Payroll has always been a critical function for any business, large or small. Beyond just paying wages, it's about ensuring you meet your legal obligations under employment law: correct wages, penalty rates, allowances, superannuation, leave, and more. Until recently, many payroll mis-steps were treated as administrative errors or civil breaches. But that has changed. In Australia, certain payroll failures — in particular, deliberate underpayments (often called "wage theft") — can now lead to criminal liability, not just civil penalties.
If you run a business in Australia (or manage payroll for one), this is must-know territory. The risks have increased dramatically.
What's changed in the law
Landmark reform
From 1 January 2025, the reforms introduced by the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 and amendments to the Fair Work Act 2009 mean that an employer who intentionally underpays an employee's entitlements (wages, allowances, etc) may commit a criminal offence.
The federal workplace regulator, the Fair Work Ombudsman (FWO), now has the power to investigate suspected criminal underpayment matters and refer them to the Commonwealth Director of Public Prosecutions (CDPP) or the Australian Federal Police (AFP).
Civil vs criminal
The key distinction:
- Civil breach: e.g., an unintentional payroll error, misunderstanding of an award, system glitch. These still attract penalties and obligations to repay underpaid workers, but ordinarily won't lead to jail time.
- Criminal offence: intentional behaviour (knowing or reckless underpayment), ongoing conduct, or failure to take reasonable steps to comply. That opens the door to prosecution, criminal fines and even imprisonment.
Errors at risk of criminal liability
Criminal Liability may arise if a business engages in conduct that is deliberate, examples include:
- Paying employees, knowingly, below the minimum wage or award/enterprise agreement rate.
- Withholding penalty rates or overtime even though the employer knows they are due.
- Falsifying time-records, misclassifying employees to avoid paying entitlements, or deliberately using "sham contracting" to strip entitlements.
- Cultures or systems that tolerate non-payment of entitlements, or failure by senior management to act when aware of underpayments.
Errors less likely (but still risky)
- Genuine payroll system mistakes, award interpretation errors, or mis-classification inadvertently made (without intent) typically fall into the civil zone. That said — even if the error was unintentional, you still must act promptly to rectify it, because failure to do so can increase risk and regulatory scrutiny. As in if you are not seen to be interested in fixing the error it is hard to fight that the intention part of criminal charges.
Who can be held liable
- The liability extends beyond the business entity. In many cases, directors, senior managers, HR/payroll professionals may face personal liability if they authorise, permit or fail to take steps to prevent wage theft.
- Corporations can be liable if a "corporate culture" encouraged, tolerated or failed to prevent underpayment.
Penalties: What are the stakes?
The penalties are substantial, reflecting the seriousness of the reform.
For individuals
- Imprisonment: up to 10 years for intentional wage theft.
- Fines: up to about AUD $1.565 million for individuals (or three times the underpaid amount, whichever is greater).
For corporations
- Fines: up to around AUD $7.8 million (or three times the underpayment amount, whichever is greater).
- Reputational damage: Public naming, brand trust erosion, potential for losing business.
What small business owners should do now – a checklist
1. Conduct a payroll audit
Review all recent pays: wages, allowances, overtime, penalty rates, classification of employees, superannuation, leave entitlements. Identify any underpayments or mis-payments.
2. Rectify any underpayments promptly
If you discover mistakes, act quickly. The faster you show you're acting in good faith, the better for your compliance position.
3. Document compliance efforts
Keep detailed records of: pay calculations, classification decisions, audits, training, steps taken to rectify errors. If you ever need to show "due diligence", these records matter.
4. Adopt compliance systems and training
Invest in payroll systems that incorporate award interpretation. Train payroll staff (and decision-makers) to understand the rules (eg. awards, leave entitlements, penalty rates). Make payroll compliance part of your business culture.
5. Consider adopting the Small Business Wage Compliance Code
Small businesses (under 15 employees) have a limited safe-harbour under the Voluntary Small Business Wage Compliance Code if they adopt it and act in good faith.
6. Engage external advice if unsure
If there are grey areas (e.g., complex awards, contract classification issues), seek legal or payroll-compliance advice.
7. Monitor for system errors
Sometimes the root cause is a payroll system mis-configuration or data entry error (not wilful misconduct). But even then, failure to fix can lead to serious problems. Recent cases show payroll system failure can uncover large underpayments.
Why this matters – beyond just avoiding penalties
- Risk of prosecution: It's no longer "just" a civil issue. If the FWO refers a matter and there's sufficient evidence, you could face criminal charges.
- Reputational damage: Employee trust, customer trust, partner relationships can all suffer.
- Business viability: Large fines or criminal records can threaten a business's ability to operate.
- Worker morale and turnover: Payroll mistakes — even honest ones — undermine trust and may lead to industrial exposure, claims, disputes.
Key take-aways
- From 1 January 2025, deliberate underpayment of employee entitlements in Australia became a criminal offence, under federal law.
- The key trigger is intentional underpayment or conduct that shows recklessness or systematic failure to comply.
- Not all payroll errors are criminal — genuine mistakes still fall under civil liability — but you must act quickly and establish good faith compliance.
- Serious consequences: up to 10 years in prison for individuals, millions in fines for companies.
- Small businesses are not immune — although there is a compliance code for very small employers, all businesses must be vigilant.
- The cost of non-compliance is not just financial — it's reputational, operational and could jeopardise the business.
