Small businesses shouldn’t fear new underpayment laws: ‘Genuine mistakes will not be prosecuted’

The Fair Work Ombudsman has assured small businesses that they will not be penalised under the newly introduced underpayment laws if they put forward an honest effort to pay the right wages and other entitlements for their employees.

With new underpayment laws having commenced on 1 January 2025, many businesses throughout Australia have looked upon the new laws as yet another example of over-compliance; however, this time, the consequences for contraventions are extremely strong.

As previously reported on HR Leader, the harsher consequences include tougher penalties for corporate senior executives involved in intentionally underpaying employees, where they could potentially face up to 10 years in prison.

These prison sentences match the maximum sentences for many serious crimes under various criminal laws, yet they’ve never been applicable to workplace conduct before.

HR Leader reached out to Paul O’Halloran, partner and head of office at Dentons, about the law changes and how the new regulations may affect employers moving forward.

“The effect of these laws is that wage compliance will be elevated to the level of industrial accident prevention in workplaces and treated in the same way as avoiding serious injury and death of employees, which under health and safety laws can also attract prison sentences,” said O’Halloran.

“For too long, some employers have relegated award and wage compliance to HR teams – now – with the threat of prison sentences – award compliance will need to be monitored from the top down, and I believe that was the government’s policy rationale from the beginning.”

Although these harsher penalties may worry businesses about their payroll slip-ups, the FWO has ensured businesses, especially small businesses (fewer than 15 employees), that their honest efforts will not be met with these harsh penalties.

“Genuine mistakes will not be prosecuted under the new criminal underpayment laws that commenced on 1 January,” said Fair Work Ombudsman Anna Booth.

“We understand that small-business employers who work diligently to do the right thing by their employees may be concerned about being impacted by the criminalisation of intentional underpayments.

“They should rest assured – the offence applies only to intentional underpayments, and compliance with the Voluntary Code means we can’t refer a small business for possible prosecution.”

The code that Booth mentions also took effect on 1 January 2025, in parallel with the criminal underpayment offence, and can be used by businesses under the Fair Work Act that employ fewer than 15 employees. A small-business employer would have complied with the code in relation to an underpayment if they did not intend to underpay their employee.

According to the FWO: “The code provides a non-exhaustive list of examples of actions that a small-business employer can take, and reliable sources from which they may obtain information, to demonstrate an underpayment was unintentional.”

These actions include:

• “Making reasonable efforts to ascertain the right rates of pay and entitlements for their employee, and reasonable efforts to stay up to date with their obligations related to paying their employee. This includes referring to any award or instrument that applies to the employee and changes made to that award or instrument.”

• “Considering and relying upon information that the employer reasonably believed to be accurate (such as the employee’s role, duties, classification, relevant qualifications, age, hours and location of work).”

• “Seeking information or advice from reliable sources in relation to paying applicable amounts to the employee. Sources can include industrial associations of employers or employees (i.e. unions); lawyers or professional industrial consultants; payroll processing services; the Fair Work Ombudsman, including its website and resources; and the Fair Work Commission (which is separate from the FWO), including its website and resources.”

• “Taking reasonable steps to rectify any underpayments identified and to remedy any deficiencies in an employer’s systems.”

“Individual employers’ circumstances will be taken into account under the Voluntary Code,” Booth said. “Good faith efforts to meet all your employees’ entitlements and fix any problems are a focus.”

“For instance, if a small-business employer proactively undertook an audit of their payroll compliance, and, having found any inadvertent failures to meet their obligations, promptly responded with full back payments and fixing their systems to prevent further issues, this is an example of conduct that would suggest compliance with the Voluntary Code.”

“Intentional underpayments are unacceptable, and the Fair Work Ombudsman will investigate and refer for possible prosecution conduct caught by the new criminal underpayment offence. But there is no reason employers can’t take reasonable steps to get their compliance right.”