What Happens If You Underpay Employees in Australia?

Underpaying employees in Australia has never been riskier. Between the criminal wage theft provisions that commenced on 1 January 2025, escalating civil penalties, and the Fair Work Ombudsman's expanded enforcement budget, employers who get it wrong face consequences that can shut down a business.

This is not a scare piece. Most underpayments are accidental — the product of award complexity, poor record-keeping, or outdated payroll setups. But the law does not care about your intentions when it comes to civil penalties and back-pay orders. And since January 2025, if a court finds the underpayment was intentional, you are in criminal territory.

Here is what actually happens when an employer underpays staff in Australia, and what you can do to prevent it or fix it quickly.

The Scale of the Problem

Underpayment is endemic in Australia. The Fair Work Ombudsman recovered over $532 million in underpaid wages for Australian workers between 2018 and 2024. In the 2023-24 financial year alone, the FWO secured $473 million in back-payments — a record driven largely by major corporate self-disclosures from companies like Woolworths, Qantas, and the Commonwealth Bank.

These are not just hospitality businesses paying cash-in-hand. Some of Australia's largest and most sophisticated employers have been caught underpaying staff due to errors in award interpretation, particularly around penalty rates, overtime calculations, and allowance entitlements.

Civil Penalties: The Baseline Consequence

Even if an underpayment is genuinely accidental, the employer is exposed to civil penalties under the Fair Work Act 2009.

Maximum Civil Penalties (2025-26)

A "serious contravention" means the person knowingly contravened the provision, and the contravention was part of a systematic pattern of conduct relating to one or more persons.

Each contravention is penalised separately. If you underpay 10 employees over 26 fortnightly pay periods, that is potentially 260 separate contraventions. Even at standard rates, the theoretical maximum exposure is enormous.

In practice, courts apply penalties that are proportionate to the circumstances. But the Federal Court has increasingly taken the view that penalties need to be high enough to deter future non-compliance, particularly for repeat offenders or cases involving vulnerable workers.

How Courts Calculate Penalties

The Federal Court considers these factors when determining civil penalties (established in Fair Work Ombudsman v Grouped Property Services Pty Ltd [2017] FCA 557):

• The nature and seriousness of the contravention
• Whether the conduct was deliberate
• The period over which the contravention occurred
• Whether the employer has previously contravened the Act
• The size of the employer's business
• Whether the employer cooperated with the FWO investigation
• Whether the employer took steps to remediate
• The need for specific and general deterrence

Criminal Prosecution: Intentional Underpayment

Since 1 January 2025, intentional underpayment of employees is a criminal offence under section 327A of the Fair Work Act.

Criminal Penalties

• Individuals: Up to 10 years' imprisonment, or a fine of up to the greater of 3 times the underpayment amount or $1.565 million, or both
• Body corporates: A fine of up to the greater of 3 times the underpayment amount, $7.825 million, or 30% of the company's turnover during the breach period

The prosecution must prove beyond reasonable doubt that the employer intentionally engaged in conduct that resulted in underpayment. Accidental underpayments do not attract criminal liability, but recklessness and wilful blindness can be enough. An employer who deliberately avoids checking award rates because they suspect they are underpaying is on dangerous ground.

The Small Business Safe Harbour

Small businesses (fewer than 15 employees) can access protection from criminal prosecution through the Voluntary Small Business Wage Compliance Code. To qualify, the employer must demonstrate they:

1. Identified the correct award covering each employee
2. Checked current pay rates using the FWC pay guide or PACT calculator
3. Kept records of the steps taken to determine pay rates
4. Reviewed rates at least annually
5. Fixed errors promptly when discovered

Following the Code does not prevent civil action or back-pay claims, but it provides a safe harbour against criminal prosecution.

Back-Pay Orders

Regardless of whether the matter is pursued civilly or criminally, the employer must pay back every cent of underpaid wages, plus interest.

How Far Back Can Claims Go?

