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If you are a business owner, you must ensure you classify all of your employees under the correct modern award. A crucial part of your business practice is to undertake an annual audit of award coverage and compliance. If you are unsure, you should pay careful attention to the Fair Work Ombudsman’s current crackdown on underpayment of staff.

Jewellery retailer Michael Hill recently disclosed that it underpaid retail staff up to $25 million over the past six years. The Shangri-La Hotel in Sydney has also admitted to underpaying staff up to $250,000. Both businesses now face an enquiry by the Fair Work Ombudsman to determine how these breaches occurred and what each business should do. Michael Hill and the Shangri-La Hotel are the latest in a string of multiple large retailers and businesses found to have underpaid employees, including: 

  • 7-Eleven convenience stores;
  • Domino’s Pizza; and 
  • Pizza Hut. 

How does underpayment happen? For many employers, the answer lies in the modern award system. As a business owner, understanding your legal obligations in this area is key to avoiding potentially huge financial penalties.

Common Mistakes with Modern Awards

As a business owner, you may be familiar with the modern award system. A modern award outlines the entitlements that an employee in a particular role and industry should receive. There are currently 122 awards, all of which specify:

  • base rates of pay;
  • overtime rates;
  • allowances; and
  • penalty rates.

Because the system is extremely complex, mistakes can occur in the classification and payment of employees. In order to correctly pay staff, an employer must know: 

  • if an award applies; and
  • which award applies to each specific employee. 

Different awards may apply to employees in the same business, and after determining your employee’s award you must ensure that you assign the employee to the correct ‘level’ of that award. 

For example, a shop assistant might be considered a level 1 employee under the retail industry award. However, if they are second-in-charge of the store, they might be classified as a level 2 employee

Some awards specify how employees should progress from level to level. For example, an employee may progress to the next level within the award, or to another separate award, after 3 months of employment. A common error is failing to recognise when an employee has moved up a level.

Even if you are confident that you have applied the correct award and level to each staff member in your team, calculating wages in daily practice is another matter. Mistakes can easily be made in these calculations because of the many differences between awards and award levels.

For example:

  • overtime starts at different times depending on which award your employee is under; and
  • certain awards require you to provide your employees with paid breaks

In addition, award rates increase every year on 1 July, and many employers fail to apply these annual changes.

Penalties and Remedies for Underpayment of Staff

As a business owner, if you are found to have underpaid your staff you will need to pay: 

  • the relevant backpay; and
  • extra penalties.

The Fair Work Commission can apply additional penalties of up to $63,000 per breach of the relevant modern award.

For example, if you paid your employee below their hourly rate and paid them the incorrect overtime rates, you may have breached the award twice. This means that you could face a penalty up to $126,000.  For businesses that seriously breach the award, penalties can be up to ten times this amount. Examples of serious breaches include: 

  • ongoing issues with compliance; and
  • deliberate underpayment of staff.

A Melbourne business recently faced penalties from the Fair Work Ombudsman in the sum of $257,000 for a combined underpayment of staff in the sum of $73,347. These penalties are payable in addition to backpaying any underpayments, meaning that the total financial consequences of underpaying staff can be huge.

If you are a franchisor, it is important to be aware that you may be liable for breaches of the modern award system by your franchisees. You should ensure that all franchisees across your franchise network comply with the relevant regulations for your industry.

Key Takeaways

The modern award system in Australia is very complicated. Businesses often apply awards or award levels to their employees incorrectly. As a business owner, you may face penalties of up to $63,000 for each breach of the award in addition to backpay. These penalties apply even to unintentional breaches. As the Fair Work Ombudsman is paying close attention to the issue of underpayment, it is essential that you ensure all past, present and future payments to your employees are correctly calculated. If you are unsure about your business’ award compliance, LegalVision can help you to understand your potential liability. We can also assist with an audit of your entire past and present team. Our audit will identify: 

  • any underpayment or award application issues;
  • your potential liability; and 
  • your options to proceed.

Contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page to discuss your business’ next steps.


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