With the various high-profile cases recently broadcasted surrounding the underpayment of employee’s wages and entitlements, the Fair Work Ombudsman is employing a greater focus on non-compliant businesses.

Although unintentional in most cases, underpaying employees is a serious breach of Australian workplace laws and industrial instruments and can lead to the imposition of significant penalties, as well as the risk of reputational damage to your business.

It is important to understand your obligations concerning accurately paying your employees, as small mistakes can have large consequences. Ultimately, the failure to identify an underpayment issue can give rise to underpayment claims from employees and the potential for your business to be subject to further investigations by the Fair Work Ombudsman.

To avoid non-compliance, we have summarised the common mistakes that employers make that result in underpayments, and how to prevent them.

Small errors, serious ramifications 

Misunderstanding your legal obligations 

With the various industrial instruments that apply to employees and the frequency of changes to the law, employers can lack knowledge of, or simply be unaware of their obligations towards their employees under the Fair Work Act 2009 (Cth) (FWA), the applicable Modern Award or an Enterprise Agreement. This may result in the misapplication of relevant workplace laws and regulations and a failure to meet those obligations.

Payroll issues

Using outdated payroll technology, under-investing in resources, or foregoing regular reviews of your payroll systems can cause issues to be overlooked.

Incorrect classification of employees

There are several Modern Awards currently in operation, with many more being established each year. Employers often experience difficulty in accurately classifying an employee, or in circumstances where an employee is correctly classified at the commencement of their employment, as the employee’s role changes, the Modern Award that initially applied changes, or as a more relevant Modern Award comes into the fold, the employee may eventually become incorrectly classified.

Failing to keep note of annual wage increases

The Fair Work Commission reviews the National Minimum Wage and rates of pay set out in the existing Modern Awards each year. Wage increases following the Commission’s review generally take effect from July 1 of that year. As such, the 2020-21 Annual Wage Review conducted by the Fair Work Commission which instituted a wage increase of 2.5% is applicable from 1 July 2021.

Annualised salaries Failing to keep accurate records

Failing to keep and maintain accurate records of the hours employees have worked, including hours of overtime and relevant penalty rates, or taking note of the age of junior employees may result in employers overlooking an employee’s entitlement to pay increases and can also lead to breaches of employer obligations under the FWA surrounding the requirement to make and keep employment records.

What is at risk

The Fair Work Ombudsman takes a very grim view of non-compliance. Even if an employer discovers the underpayment soon after the fact, promptly rectifies it, and self-reports to the Fair Work Ombudsman, the Fair Work Ombudsman may still determine that the employer is liable for penalties for breaching the relevant workplace laws.

In addition to penalties, failure to accurately pay the minimum rates of pay and entitlements can lead to public embarrassment for an employer. This was the case in Compass Group (Australia) Pty Ltd T/A ESS; Compass Group Healthcare Hospitality Services Pty Ltd T/A Medirest (Australia) Pty Ltd [2019] FWC 6186 where the employer, Compass Group, was publicly criticised for neglecting to understand the roles and duties performed by its employees resulting in the incorrect application of the Hospitality Industry (General) Award when the Health Professional and Support Services Award was more appropriate.

Time to review your payroll process

More often than not, underpaying employees is the result of simple errors or a lack of understanding or interpretation of the applicable industrial instruments.

With the ever-changing nature of the law, it is important that you stay up to date with changes to minimum wages and entitlements to ensure you are fulfilling all your obligations as an employer. Additionally, employers should regularly review, update and configure payroll processes and employment records to avoid non-compliance.

A review of your payroll process and employment records is best conducted as a combined effort involving your business’s internal payroll department and a team of employment law experts. If you are unsure whether you are classifying or paying your employees correctly or lack an understanding of your obligations under the various industrial instruments it is imperative that you seek legal advice.