Underpayment claims under the Fair Work Act can go back 6 years from the date the claim is lodged. This means an employer could owe back-pay covering multiple Annual Wage Review increases, compounding the amount owed.

Interest on Back-Pay

Courts can order interest on back-pay amounts. The rate is typically the Federal Court's standard pre-judgment interest rate, which is calculated using the Reserve Bank's cash rate plus a margin. At current rates, this adds a meaningful amount to large back-pay claims.

Tax and Super on Back-Pay

Back-pay amounts are treated as assessable income for the employee in the year they receive the back-pay. The ATO provides concessional tax treatment under section 86-60 of the Income Tax Assessment Act 1997 for lump sum payments in arrears, which allows the tax to be offset to reflect the years the income should have been received.

Crucially, superannuation is also owed on back-pay amounts. If you underpaid wages by $50,000, you also owe $6,000 in super (at 12%) plus the Superannuation Guarantee Charge for late payment.

Public Naming and Shaming

The Fair Work Ombudsman routinely publishes the names of businesses and individuals who have been penalised for underpaying employees. This information is:

• Published on the FWO website in media releases and litigation outcomes
• Indexed by search engines, meaning it appears when customers, potential employees, or business partners search your business name
• Picked up by media outlets, particularly for large underpayment cases or cases involving well-known brands

The reputational damage from being publicly named can be more damaging than the financial penalties, especially for small businesses that rely on local reputation.

Compliance Notices and Infringement Notices

Not every underpayment goes to court. The FWO has several enforcement tools short of litigation:

Compliance Notices

A Fair Work Inspector can issue a Compliance Notice (section 716 of the Fair Work Act) requiring an employer to:

• Take specified actions to remedy the contravention
• Pay amounts owed to employees
• Calculate and pay interest on underpaid amounts

Failure to comply with a Compliance Notice is itself a contravention carrying penalties of $18,780 for individuals and $93,900 for body corporates.

Infringement Notices

For certain contraventions, Fair Work Inspectors can issue on-the-spot Infringement Notices. These are like traffic fines — fixed penalties without the need for court proceedings. The amounts are:

• $937.50 per contravention for an individual
• $4,687.50 per contravention for a body corporate

These are used for clear-cut breaches like failing to issue pay slips, failing to keep records, or paying below the minimum wage.

What Triggers a Fair Work Investigation?

Understanding what brings the FWO to your door helps you assess your risk level:

1. Employee complaints: The most common trigger. Any current or former employee can lodge a complaint online through the FWO website. It takes about 15 minutes.

2. Anonymous tip-offs: Workers, family members, or competitors can report concerns anonymously through the FWO's Anonymous Report function.

3. Industry campaigns: The FWO runs targeted compliance campaigns in industries with high rates of non-compliance. Hospitality, fast food, retail, cleaning, and agriculture are frequent targets.

4. Payroll data analysis: The FWO has access to STP data reported to the ATO. Advanced analytics can flag businesses where reported pay rates appear below award minimums.

5. Award comparison audits: When a business is found to be non-compliant, the FWO may audit other businesses operated by the same directors or franchisors.

6. Self-reporting: Large companies that discover underpayment issues increasingly self-report to the FWO under cooperation agreements. This does not prevent penalties but is a significant mitigating factor.

The Real Cost of Underpayment: A Worked Example

Consider a small cafe employing 8 casual staff under the Restaurant Industry Award (MA000119) at Level 1 (Food and Beverage Attendant Grade 1).

The base rate is $23.23/hr. With casual loading, the ordinary weekday rate is $29.04/hr. But the cafe owner pays everyone a flat $27.00/hr regardless of when they work.

