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HR Outsourcing

Underpayment of Wages

Underpayments are fast becoming the Achilles heel of the modern business world, with many Australian household names in the media spotlight recently for failing to properly compensate employees.

The Fair Work Ombudsman is cracking down on ‘wage theft’ after a number of prominent Australian names such as Woolworths, Qantas, 7-Eleven, the Commonwealth Bank, Dominos, Oliver Brown, RSPCA NSW and Michael Hill Jewellers have come under fire for underpaying their employees.

With the regulator, Members of parliament and legal professionals all calling for employers to be compliant with workplace legislation, it is now more important than ever for organisations to ensure their remuneration processes and policies are transparent and clearly communicated.

All employers must ensure that they are paying employees the minimum pay rates and all associated entitlements as prescribed by their relevant Modern Award or Enterprise Bargaining Agreement. This is an involved process of assessing an employees’ role and their skill level and mapping this against the Modern Award or Enterprise Agreement’s classification structure.

Failure to meet any minimum standards results in employee underpayment. When running a business, with its many considerations, it can be easy to miss key changes to employee pay rates and associated entitlements.

Below are the seven most common ways which underpayment mistakes can occur and their repercussions to help ensure your business is not faced with any costly underpayment issues.

1. Short-paid hourly rates, penalty rates and overtime

Likely the most common form of underpayment, this occurs when employers purposely or accidentally pay below what the industrial instrument stipulates. In June of this year, Sushi Bay in Canberra was fined $103,680 and its franchise owner Rebecca Yi Jeong Shin personally fined a further $20,736 for underpaying their staff members.

It is therefore crucial that all employers are aware of the industrial instrument that governs their industry and are knowledgeable of all minimum conditions that they must meet.

2. The deprivation of statutory leave

Often times a payroll system error can lead to the miscalculation of employee leave. It is therefore very important that anyone processing pay is knowledgeable of the system and is able to identify and rectify errors quickly. Also, ensuring employee records are kept up to date can help keep information clear and relevant.

3. Inappropriate deductions from wages

In 2014 poultry company Baiada was investigated by the Fair Work Ombudsman for manipulating foreign workers into living in accommodation owned by labour contractors and having the rent compulsorily deducted from their pay. This resulted in legal action taken against the company and they were fined for the infraction.

It is important that employers are aware of which payroll deductions are legal. Under the Fair Work Act 2009, employers can only make payroll deductions if both parties agree in writing, the Modern Award or Enterprise Bargaining Agreement allows, if it is permitted by law or if a court of law orders for the deduction to occur. The deduction must also be principally of benefit to the employee.

4. Work performed ‘off the books’

Any employer found to be engaging employees without proper and legal documentation does not only risk being fined by the Fair Work Ombudsman, but by the Australian Taxation Office and other regulatory bodies.

5.Sham contracting

It is an offence under the Fair Work Act 2009 (FWA) to claim that a worker is a contractor when they are in fact an employee. This is generally done in order to avoid paying all necessary entitlements as per the Modern Award of relevant Enterprise Bargaining Agreement. Hefty penalties apply.

It is very important for employers to know what differentiates an employee from a contractor and classify them appropriately in addition to ensuring that they are compensated according to their relevant Modern Award or Enterprise Bargaining Agreement.

6. Internships and work trials

Employees must be paid unless they are on vocational placement as defined by the Fair Work Act 2009. This means that unless the work is required by an authorised educational course, workers are not on vocational placement and therefore must be treated as employees and paid appropriately.

Failure to pay an employee for work outside of the guidelines set above can attract financial penalties from the Fair Work Ombudsman as demonstrated in 2014 when an Asian grocery store, Marina Market in Adelaide was ordered to repay wages to employees who engaged in over 12 hours of unpaid trials.

7.Commission-only arrangements

In 2015 construction company Longridge Pty Ltd employed commission-only sales staff and failed to pay them an additional hourly rate in contravention to the Miscellaneous Award 2010. Longridge Pty Ltd was ordered to repay employees and was fined $29,700 for the infraction.

The only time that an employer may engage an employee for commission-only work is when the applicable Modern Award permits it. It is therefore crucial that employers familiarise themselves with the terms and conditions of the industrial instrument that governs their industry.

Need further HR advice on avoiding costly underpayment errors? Need help with Modern Award of Enterprise Bargaining Agreement interpretation?

Get in touch – as specialist HR Consultants, we’d love to hear from you: or 1300 887 458