Understanding the Criminalisation of Wage Underpayment: Important Update for Employers
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As of 1 January 2025, employers in Australia need to be aware of a substantial update in the country’s employment law – the criminalisation of wage underpayment, also referred to as wage theft.
This is a component of the Fair Work Legislation Amendment (Closing Loopholes Number 2) Act 2024. Employers are expected to comply with these changes or face serious implications.
Breaking Down Wage Theft
Wage theft, including the underpayment of wages and withholding entitlements has been a long-standing issue for employees. These new laws seek to combat this issue by provide greater fairness for employees and holding employers accountable.
For employers, this new law highlights the importance of compliance.
Adhering to wage laws not only protects your business from hefty fines and imprisonment but also positively promotes workplace culture, instils trust between the employer and employee and compliments your company’s reputation.
Wage theft can also occur where an employer fails to pay an employee their full wages or even a portion of it. This means, if an employee is not paid their superannuation, overtime, allowances or meals breaks (when required).
Wage theft can be either intentional or unintentional, often due to errors, oversight, or negligence.
Provisions tackling wage theft and offering recovery remedies are part of multiple jurisdictional laws and are included in underpayment clauses of Enterprise Agreements.
The latest amendments in Section 327A of the Fair Work Act 2009 (Cth) criminalise intentional underpayment of a “required amount” to an employee by an employer. This “required amount” covers wages and superannuation, and employees are entitled to receive this under the Act, a fair work instrument, or a transitional instrument.
When Are These Amendments Effective?
These amendments took effect from 1 January 2025.
What is the Enforcement Method and Attached Penalties?
The Fair Work Ombudsman (FWO) has the authority to investigate potential wage theft offences under the new changes. However, the Commonwealth Director of Public Prosecutions (CDPP) or the Australian Federal Police (AFP) would handle actual prosecutions.
Prosecutions can commence up to six years after the alleged wage theft.
Penalties for Committing Wage Theft
The penalties for wage theft are stringent:
- Up to 10 years’ imprisonment for individuals
- Fines up to $1.65 million for individuals, or $8.25 million for companies
- Alternatively, the penalty could be three times the amount of the underpayment if it can be estimated.
What is an Example of Wage Theft?
Wage theft can take many forms and understanding these can help employers avoid unintentional violations. Here are some detailed examples:
- Underpayment of Wages: This occurs when employers pay their employees less than the minimum wage stipulated by the Fair Work Act 2009 their classification under the relevant award instrument.
- Incorrect Leave Entitlements: Employees are entitled to various types of leave, such as annual leave, personal leave, and parental leave. Employers must calculate the correct accrual of leave entitlements and payment for leave taken. When an employee resigns, their accrusals
- Misclassification of Employees: Employers must correctly classify workers as employees or independent contractors. Misclassification to avoid paying entitlements such as superannuation and overtime can lead to underpayment. For example, if a worker performs duties like those of an employee but is classified as a contractor and paid less, it constitutes wage theft. Clear guidelines and regular reviews of worker classifications can help maintain compliance.
Can all Underpayment Instances lead to Prosecution?
Not every case of underpayment leads to prosecution. The new changes focus on intentional underpayment and provide a “safety net” for employers who make honest mistakes (See Section 327B of the Fair Work Act 2009 (Cth)).
Also, the freshly introduced ‘cooperation agreement’ acts as a protection against future prosecutions if the employer self-reports the underpayment and signs the agreement with the FWO.
Introducing the Voluntary Small Business Wage Compliance Code
This voluntary code, also introduced in Section 327B, offers small businesses protection against potential criminal prosecution, provided they have complied with the Code in relation to an underpayment. Factors outlined in the Code will determine this compliance.
Guidelines for Employers
Going forward, employers should do the following to ensure they comply with the new laws:
- Conduct a thorough workplace audit of pay rates, classification, and compliance with Awards and Enterprise Agreements
- Review employment contracts and position descriptions to ensure alignment with relevant Award
- Verify that correct rates are being applied in your payroll system
- Ensure accuracy by updating payroll software or systems if necessary.
Take Proactive Steps Now
Take decisive action today to ensure compliance with these new laws. If you need help understanding your obligations or need guidance, don’t hesitate to reach out. Contact Preston HR to safeguard your business and stay updated with these changes.