Circular 2024/05: Correction of underpayment of wages and entitlements

Purpose  

1. Commonwealth employers have legal obligations under the Fair Work Act 2009 (FW Act) to ensure their employees are paid correctly.  
2. This circular replaces Circular 2020/2: Correction of underpayment of wages, and provides:

• guidance on steps agencies should take to reduce the risk of employee underpayments and expectations on actions agencies should take in the event underpayments occur, and   
• an overview of the penalties that may apply in the event employees are underpaid. 

Expectations for Commonwealth employers 

Key expectations  

3. As model employers, Commonwealth agencies must take a proactive approach to ensuring employees are paid their entitlements correctly. This includes salary, allowances, superannuation and voluntary and mandated deductions. 
4. If an underpayment occurs, agencies should make corrections as soon as possible and take action to ensure the factors that led to the underpayment (for example, payroll system errors) are rectified.  
5. Any serious or significant underpayment should be self-reported to the Fair Work Ombudsman and notified to the Australian Public Service Commission.   
6. Agencies should examine existing practices to make certain there is a comprehensive framework in place to ensure FW Act, industrial instrument and employment contract compliance and to prevent underpayments occurring.  
7. At a minimum, agencies should consider the following matters.

Oversight and awareness 

8. Underpayments can arise due to a number of reasons including:

• the incorrect application of industrial instruments or legislative entitlements such as long service leave or superannuation 
• not updating pay rates where they fall below the minimum award amounts following the Fair Work Commission annual wage review decision 
• inadequate payroll systems and coding errors 
• inadequate training and resourcing for managers and payroll staff, and/or 
• failure to regularly check specific conditions such as overtime hours, and ensuring the correct application of entitlements where cohorts of employees are working under different arrangements (for example, weekend or rostered work patterns).

9. Agency Heads should ensure FW Act compliance is considered as part of their governance framework and that adequate policies and processes exist to monitor compliance and mitigate risks. 
10. Agencies should consider whether employees such as HR and Workplace Relations, payroll staff and managers have adequate training and the resources needed to ensure entitlements are being paid correctly. 
11. All staff responsible for managing or supervising employees should be made aware of the serious consequences that may arise if employees are not paid correctly, and understand their obligation to take appropriate action if they become aware of a potential issue. 
12. Agencies should take steps to ensure employees understand their entitlements and there is a mechanism for them to raise concerns. Where concerns are raised there should be a process to investigate and resolve concerns promptly. Individual employee concerns should not be considered in isolation if there is a risk of other employees being impacted.

Systems and processes 

13. It is strongly recommended that agencies set a regular schedule for reviewing and auditing payroll processes. 
14. Many agencies do not process their own employees’ payroll, either using a shared service provider or outsourcing to a third party. These arrangements do not remove an agency’s responsibility to ensure employees are paid correctly. 
15. Agencies should have processes in place to audit payroll procedures, monitor payroll information and liaise regularly with their payroll provider to ensure they are operating correctly.  
16. Agencies also need to ensure their payroll provider:

• understands the operation of the relevant industrial instruments, and 
• is informed in a timely manner of changes to: 
   
  • terms and conditions in industrial instruments, including wage increases 
  • individual employee circumstances that impact on terms and conditions, and  
  • machinery of government changes.
     

17. If an agency is unsure of the interpretation or application of an entitlement, it may be prudent to seek legal advice. 
18. Agencies also need to ensure they are compliant with their record keeping obligations under the FW Act and the Fair Work Regulations 2009.

Correction of underpayments 

19. Agencies need to act promptly to rectify any underpayments and to consult with affected employees and their representatives.  
20. Agencies should also conduct a review of systems and correct any issue that has contributed to the underpayment, taking appropriate steps to avoid repeat occurrences.

Reporting of underpayments 

21. Where an agency becomes aware of a serious or systemic underpayment, it must self-report to the Fair Work Ombudsman. 
22. Isolated payroll errors resulting in underpayments to employees over a short period of time (up to 12 months) can be dealt with internally, as long as:

• employees are appropriately informed of the underpayment;  
• employees are back paid in full as soon as practicable; and 
• changes are implemented to ensure the error does not happen again.

23. Serious errors or those that occur over a significant period of time and/or impact multiple employees, must be reported.  
24. Reports to the Fair Work Ombudsman should be made directly to the Fair Work Ombudsman’s Corporate Assurance team via email at corporateassurance@fwo.gov.au. 
25. Agencies should also report serious or significant underpayments to the Australian Public Service Commission at workplacerelations@apsc.gov.au.

