How Can I Prevent Wage Underpayment?

In Short

• Ensure all employees, including casuals and part-timers, are paid correctly and per Fair Work obligations.
• Regularly review and update your payroll systems to reflect changes in legislation and employee classifications.
• Keep detailed records of employee work hours, pay rates, and any variations to employment contracts.

Tips for Businesses

Regularly audit your payroll to ensure compliance with Fair Work regulations. Provide ongoing training for staff managing payroll to inform them of their legal obligations. Implement a system for tracking work hours accurately and consult a legal expert if you’re unsure about wage calculations or employee entitlements.

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Table of Contents

• How Does Wage Underpayment Occur?
• Calculating Wage Underpayment
• Managing Remediation
• Key Takeaways
• Frequently Asked Questions

Many of Australia’s big brand-name companies are being swept up in the unfortunate trend of employers who have underpaid their employees. Pizza and jewellery store chains, banks, airlines, broadcasters, supermarkets – even celebrity chefs are facing the brunt of reputational damage as the media reports on one company after another who have either admitted to or have been caught underpaying employees (coined ‘wage theft’). 

Wage theft in Australia is now illegal and subject to huge penalties. If you are worrying that it might happen to your company on your watch, you are right to be concerned: even with a plan in place, underpayment of workers can still happen, but there are certainly ways to alleviate the risks. This article will outline:

• how wage underpayment occurs;
• how to calculate it when it does occur;
• what remediation you will require; and
• how to mitigate the risk of it occurring in the first place.

How Does Wage Underpayment Occur?

Even with the best-laid plans and risk management programs, wage underpayment can still occur. It is either deliberate or inadvertent – and for the most part, it is the latter.

Deliberate Underpayment

The first of the recent high profile wage underpayment cases to highlight this issue was the 7-Eleven franchise chain. In 2016, the Fair Work Ombudsman found that a number of franchisees had been deliberately falsifying records to disguise wage underpayment. Fair Work also found that 7-Eleven did not adequately detect or address non-compliance. Franchisees consciously underpaid employees, or paid them the correct wages but required them to make cash payments back to their employer.

Inadvertent Underpayment

Most underpayment cases have occurred because employers have struggled to interpret and apply the correct salary entitlements. Under Australian workplace relations laws, the key sources of employee entitlement are modern awards and the Fair Work Act. Companies not relying on awards leverage the legislation.

Awards are particularly complicated and are the primary source of the recent underpayment issues. In Australia, there are more than 100 modern awards, each outlining minimum pay rates and employment conditions for employees based on their industry or occupation. Calculating salaries based on awards can be challenging, with different rates for Saturdays and Sundays, overtime rates, allowances for uniforms, and so forth.

Mistakes usually occur when:

• provisions in the award are misinterpreted;
• all-encompassing salaries are incorrectly calculated in the first place; or
• salaries are based on estimated hours an employee will work, but their roster then changes, making the original estimate incorrect.

How Do I Know if Underpayment is Occurring? 

The fact is, you might not know that underpayment has been occurring until an employee makes an underpayment claim. Underpayment can also slip through the cracks of an internal audit. If so, it is difficult to prove to the Fair Work Ombudsman that you did not deliberately ‘miss’ the underpayment in the audit.

Calculating Wage Underpayment

Once you have identified that there is an issue, you need to calculate how much you have underpaid your employees. How difficult this process depends on several factors, including the:

• number of employees affected;
• size of the underpayment;
• source and nature of the entitlement; and
• quality of your record keeping.

Should I Bring in an External Auditor?

Auditing salaries to check for underpayment is challenging, and you may well need to involve an external auditor. Before doing so, consider enlisting the help of an employment lawyer. They can objectively assess and interpret the awards and cross-reference them against your employees’ salaries. Here, they can confirm whether or not you have correctly calculated the salaries. They can also recommend whether or not you should bring in an external auditor.

Furthermore, after your lawyer reviews the awards relevant to your workforce, they may be able to point out where you have the right not to pay a particular entitlement. This advice will put you in a stronger position should you end up in court. This is because your company is much less likely to receive a penalty if you can demonstrate that you did not deliberately avoid paying the entitlement but received legal advice not to pay it.

When undertaking a complex underpayment project of this scale, technology can assist in creating a structured process. Here, technology can track how many issues have been: 

• identified;
• addressed; and
• resolved.

You can then easily report this to the dashboards of senior management. Your legal advisor can supply the technology, which they also use to ensure you are compliant on an ongoing basis.

Managing Remediation

After you have identified and calculated the issue, your next step is to make the repayments. You will also need to handle communication on the underpayment. As media headlines attest, this is a difficult process to navigate.

How you should handle communication will differ depending on the scale of the issue. If you have only underpaid a handful of employees, and you have rectified this quickly with systems put in place to prevent it from happening again, the communication process will be different than it would if you had discovered that your business owed $300 million in underpayments.

Sending out a letter of apology to employees and issuing repayments may simply not be enough. However, approaching the Fair Work Ombudsman and self-confessing can be fraught, too. This is because the Ombudsman could use this admission against you if they ever prosecute your company.

On the other hand, having a proactive approach to handling public relations before any issues arise could be better in the long run. Regardless, you should handle the decision on whether to self-identify carefully and consult workplace lawyers.

How to Prevent Wage Underpayment

Ensure your employees are paid correctly with our free guide on how to prevent wage underpayment.

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Key Takeaways

The majority of employers are law-abiding and want to do the right thing by their employees. But, interpreting awards can be complicated and fraught with difficulty. Seeking external advice from an employment lawyer will help ensure your salaries are correct in the first place. Should the worst occur, you will be able to demonstrate to the Fair Work Ombudsman that you proactively sought to do the right thing.

Regardless, if you find yourself in the midst of an underpayment situation, seeking independent advice will ensure that you can remedy the situation with the best possible outcome for both you and your employees. It will also help keep your company’s reputation intact.

If you have any questions about how to deal with an underpayment situation, our experienced employment lawyers lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions