Underpayments - jail time & increased penalties

From 1 January 2025, employers and individuals risk criminal prosecution under a new criminal wage theft offence.

What’s the criminal wage theft offence?

An employer will commit a criminal offence under a new section 372A of the Fair Work Act if 3 elements exist:

1. The employer is required to pay an amount to or on behalf of, or for the benefit of, an employee under the Fair Work Act or an industrial instrument (Required Amount)
2. The employer engages in conduct, and
3. The conduct results in a failure to pay the Required Amount to, on behalf of, or for the benefit of, the employee in full on or before the day when the required amount is due for payment.

Importantly, as this is a criminal offence which requires fault, the employer must have an intention to engage in conduct that results in the failure to pay the employee.

The criminal offence is not intended to apply to honest and genuine mistakes.

The Fair Work Ombudsman also has new powers to investigate and refer suspected underpayments to the Commonwealth Director of Public Prosecutions and the Australian Federal Police for prosecution.

What’s the standard of proof?

The standard of proof in criminal prosecutions is that the accused must be guilty ‘beyond reasonable doubt’.

That is a higher standard of proof than in civil cases.

In civil underpayment cases, the Fair Work Ombudsman must prove its case on ‘the balance of probabilities’.

Are employees & companies involved liable?

Employees and other companies could also face criminal prosecution under the Criminal Code in the Criminal Code Act.

Under the Criminal Code:

1. A person who attempts to commit an offence is punishable as if the offence attempted had been committed – see section 11.1 of the Criminal Code.
2. A person who aids, abets, counsels or procures the commission of an offence by another person is taken to have committed that offence – see section 11.2 of the Criminal Code.
3. If a person and at least one other party enter into an agreement to commit an offence and an offence is committed as agreed (or in the course of carrying out the agreement), the person is taken to have committed the joint offence – see section 11.2A of the Criminal Code.
4. A person who urges the commission of an offence commits the offence of incitement – see section 11.4 of the Criminal Code.
5. Offences under the Criminal Code apply to companies the same way as they apply to individuals – see section 12.1 of the Criminal Code.

What are the criminal penalties?

New maximum criminal penalties are set out in sub-sections 372A(5)-(6) of the Fair Work Act.

What’s the link with Corporate culture?

It’s important that employers ensure a culture of proactive compliance with the Fair Work Act.

That is because a corporate culture influences whether an employer’s underpayment is intentional.

An intentional underpayment under clause 12.3 of the Criminal Code may be established if:

1. The employer’s corporate culture directed, encouraged or tolerated non‑compliance, or
2. The employer did not create and maintain a corporate culture that required compliance.

The Fair Work Ombudsman’s Guide to Cooperation Agreements decribes an employer’s culture as:

An attitude, policy, rule, course of conduct or practice existing within the employer’s business generally, or in the part of the business where the underpayment of employee entitlements happens.

Why is the ‘mistake’ exemption problematic?

The criminal offence is not intended to apply to mistakes.

Unfortunately, in Lawlux’s experience, aspects of awards are ambiguous and open to interpretation.

As such, in practice, Lawlux’s concern is that employers and individuals in HR and payroll will be exposed to criminal offences if:

• An unreasonable delay exists in rectifying underpayments,
• The employer does not pay employees in full when required (ie potentially on termination of employment or in breach of section 325 of the Fair Work Act), or
• The Fair Work Ombudsman does not agree with the employer’s approach to quantifying an underpayment.

The Fair Work Ombudsman may not agree with the employer’s approach to quantification on the basis of:

• A different interpretation on award coverage or when an award or enterprise agreement entitlement is triggered, or
• Disagreement with the employer’s repayment methodology (ie adopting a certain repayment back-pay period, averaging underpayment across pay periods, or not paying interest etc).

Even well intentioned employers can misinterpret when certain complex entitlements are payable.

Indeed, the Fair Work Commission has issued inconsistent or complex views on award interpretation.

Even the federal Department of Employment and Workplace Relations, which is responsible for overseeing federal workplace and employment conditions underpaid its employees.

Are there protections for small business?

A small business employer won’t be referred for criminal prosecution if it has:

1. Underpaid an employee, and
2. Complied with the Voluntary Small Business Wage Compliance Code (Compliance Code).

The Compliance Code provides that:

A failure by a small business employer to pay an applicable amount to, on behalf of, or for the benefit of, an employee must not be intentional.

The Compliance Code then sets out a range of factors that are considered to assess if an underpayment was not ‘intentional’.

In any event, a small business employer who has underpaid employees will remain at risk of the Fair Work Ombudsman investigating the underpayment and lodging civil proceedings for rectification.

What are the exceptions?

The criminal wage theft offence doesn’t apply to:

• Employees in New South Wales, South Australia, Queensland, Tasmania and Victoria of sole traders, partnerships, other unincorporated entities, or non-trading corporations
• Most Victorian state government employees, or
• Tasmanian local government employees,

in relation to:

• Superannuation contributions, or
• Long service, victim of crime, jury duty or emergency services leave.