Underpayment on ordinary weekday hours: $29.04 - $27.00 = $2.04 per hour

Underpayment on Saturdays (casual rate should be $34.85/hr): $34.85 - $27.00 = $7.85 per hour

Underpayment on Sundays (casual rate should be $40.65/hr): $40.65 - $27.00 = $13.65 per hour

Underpayment on public holidays (casual rate should be $58.08/hr): $58.08 - $27.00 = $31.08 per hour

If each employee works an average of 25 hours per week including 8 hours on Saturday and 8 hours on Sunday, the weekly underpayment per employee is:

• 9 weekday hours x $2.04 = $18.36
• 8 Saturday hours x $7.85 = $62.80
• 8 Sunday hours x $13.65 = $109.20

Total per employee per week: $190.36

Total for 8 employees per week: $1,522.88

Total for 1 year (52 weeks): $79,189.76

Total for 6 years (the claim period): $475,138.56

Plus 12% super on that amount: another $57,016.63. Plus interest. Plus potential civil penalties of up to $93,900 per contravention. The total exposure runs well into the millions.

How to Fix an Underpayment You Have Discovered

If you have discovered you have been underpaying staff, act fast:

Step 1: Quantify the Underpayment

Go through payroll records and calculate the exact amount underpaid for each employee, for each pay period, covering the full 6-year claim period (or however long the underpayment has been occurring).

Step 2: Calculate Super Owed

Add 12% super on all underpaid ordinary time earnings amounts.

Step 3: Pay It Back Promptly

Pay the back-pay and super as quickly as possible. Prompt remediation is the single most important mitigating factor in any enforcement action.

Step 4: Fix the Root Cause

Update your payroll system, reclassify employees if necessary, and ensure all rates match the current award pay guide. Test your system by running scenarios through an independent calculator.

Step 5: Document Everything

Keep records of when you discovered the error, what steps you took to investigate, how you calculated the back-pay, and when you remediated. This documentation is your evidence of good faith.

Step 6: Consider Self-Reporting

For significant underpayments, consider approaching the FWO under a cooperation agreement. Self-reporting demonstrates good faith and typically results in lower penalties than being caught during an investigation.

How AirComply Helps Prevent Underpayments

Most underpayments happen because employers do not know the correct rate in the first place. The award system is genuinely complex — 155 awards, each with different classification structures, penalty rate tables, and overtime rules.

AirComply's calculator covers all 155 Modern Awards and shows you the exact rate for any classification, employment type, day, and time. It takes seconds to check whether your payroll is calculating correctly.

Check your rates now with AirComply — it is free and covers every award.

Frequently Asked Questions

Can I go to prison for underpaying an employee?

Yes, since 1 January 2025, intentional underpayment is a criminal offence carrying up to 10 years' imprisonment for individuals. However, the prosecution must prove beyond reasonable doubt that the underpayment was intentional. Accidental underpayments are not criminal offences.

What is the maximum fine for underpaying workers?

For criminal wage theft, the maximum fine is $7.825 million for a company or 30% of annual turnover (whichever is greater). For civil contraventions, the maximum is $93,900 per contravention for a body corporate, or $939,000 for a serious contravention.

How far back can employees claim underpayment?

Employees can claim underpaid wages going back 6 years from the date the claim is lodged. This applies to both individual claims through the courts and complaints to the Fair Work Ombudsman.

What if the underpayment was an honest mistake?

Honest mistakes still result in back-pay obligations and can attract civil penalties. However, they will not attract criminal prosecution. The key is to fix the error promptly and document your efforts to comply. The Voluntary Small Business Wage Compliance Code provides a safe harbour for small businesses who follow its steps.

Will the Fair Work Ombudsman accept a payment plan for back-pay?

The FWO can agree to a remediation plan that involves staged back-payments, particularly where a lump-sum payment would cause financial hardship for the business. However, the FWO is not obligated to agree, and interest continues to accrue on unpaid amounts.

Does underpayment affect my workers' compensation premiums?

Yes. Workers' compensation premiums are calculated based on declared wages. If you have been underpaying and under-declaring wages, your workers' compensation insurer may seek adjusted premiums, and your coverage may not fully protect you in the event of a claim.