How the New Underpayment Laws Affect SMEs
The new laws, in force from 1 January 2025, make it a criminal offence to deliberately underpay staff.
With penalties reaching millions in fines or even jail time, these amendments were designed to protect workers, but also mean small businesses must adopt or ensure stringent payroll and record‑keeping practices.
The good news? A new Voluntary Small Business Wage Compliance Code offers clear, practical steps to stay on the right side of the law, and out of trouble.
What are the Changes in the Law?
It is now a criminal offence under the Fair Work Act 2009 (Cth) for employers, including small businesses, to knowingly underpay staff entitlements - an act otherwise known as wage theft. The criminalisation of intentional wage underpayment took effect on 1 January 2025 as part of the reforms introduced by the Fair Work Legislation Amendment (Closing Loopholes) Act 2023 (Cth).
Examples of wage theft include:
Not paying the correct amount (or not paying full stop!) of wages, penalty rates, overtime rates or super to your employees in full or on the day they are expected to be paid
Not paying according to the applicable award or enterprise agreement
Intentionally engaging in conduct that results in the underpayment of employees
What are the Penalties for Wage Theft?
The criminalisation of intentional wage underpayments means that alongside the existing civil penalties in the form of fines or orders to repay the amount owed to the employees, employers may be found guilty of wage theft and can face criminal charges.
In 2020, a cafe franchisee was fined $230,040 for the repeated underpayment of their employees, which totalled to $5,111. The new reforms mean that the FWO is cracking down harder on wage theft.
Before the reforms:
Penalty Units & Fines:
For individuals: up to $99,000
For body corporates: up to $495,000
Imprisonment:
None.
After the reforms
Penalty Units & Fines:
For individuals: if the court can determine the underpayment, the greater of three times the underpayment amount and $1,650,000, or otherwise, a fine of up to $1,650,000.
For body corporates: If the court can determine the amount of underpayment, the greater of three times the amount of the underpayment and $8,250,000, otherwise a penalty of up to $8,250,000.
Imprisonment:
Up to 10 years in prison for individuals involved in the offence.
It is important to note that these provisions don’t apply to certain employees for:
superannuation contributions
payment for taking long service leave payments
payment for taking leave connected with being the victim of a crime
payment for taking jury duty leave or for emergency services duties.
What about Honest Mistakes?
The law draws a clear distinction between intentional wrongdoing and honest misconduct. Honest mistakes in the form of genuine payroll errors or unintentional administrative slip-ups may avoid civil penalties as long as employers act quickly to rectify them.
These reforms aim to safeguard employees from wage theft by imposing strict penalties for deliberate underpayments and repeat offenders. However, it does not operate as a blanket rule by criminalising all acts of wage theft.
My Employee Has Been Underpaid. What Should I Do Next?
For employers who have underpaid employees, the Fair Work Ombudsman (FWO) offers a cooperation agreement, which is a formal, written agreement that employers can enter into with the FWO.
Under this mechanism, employers who voluntarily disclose conduct that may amount to a criminal offence, such as deliberate underpayment of wages or entitlements, and commits to taking corrective action, are eligible for protection from criminal prosecution for wage theft.
While the cooperation agreement is active, the FWO agrees not to refer the employer for criminal prosecution based on the disclosed conduct. However, entering a cooperation agreement does not prevent the FWO from pursuing other enforcement actions. These can include issuing compliance notices, enforceable undertakings or initiating civil litigation to ensure employees are properly compensated.
Imagine a business discovers that a store manager intentionally underpaid overtime and penalty rates to staff.
The business voluntarily informs the FWO, commits to repaying affected employees and upgrades payroll systems to prevent future issues.
By requesting and entering into a cooperation agreement, the business avoids criminal prosecution while resolving the matter cooperatively.
Employers interested in cooperation agreements must submit an application and provide evidence supporting their commitment to rectifying underpayments and improving compliance. The FWO assesses each case individually, considering the circumstances, the employer’s history, and willingness to cooperate fully. You can read more about cooperation agreements here.
How Are Small Businesses Affected by These Reforms?
These reforms may impose additional pressures on small businesses, as employers must now invest time and resources into payroll accuracy and documentation to avoid risk of penalties arising from accidental breaches. Small businesses make up 97.2% of all Australian businesses (ASBFEO) and employ around 44% of the national workforce (ASBFEO). Many operate on tight margins and lack the in-house legal and HR support available to larger enterprises.
Recognising this, the government established the Voluntary Small Business Wage Compliance Code to provide a practical compliance pathway tailored specifically for small businesses.
What is the Voluntary Small Business Wage Compliance Code?
Under this Code, small businesses with less than 15 employees are shielded from criminal prosecution for unintentional underpayments if they can demonstrate they have taken reasonable steps to comply with wage laws. This means:
Small businesses must regularly review pay rates and entitlements to ensure accuracy.
They need to maintain detailed records of hours worked, wages paid and entitlements granted.
If an underpayment is found, businesses must act promptly to rectify the error and back-pay the owed amounts.
Employers should implement robust payroll systems and training to minimise mistakes.
Open communication with employees about pay and entitlements is encouraged to catch issues early.
Compliance with the Code is assessed by the FWO before any decision to pursue criminal charges. If a small business is found to have genuinely complied with the Code but still made an unintentional error, prosecution will be avoided. Small businesses that comply with the Voluntary Small Business Wage Compliance Code are generally ineligible for cooperation agreements because the Code itself protects them from criminal prosecution for unintentional underpayments. We provide an in-depth, plain English explanation of the Code that you can read here.
What Proactive Steps Can Small Businesses Take To Ensure Compliance?
Small businesses can take several practical measures to avoid unintentional wage underpayments and demonstrate good faith under the new criminal underpayment laws effective from January 2025. Key steps include:
Stay Informed and Educated
Regularly check the FWO website for current pay rates, award conditions and compliance updates. The FWO offers:
Implement Robust Payroll Systems
Use reliable payroll software that accurately records hours worked, pay rates, overtime, leave entitlements and any adjustments. Conduct regular audits of payroll records to detect and correct mistakes promptly.
Maintain Detailed Records
Keep comprehensive and accurate records of employee hours, wages, and entitlements for at least seven years. These records are essential for verifying payments and defending against compliance issues if disputes arise.
Promptly Rectify Underpayments
Mistakes happen. What matters is how quickly you respond. If you identify an underpayment:
Back-pay employees as soon as possible
Communicate openly and transparently
Review systems to prevent recurrence
Encourage Open Communication
Create a workplace where employees feel safe raising pay concerns. This enables early detection of payroll issues and avoids escalation.
Seek Professional Advice
When uncertain, consult employment law specialists, payroll consultants, or employer associations to ensure correct interpretation and application of wage laws.
Consider Self-Reporting
If you identify a serious issue whereby significant underpayments are found, proactively self-reporting to the FWO can mitigate legal and reputational risks.
By taking these steps, small businesses can effectively manage wage compliance risks, demonstrate their commitment to fair pay and reduce the chance of criminal penalties under the new laws.
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If you think you may have underpaid your employees, or need help interpreting the Small Business Code, reach out below.
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