However, the criminal wage theft offence applies to other wages and entitlements for those employees.

What are the enforcement options?

The Fair Work Ombudsman’s efforts to reduce underpayments has resulted in a significant number of enforceable undertakings.

Browse the enforceable undertakings here.

The Fair Work Ombudsman now has new powers to enter into Cooperation Agreements.

Of course, the Fair Work Ombudsman also had the power to investigate underpayments and lodge civil proceedings for rectification.

Previous reform to minimise employee underpayments

The most recent amendments follow the implementation of the ‘protecting vulnerable workers’ amendments on 27 October 2017 that:

• Created a ‘serious contravention’ category of workplace law non-compliance that significantly increased penalties – see section 557A of the Fair Work Act.
• Implemented a ‘reverse onus of proof’ if an employer contravenes their record keeping, pay slip or inspection of records obligations and does not have a reasonable excuse – see section 557C of the Fair Work Act.

A ‘serious contravention’ occurs if:

• The person or employer knowingly contravened an obligation under workplace laws, or
• The person or employer was reckless as to whether the contravention would occur.

A person is ‘reckless’ if they were aware of a substantial risk the contravention would occur and it was unjustifiable to take that risk.

An individual (such as a Payroll Manager, Managing Director or P&C Coordinator) will be involved and deemed to have themselves committed a ‘serious contravention’ if the employer engaged in a ‘serious contravention’ and the individual knew it was a ‘serious contravention’.

What’s Lawlux’s view on underpayments?

Underpayments in Australia are a significant issue.  It’s critical that employees are paid correctly.

However, our experience is that most employers want to do the right thing.

We have also experienced offshore companies deciding not to open an office in Australia because of industrial complexity.

Many employers want to pay employees correctly, but find it difficult, expensive and time consuming to so because of complex employment laws and ambiguous awards.

Further, awards don’t reflect modern working preferences of many employees.  Awards don’t support innovation, small business employment, the development of new industries, or the Australian government’s critical Future Made in Australia economic plan.

Although it might be politically expedient to simply increase penalties on employers (along with P&C and payroll employees), Lawlux would welcome an equally strong focus on:

1. Amending Awards so that:
   1. The number of awards is significantly reduced from the current 121 modern awards
   2. Coverage and classification levels are easier to interpret and apply
   3. Only 1 modern award applies to each workplace
   4. Entitlements such as overtime and penalty rate entitlements are less complex, and
   5. Loaded ‘all in’ rates of pay can be used for weekday and weekend work in certain situations (ie for flexible remote workers who work up to 50 hours Monday – Friday).
2. Permitting employers to agree to individual flexibility arrangements with employees that are more secure and value the provision of flexible hours.
3. Adjusting the Fair Work Ombudsman’s enforcement policy so that employers are unlikely to face civil prosecution if they:
   1. Self report an underpayment to the Fair Work Ombudsman
   2. Cooperate with the Fair Work Ombudsman
   3. Rectify, and
   4. Act in good faith.
4. Allowing employers to easily and efficiently approach the Fair Work Commission for a determination on the interpretation of a modern award, which is then published publicly.
5. Ensuring legislation is up to date.  We were concerned to see that, as at 6 February 2025, the Fair Work Act had not been updated to include the new criminal wage theft offence provisions even though they were legislated 14 months earlier.  We confirm that those provisions are now in the most recent compilation.

What should employers do?

Employers should at a high level, foster a culture of compliance with the Fair Work Act by:

• Allocating sufficient resources for the HR and payroll teams
• Conducting an underpayment audit (see an example below)
• Training managers and employees on their rights and obligations, and
• Encouraging dialogue between employees and managers on pay and entitlements.

Employers could also conduct an underpayment audit.  That might involve:

• For each position, assessing:
  • If an award or enterprise agreements applies, and
  • The applicable classification level and pay rates.
• Reviewing how employee time and attendance is recorded and how each employee is remunerated as part of assessing if employees are being underpaid.  Key remuneration options are:
  • Strict compliance with an award or enterprise agreement
  • A common law ‘set off’ clause
  • An annualised salary, or
  • A guarantee of annual earnings.
• Maintaining mandated employee records and pay slips.  That may require the implementation of time and attendance tracking.
• Implementing a time and attendance policy that deals with overtime, time off in lieu, flexible work, and manager approvals for hours of work that could trigger an underpayment risk.
• Reviewing payroll processes and time and attendance data to ensure consistency with applicable awards and enterprise agreements.

Further, small business employers (employers with fewer than 15 employees) should familiarise themselves and comply with the Voluntary Small Business Wage Compliance Code.

Would you like assistance?

Lawlux has considerable experience working with employers to identify, quantify, remedy and self-disclose underpayments.

If you would like to discuss your situation or require assistance, please contact us or get started with Lixo AI.