Potential consequences of underpayments    

26. Agencies should be aware of the serious penalties that can be imposed on Commonwealth employers if underpayments occur, including the potential for criminal liability for intentional underpayments from as early as 1 January 2025. 
27. Underpayments can result in disputation, employee recovery action and liability to pay civil penalties.  
28. In addition, the Fair Work Legislation Amendment (Closing Loopholes) Act 2023 and the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 amend the FW Act to:

• increase the maximum civil penalties a court may impose for certain contraventions 
• introduce a new lower threshold of recklessness for ‘serious contraventions’ of the FW Act, and  
• introduce a new criminal offence for intentional underpayment or non-payment of employee entitlements.

Criminal offence     

29. Under the new provisions, an employer will commit a criminal offence if:

• they are required to pay an amount to an employee (such as wages), or on behalf of, or for the benefit of an employee (such as superannuation) under the FW Act or an industrial Instrument (such as an Enterprise Agreement or Modern Award), and 
• they intentionally engage in conduct where the intended result was a failure to pay the required amount to, on behalf of, or for the benefit of, the employee on or before the day the amount is due to be paid.

30. Honest mistakes will not be caught by the wage theft offence.

Who can be held liable?  

31. Body corporates, the Commonwealth and individuals can all be prosecuted under the wage theft provisions.  
32. An agency may have a relevant 'intention' to engage in conduct that results in the failure to pay a required amount to an employee if it expressly, tacitly or impliedly authorised or permitted the commission of the offence.  
33. The knowledge, conduct and intention of Agency Heads and/or Senior Executives would be relevant, as would the extent to which the Agency has created and maintained a culture (i.e., attitudes, policies, rules, courses of conduct or practices) that directed, encouraged, tolerated or led to non-compliance with the FW Act or failed to create and maintain a corporate culture that required compliance.  
34. An individual may have a relevant ‘intention’ to commit an offence if they mean to engage in the conduct. For example, intention may be established on the part of a senior manager if they direct a payroll officer to continue to use a calculation method knowing that employees would be underpaid as a result.

Criminal offence penalties  

35. For Commonwealth employers, the offence will carry a maximum fine of:

• 3 times the amount of the underpayment, if the court can determine that amount, or  
• 25,000 penalty units ($7.825 million as at June 2024).

36. For individuals, the penalty will be a maximum of ten years imprisonment, and/or a maximum fine of the greater of:

• 3 times the amount of the underpayment, if the court can determine that amount, or  
• 5,000 penalty units ($1.565 million as at June 2024).

Investigation  

37. The Fair Work Ombudsman will be responsible for investigating the new criminal offence. The Fair Work Ombudsman will refer matters to the Commonwealth Director of Public Prosecutions or the Australian Federal Police for consideration, and prosecution where appropriate. 
38. If an employer identifies underpayments, they may be able to seek safe harbour from criminal prosecution by reporting the matters to the Fair Work Ombudsman and applying for a cooperation agreement. Information on the process will be published by the Fair Work Ombudsman closer to the commencement of the offence.  
39. The offence will commence on the later of 1 January 2025, or the day after a Voluntary Small Business Wage Compliance Code is first declared. 
40. The offence will apply to intentional underpayments that occur after the offence commences.

What should agencies do?  

41. The new offence does not create any new obligations for employers to pay employees their correct entitlements. However, agencies are encouraged to consider the legislative changes and their current governance, practices and procedures to ensure there is a comprehensive compliance framework in place.

Resources  

42. The Department of Employment and Workplace Relations has published a fact sheet on the criminal offence: Compliance and enforcement: Criminalising wage theft - Department of Employment and Workplace Relations, Australian Government (dewr.gov.au) 
43. The Fair Work Ombudsman has also published guidance on the criminal offence: https://www.fairwork.gov.au/about-us/workplace-laws/legislation-changes/closing-loopholes/criminalising-wage-underpayments-and-other-issues  
44. Agencies should also be aware of the Fair Work Ombudsman’s Compliance and Enforcement Policy which is updated from time to time: https://www.fairwork.gov.au/sites/default/files/migration/725/compliance-and-enforcement-policy.pdf

Further information  

45. Agencies seeking further information on this circular should contact WorkplaceRelations@apsc.gov.au.