You've Underpaid Employees. Here's How to Make It Right.

Discovering that you've been underpaying employees is a gut-punch moment for any business owner. The immediate questions — "How much do I owe? Will I be fined? Could I go to jail?" — can be paralysing. But what you do in the next few weeks matters enormously. Businesses that self-report and proactively remediate underpayments typically face penalties reduced by 50–80% compared to those discovered through complaints or audits.

Here's the step-by-step process for making it right — financially, legally, and operationally.

Step 1: Quantify the Full Scope

Before taking any external action, you need to know the complete picture. A partial remediation that misses some employees or some pay periods is worse than no remediation — it signals negligence rather than good faith.

Review every employee who may be affected. For each one, compare actual payments made against the correct Award entitlements for every pay period in the affected timeframe. This means checking: base hourly rates against the Award pay guide for the relevant classification level, penalty rate calculations for weekends, public holidays, and overtime, allowances specified in the Award (meal, travel, uniform, split shift, etc.), leave accrual and payment accuracy, and superannuation on any shortfall amounts (super is payable on underpaid amounts).

Be thorough. If you're going to self-report, you want to report everything at once. Discovering a second tranche of underpayments after you've already reported the first undermines your credibility and reduces the good-faith benefit of voluntary disclosure.

For most businesses, this audit requires professional assistance — either from an employment lawyer with payroll expertise or from a managed payroll provider who specialises in Award interpretation. The cost of professional calculation is trivial compared to the cost of getting it wrong.

Step 2: Understand Your Legal Position

The legal framework for underpayment in Australia has tightened significantly in recent years. Civil penalties for non-compliance with the Fair Work Act are up to $93,900 per contravention for individuals and $469,500 for companies (per contravention — and each underpaid employee for each pay period can constitute a separate contravention).

Criminal wage theft provisions now operate in several jurisdictions, with penalties including imprisonment for deliberate or reckless underpayment. The threshold between "inadvertent" and "reckless" isn't always clear — an employer who suspected their payroll might be wrong but didn't investigate could be found reckless.

However, the FWO's compliance and enforcement policy draws a sharp distinction between businesses that self-report, cooperate, and remediate voluntarily, versus those that are discovered through complaints or investigation. Voluntary disclosure is the single most effective way to reduce your penalty exposure.

Step 3: Self-Report to the Fair Work Ombudsman

The FWO has a self-reporting pathway for businesses that discover underpayments. A strong self-report includes: a complete audit of all affected employees and pay periods, the methodology used to calculate correct entitlements, the total underpayment amount, a proposed remediation timeline (payment plan if the amount is large), evidence of the root cause (misconfiguration, classification error, outdated rates), and a description of the systemic changes you're implementing to prevent recurrence.

The quality of your self-report matters. A thorough, well-documented disclosure that covers everything is treated much more favourably than a vague acknowledgement that "some employees might have been underpaid."

Step 4: Remediate — Pay What's Owed

Pay the calculated shortfall to all affected employees, including superannuation on the underpaid amounts. If the total amount is large and you can't pay it in one lump sum, negotiate a payment schedule with affected employees and the FWO — demonstrating willingness to pay is critical even if the full amount requires staging.

Communicate with affected employees clearly and honestly. Explain what happened, how much they're owed, and when they'll receive it. Transparency at this stage preserves trust and reduces the likelihood of employees seeking their own legal action.

Step 5: Fix the System

Remediation addresses the past. Fixing the system prevents the future. This usually requires: a complete payroll audit and reconfiguration by someone with genuine Award interpretation expertise, correct classification of every employee against the relevant Award, updated pay rates reflecting the current Annual Wage Review, proper configuration of penalty rates, overtime thresholds, and leave accrual, and an ongoing managed payroll process that includes proactive compliance monitoring — not just transaction processing.

The root cause of most underpayments is not malice — it's the gap between the complexity of Australia's Award system and the expertise of the person configuring the payroll. Closing that gap permanently requires professional Award interpretation, not just better software settings.

The Cost of Delay

Every pay run that passes with the error uncorrected increases your total liability. If you've discovered an underpayment, acting immediately limits the financial exposure and demonstrates the good faith that reduces penalties. Delay — even if motivated by fear or uncertainty rather than bad intent — increases both the dollar exposure and the reputational risk.