How far back can an underpayment claim go?

Underpaying your employees isn’t just bad for business – it can hit your wallet hard and seriously damage your reputation. Starting from 1 January 2025, new laws will mean even tougher consequences, including hefty penalties and even jail time for individuals responsible.

In 2023-24, the Fair Work Ombudsman (FWO) recovered $473 million in unpaid wages for nearly 160,000 workers – one of the highest annual recoveries in the regulator’s history. Now, we know most business owners would never dream of intentionally doing the wrong thing, but mistakes can happen. That’s why it’s so important to stay on top of your obligations and make sure you’re getting them right.

So, how far back can you claim underpayment of wages in Australia?

Six years is the statutory limit for claiming underpayments in Australia.

What can an employee claim in an underpayment case?

Employees can claim underpaid wages for:

• Minimum wages;
• Penalties;
• Allowances including meals, travel time, and travel;
• Leave entitlements including annual leave and long service leave;
• Overtime;
• Superannuation; and
• Any other entitlements outlined in the National Employment Standards (NES), modern awards, or enterprise agreements.

What does the law say?

Australia recently criminalised intentional wage and superannuation theft, and the provisions have been incorporated into the Commonwealth Criminal Code. These new laws came into effect on 1 January 2025.

An employer will commit wage theft when they intentionally engage in conduct that fails to pay an employee their minimum statutory entitlements arising from the Fair Work Act 2009 (Cth) (FW Act) or an industrial instrument such as a modern award or enterprise agreement. Unintentional failure to pay employees their required amounts won’t be considered wage theft.

The FWO has unveiled a crime prevention code, the Voluntary Small Business Wage Compliance Code, for small businesses. The voluntary code aims to protect businesses from criminal liability under the Closing Loopholes legislation and is a useful resource for employers of all sizes. It provides practical advice and tips to help companies ensure workers are paid correctly and address any payroll errors.

This also includes:

• Identifying the relevant award or agreement;
• Ensuring workers are properly classified;
• Understanding potential changes to pay rates and entitlements;
• Adhering to pay slip and record-keeping requirements; and
• Staying informed about changes in workplace laws.

What should businesses do if they discover an underpayment?

1. Identify the underpayment period
Look at your pay records to identify when the underpayment happened. If you’re unsure, review the employee’s entire work period to be safe.

2. Calculate the mistake: what’s owed vs. what was paid
Write down how much the employee was actually paid during the underpayment period. Then, figure out how much they should’ve been paid based on their pay rate, hours worked, and entitlements like penalty rates, overtime, or leave payments.

3. Determine the total underpayment amount
Compare what the employee should have received with what they were actually paid – the difference will be the total underpayment amount.

4. Communicate with the impacted employees and arrange payment
Have a conversation with the affected employees to explain what happened and how the underpayment will be fixed. Agree on how to pay them back – either in a lump sum or a payment plan. If there’s a plan, make a written agreement signed by both parties that details the payment terms. Record all repayments in your employee pay records.

5. Fix compliance gaps
Stay on top of wage increases by keeping track of updates to awards, pay rates, and entitlements. Subscribe to alerts to be notified about any changes so you can avoid similar issues in the future.

Get your payroll compliance in check. Save now, avert costly surprises in future

Prevention is better than a cure – it’s much less costly, less damaging to reputation, and more efficient to pay employees correctly than to rectify underpayments. Consider investing in an efficient payroll system and seeking advice from HR experts on what you should be paying your employees.

Let us take care of the complicated stuff so you can get back to doing what you do best – running your business.

The team at Citation HR offers award-winning payroll compliance services. If you’re not 100 per cent confident with your payroll processes or award/agreement interpretation, get in touch via our 24/7 Advice Line.

Not a Citation HR client and need some advice on managing underpayment risks? The team at Citation HR can support your business on a range of workplace matters. Contact us today to arrange a confidential, no-obligation chat.