpayment cases, where an otherwise competent manager/supervisor is required to monitor compliance whilst lacking the necessary specialist compliance knowledge and experience.
Recent articles and an analysis of the enforceable undertakings and FWO litigation going back to 2019 are highly suggestive that the same causal factors that we have mentioned above keep on recurring and are the root cause of the problem. As such a risk management perspective/approach should be adopted alongside regular internal and external compliance checks, a highly trained payroll workforce, and an appropriate and supportive reporting mechanism.
Please note: As of 1 January 2025, any such underpayments found to be deliberate will be considered a criminal liability.
Where to from here?
In our many years of supporting businesses with compliance issues, we have observed that the most appropriate risk mitigation is to use both internal compliance officers (regular and ongoing) and external/independent compliance (at specified time periods or during a legislative change) to avoid even honest mistakes.
Our research suggests that this step alone would significantly reduce the chance of underpayments or any allegations of “wage theft “quickly and effectively.
All rectification steps of any wage underpayments should be run and managed by a competent and preferably external provider as this will assist the company to ensure nothing slips through the cracks.
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