Are you inadvertently underpaying employees?

Underpaying employees

Lately it seems a week doesn’t go by without a new revelation about a high-profile business being found to be underpaying employees.  Grill’d, ABC, Qantas, Super Retail Group, Commonwealth Bank, Woolworths, and the list goes on. If you’re interested in all the details of these scandals, SBS news is keeping a running list.

Since payroll is increasingly a high-risk area for Australian employers, it’s timely for businesses of all sizes to review their payroll processes to ensure they are getting it right.


How do these underpayments occur?

Whether these top end of town failures come down to a misunderstanding, bad processes or blatant wage theft will no doubt be revealed as the Fair Work Ombudsman investigates.

In our experience, underpayments by smaller businesses are usually the result of these common mistakes:


1. Misunderstanding modern awards, registered agreements and legislation terms

Minimum conditions at work can come from registered agreements, awards or legislation.

When a business has a registered agreement in place and it covers the work that the employee does, then the minimum pay and conditions in the agreement will apply.

If there’s no registered agreement that applies and an award covers the employer and the work the employee does, then the minimum pay and conditions in the award will apply.

There are more than 100 industry and occupation awards that cover most people working in Australia. This means many employees who aren’t covered by an agreement will most likely be covered by an award.

Where no award or agreement applies, the minimum pay and conditions in the legislation will apply.

Note that an employer can be covered by more than one award depending on the jobs that the employees do. For instance, in a building and construction business, most employees will be covered by the Building and Construction Award but administration staff would be covered by the Clerks Award.

Your employee’s relevant award will set out the minimum terms and conditions of their employment on top of the National Employment Standards (NES) such as:

  • Pay rates
  • How hours of work and rostering arrangements
  • When overtime, penalty rates and allowances are to be paid
  • What allowances they are entitled to

You can find out more about awards, agreements and legislation pertaining to your employees on the Fair Work Ombudsman website.


2. Annualised salary arrangements

Annualised salaries roll up the overtime and penalty rates workers are entitled to under an award into an annual sum. This is often done for convenience. It’s only lawful if employees are paid the same or more than their award entitlements. Therefore, it requires regular checking and monitoring.

In the case of Woolworths, the supermarket giant has admitted underpaying about 5,700 staff by up to $300 million. Staff were mostly department managers on annualised salaries (of about A$73,000). Their salaries were supposed to cover ordinary working hours, overtime and any other payments they were entitled to under the General Retail Industry Award. But when the actual hours being worked were calculated, it turned out the salaries amounted to less, not more, than the award.

Where annualised salary or over-award arrangements are in place, employers are accountable for ensuring that the payment is sufficient to cover the actual award entitlements. This can only be achieved by keeping accurate records and doing a reconciliation of Award entitlements against actual wages.


3. Confusion over part-time and casual worker entitlements

Some awards require overtime penalty rates to be paid to part-time employees when they work more than their contracted hours. Employers often incorrectly assume overtime is paid when a part-time employee works more than 38 hours a week.

If a worker is contracted to work 20 hours a week, any time they work more than 20 hours should be paid at overtime rates.

Another potential source of confusion is what constitutes ordinary hours, which can differ between and even within awards. One classification might include Saturdays in ordinary hours, while another may not. Even in the same industry, payment of overtime provisions may vary depending on your type of business.


4. Unpaid work experience or internships

For many young people, internships, work experience and unpaid trials can provide valuable experience and a stepping-stone to their chosen career.  These arrangements can be initiated by employers, the person wanting the work or experience, or education / training institutions. But is unpaid work legal?

Employers need to be aware that, depending on the nature of the arrangement, the person doing the unpaid work may be considered an employee under the Fair Work Act 2009 (FW Act) and thus be entitled to the legal minimum rate of pay and entitlements for the type of work they’re doing. Whether an unpaid work arrangement is lawful under the FW Act depends on:

  • Whether an employment relationship exists, or
  • Whether the arrangement involves a vocational placement

No one factor determines the existence of an employment relationship.  A worker is regarded as an employee if they satisfy a multi-factor test. Read more about unpaid internships and work experience in our article on unpaid work.


5. Superannuation miscalculations

Employees are to be paid super when:

a) They are over 18 years of age and earn at least $450 (before tax)


b) They are under 18 years of age, earn at least $450 (before tax), and work 30 hours per week or more

It doesn’t matter if these staff members are employed on a full-time, part-time or casual basis. If they fit the above criteria, you need to pay super on their behalf. In fact, the ATO may also regard some contractors as eligible employees for superannuation purposes.

The ATO has a handy decision tool to help you work out whether an employee is eligible for super.

Currently, the amount of super due for each employee is 9.5% of their Ordinary Time Earnings. This is not always an employee’s total salary package. It generally includes base salary or wages, leave entitlements, some allowances and commissions, but usually, not overtime.

Make sure your software is current and set-up to manage the ATO’s single touch payroll system. Any mistakes must be disclosed to the Australian Taxation Office (ATO) and will incur administration fees and a fine, plus interest on the repayment.

Also be aware that Australia’s superannuation law is strict with regards to paying by the due date. Even if you’re late by one day, you can be penalised.

If you fail to meet the quarterly superannuation due dates, you may have to pay the Superannuation Guarantee Charge (SGC) and lodge a SGC statement. Late super is not tax deductible, and penalties and interest are applied (10% p.a. interest plus $20 admin fee per quarter per employee). Therefore, it is in your best interests to be proactive and pay early.


What should you do if you uncover an underpayment of wages in your business?

The Fair Work Office suggests the following steps in rectifying underpayments:

  • Determine the duration of the underpayment
  • Determine the amount actually paid
  • Determine what the entitlement was
  • Calculate the difference
  • Make a back-payment
  • Identify the root cause of the error, and implement systems to prevent another occurrence


Resources offered by the Fair Work Ombudsman:

The Fair Work website offers a wealth of information to help employers get it right. In addition to information on awards and calculating leave and entitlements, you may find the following helpful information:


Further help:

If you have any questions in relation to payroll processing, please contact your usual Marsh & Partners advisor or get in touch with us on (07) 3023 4800 or at

If you require ongoing payroll assistance, consider outsourcing your needs to our bookkeeping service.

As well as bookkeeping, BAS preparation and reporting; our bookkeeping team are payroll experts and offer expertise in:

  • Payroll set up
  • Payroll processing
  • Payroll Tax advice and calculations
  • Payment summaries
  • Superannuation
  • STP setup and reporting

Find out more about our Bookkeeping Services.

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