Reducing Underpayment Risk
What is an Underpayment?
An underpayment occurs when a business pays an employee less for their work than required by an employment contract, award, or enterprise agreement that applies to their employment. An underpayment may cause a business to breach the Fair Work Act 2009.
How do underpayments occur?
Underpayments can be deliberate or inadvertent. Inadvertent breaches typically occur because payment obligations are misunderstood or misapplied. Alternatively, technology, process or system deficiencies can result in underpayments occurring without the knowledge of business decision makers.
Deliberate underpayments can attract criminal sanctions under workplace laws. Non-deliberate underpayments can also attract serious civil penalties, depending on the magnitude and seriousness of the underpayment. The Fair Work Ombudsman may commence legal proceedings or take other steps to satisfy itself that underpayments are remediated appropriately. These are obviously things that all employers should try to avoid.
This all sounds very straightforward – where is the complexity?
Underpayments can be complex to identify and quantify because they often depend on matters of interpretation in awards or enterprise agreements. A business may be in the process of transformation or change when it discovers possible compliance gaps. Alternatively, routine reviews can bring certain unsanctioned work practices / patterns to the attention of managers. Sometimes the issue will arise following employee or union complaint.
Responding to potential underpayments can involve navigating significant liability and legal risk. It is essential to get legal advice if you suspect that an underpayment has occurred.
Key Sources of Underpayment Risk
Our workplace relations laws are complex to navigate. There are multiple, overlapping sources of legal obligation. There is also no central, easily to understand, plain English source of truth for employers regarding their obligations. Well-intentioned employers can be genuinely caught out from time to time. This document introduces the key sources of risk for employers and suggests simple strategies to minimize or eliminate underpayment risk.
Sources of Risk
1. Award / EBA coverage
There is a heightened risk of underpayments where employees are award or EBA covered. Industrial instruments often contain complex and unclear rules about entitlements that can be overlooked or incorrectly applied. Sometimes there are multiple interpretations.
2. Set and forget approach to annualised salary
Employee cohorts who are paid close to minimum applicable rates of pay are more likely to be underpaid.
This risk is magnified where employers use a ‘set and forget’ approach where annualised salaries are not regularly reviewed as minimum rates increase over time.
3. Non-standard hours
Employee cohorts who work substantial amounts of overtime or who often work during unsociable evening / weekend periods are more likely to be underpaid. For example, rules about overtime / penalty rates in Awards / EBAs can be complex and can catch well-intentioned employers out.
4. Outdated / informal contracts
Employee cohorts whose employment contracts are outdated and / or informal are more likely to be underpaid. For example, contracts may contain ineffective / missing set-off clauses. Contracts can be drafted to minimise risks associated with certain legalistic / technical underpayment claims.
* Why is this important? Intentionally underpaying employees is now a criminal offense under recently enacted workplace laws. Significant civil penalties apply to underpayments generally.
Steps to Minimise Risk
Review the Application of Awards / EBAs Regularly and Carefully
Greater risk for employers arises when multiple factors on the previous slide apply. For example, employers whose workforce is award / EBA covered, who have old employment contracts, who pay at or close to award minimums, and who require employees to work significant overtime / unsociable hours are at significant risk. In these cases, we recommend carefully reviewing the application of award rules relating to overtime, penalty rates, and the like.
Award rules relating to overtime, penalty rates, meal breaks, and the span of ordinary hours can be easy to overlook. Their application can be complex in modern workplaces which require continuous (or 24/7) operation. Engaging shiftworkers also attracts specific rules in most awards.
Review and Update Employment Contracts / Annualised Salaries
Offsetting clauses can be critical to include in employment contracts if there is a possibility that the workforce is covered by an award or enterprise agreement. These clauses can protect employers from certain technical underpayment claims. Our team can provide specific advice about the drafting of appropriate offsetting clauses if required. Annualised salaries should also be regularly reviewed over time.
Consider High-Risk Populations Separately
Shiftworkers and employees who work substantial amounts of overtime / during unsociable hours are at greater risk of underpayment compared to other employees (especially if they are award / EBA covered). It can be worth undertaking regular comparisons of contractual payments to award / EBA entitlements for these populations.
When do I need to get legal advice?
We recommend seeking legal advice if any of the following apply:
You are unsure about how to interpret / apply award or enterprise agreement rules relating to wages, overtime, penalty rates, or other entitlements
You have received a complaint or inquiry about correctly paying wages according to award / enterprise agreement rules and you are unsure about the business’ position
Two or more of the risk factors identified in this document apply to your business and you have not recently reviewed compliance with your industrial obligations
You would benefit from specialised advice about complying with workplace laws because of unique circumstances that apply to your industry or business
Our team has prepared a practical guide to reducing underpayment risk. Please click on the link below view the PDF.
