Underpayment or "wage theft" has gained significant media attention recently with a string of high-profile companies (including Woolworths, Coles, Star Entertainment Group, the Commonwealth Bank of Australia and Australia Post) being faced with underpayment issues. The Fair Work Ombudsman (the "FWO") in its strategic priorities for the 2021-2022 financial year outlined its continued focus in taking action against large corporate employers for non-compliance with minimum standards and underpayments.

But issues of underpayment are not limited to large companies. The FWO frequently commences investigations, issues compliance notices and brings claims against small-medium employers for underpaying employees. As an employer, what should you do if you discover an underpayment issue?

How does an underpayment issue occur?

Employees are to be paid the entitlements owed to them in their contract of employment, modern award, enterprise agreement or the National Employment Standards ("NES"). Underpayments are not a rare occurrence and can arise due to a number of different reasons such as human miscalculation, payroll error, or not applying the appropriate penalty or overtime rates.

If employers can rectify the amounts owed to employees promptly and ensure systems are in place to prevent future occurrences, then they minimise the risk of substantial action being taken against them.

What to do if you discover an underpayment issue

If an employer becomes aware of an underpayment issue they should adopt the following procedures to rectify the issue and prevent it from happening again.

  1. Locate pay records and determine how many employees were underpaid and for how long

All employers must maintain records of payments made to employees for seven years. From these records employers should be able to ascertain how many employees have been underpaid and how long the underpayment has occurred.

  1. Calculate the full entitlement, amounts paid and the gap

This involves determining what an employee was entitled to be paid and what they were actually paid. Employers should not focus only on wages but calculate penalty rates, overtime, allowances, leave payments, leave loading and other entitlements contained in an industrial instrument. Once the full entitlement has been calculated the amounts paid to the employee can be deducted so that the underpayment can be identified.

  1. Back pay arrangements and communications strategy

Once the amount of the underpayment has been calculated, the employer will need to resolve the underpayment as soon as possible, and ideally in the employee's next pay cycle. Affected employees should be contacted to explain how the underpayment occurred, the amount of the underpayment and when they will receive backpay.

If the employer is unable to pay the employee backpay in one instalment then a payment plan should be agreed between the employer and employee. Depending on the nature of the underpayment employers will need to consider their communications strategy internally and, if required, their media strategy.

  1. Put in place systems to keep up to date with future wage increases

Employers should consider what changes need to be made to ensure underpayment issues do not occur going forward. This may involve updating systems, implementing training for employees and ensuring they are up to date with pay increases in the NES, modern awards and enterprise agreements.

  1. Consider ancillary payments

Employers will also need to consider whether they have underpaid any ancillary payments which are calculated as a percentage of wages. For example, superannuation or bonuses calculated as a percentage of wages may be affected by the underpayment issues.

Do employers have to report the underpayment to the FWO?

Employers are not required to report an underpayment issue to the FWO. However, the option to self-report is available to employers and should be considered in certain circumstances, particularly if the underpayment has occurred over a long period of time, involves multiple employees or is of a significant amount.

If an underpayment is reported the FWO may conduct an investigation even if the underpayment has been resolved. Employers should be aware that even if they decide not to report the underpayment to the FWO it can be reported by an employee which may prompt the FWO to investigate.

Options available to the FWO

If the FWO becomes involved and believes that an employer has contravened the Fair Work Act 2009 by underpaying its employees, the FWO has a range of powers to investigate, enter workplaces, seek information and documents, issue compliance notices, enter into enforceable undertakings and commence court proceedings.