Prevent employee underpayment – avoid 5 common mistakes


Underpayment of employees continues to be rife in Australia. Usually this is not because of deliberate wage theft, but rather mistakes by employers in modern award interpretation or misclassification.  

The Fair Work Ombudsman continues to ramp up its audits and investigations into underpayments, recovering $532 million in unpaid wages and entitlements in the 2021 financial year.  

Employers who (even inadvertently) underpay employees face significant penalties in addition to backpay orders.  For serious contraventions the penalties are up to $666,000 for companies and $133,200 for individuals. Further, in Queensland and Victoria, deliberate underpayments are criminal offences (“wage theft”) which can attract jail time.

This article sets out 5 of the most common underpayment mistakes we see and how to prevent them.

Mistake 1: Applying the wrong or no instrument

The Fair Work Act sets out 11 minimum employment entitlements, referred to as the National Employment Standards (NES). These apply to all Australian employees.

In addition to the NES, employees may be covered by an industrial instrument (e.g. a Modern Award or enterprise agreement), which sets out additional employment entitlements. Where an employee is not covered by an industrial instrument, the individual will only be entitled to the NES.

Identifying whether an industrial instrument applies and, if so, the correct industrial instrument can be challenging. Many underpayments are the result of employers:

  • applying the wrong industrial instrument;
  • incorrectly assuming that no industrial instrument applies; or
  • failing to register changes to the relevant industrial instrument.

Prevent this mistake

To prevent this mistake, employers should:

  • confirm the applicable industrial instrument. For a Modern Award, this requires a careful analysis of the business, the employee’s role and their day-to-day duties.
  • confirm and be confident in any decision that an industrial instrument does not apply.  
  • ensure your Payroll System is coded to comply with the relevant Industrial Instrument(s) and is regularly audited for compliance. It’s imperative that employers don’t adopt a ‘set and forget’ mindset to pay rates and other entitlements.

Mistake 2: Misclassification

Once employers identify the right industrial instrument for an employee, the next step is to identify the correct classification.

This requires employers to carefully analyse the employee’s role, duties, experience, and qualifications against the classification schedules of the Modern Award or enterprise agreement.

Mistakes usually occur where employers do not look past role titles to the employee’s actual duties, or where employers fail to consider the individual’s experience, training or qualifications.

Mistakes also arise where employers fail to recognise when an employee changes or moves up classifications.  This can occur, for example, where an employee upskills or changes duties.

Prevent this mistake

To prevent this mistake, employers should:

  • Assess each employee’s classification individually at the point of hire.
  • Look past an employee’s role title and position description at the point of hire when considering their correct classification. An individual’s day-to-day duties is usually more relevant to their classification, and their experience, qualifications and training may also be relevant.
  • Ensure triggers for increased pay are built into the Payroll System (for example, junior employees’ birthdays or apprentice milestones).

Mistake 3: Miscalculating all-inclusive hourly rates and annual salaries

Rather than dealing with complex Modern Award entitlements, employers may choose to pay employees an all-inclusive hourly rate or an annual salary to compensate the employee for all their Modern Award entitlements, such as penalty rates, overtime or other allowances.

This is lawful provided:

  • the employee expressly agrees to this;
  • the employee’s employment contract contains a properly drafted set-off clause; and
  • the rate or salary is sufficient to compensate the employee for the entitlements they would have otherwise received under the Modern Award in each pay period (i.e. not just averaged out over a number of months or for the year).

Alternatively, employers can use an annualised salary clause in the relevant modern award but must ensure ongoing compliance with that clause.

Underpayments often occur where employers fail to calculate a rate or salary which adequately sets-off entitlements.

Prevent this mistake

To prevent this mistake, employers should:

  • Ensure employment contracts contain a well-drafted set-off clause, which identifies the correct Modern Award.
  • Model an employee’s working patterns (e.g., any regular overtime) to ensure their remuneration adequately compensates the employee.
  • Conduct regular reconciliations, auditing employees’ hours against their remuneration, and comparing the wages the employee would have otherwise received under the Modern Award in each pay period.
  • Ensure the Payroll System keeps up to date with changes in the applicable Modern Award.
  • If you are relying on an annualised salary clause in a modern award, make sure your compliance with that clause is ongoing.

Mistake 4: Non or underpayment of allowances, overtime and penalty rates

Industrial instruments often contain extensive entitlements to various penalty rates, loadings, allowances, and overtime.

The non-payment or underpayment of these entitlements is a major contributing factor to underpayment in Australia.

In our experience, three mistakes that commonly arise include:

  • Misapplying overtime for part-time employees – most industrial instruments entitle part-time employees to overtime for hours worked beyond their set hours.
  • Failing to provide employees with RDOs or breaks – working through RDO’s or without the minimum shift break usually triggers overtime entitlements under the relevant industrial instrument.
  • Failing to pay higher duties allowances – most industrial instruments require additional payment to employees who perform higher or additional duties.

Prevent this mistake

To prevent this mistake, employers should:

  • Review the relevant industrial and ensure all entitlements are accurately programmed into the Payroll System (for example, triggers for overtime payments).
  • Ensure employees only work through their breaks or days off if permitted.
  • Regularly assess whether employees are performing higher duties and whether they are entitled to any allowances.
  • Stay up to date with changes to the relevant industrial instrument.

Mistake 5: Trainees, Interns and work experience.

Employees must be paid, with the very limited exception of an employee engaged as part of a vocational placement which is credited towards the employee’s course. 

A vocational placement is a formal work experience program that is required as part of an education or training course.

You should assume unpaid internships and unpaid work experience are unlawful unless you can demonstrate there is no relationship of employment.

Determining whether there is a relationship of an employment requires a case-by-case assessment of the circumstances.  Hallmarks of employment include:

  • The employer’s exercise of any control over the individual.
  • The employer’s receipt of a benefit through the relationship.
  • Ongoing work.
  • No indication of volunteer work.

Prevent this mistake

To prevent this mistake, employers should:

  • Not assume that just because an individual is called an intern or work experience student, they are not an employee.
  • Take a conservative approach to whether an individual is an employee or an intern/ work experience student.
  • Ensure any ‘vocational placement’ is legitimate, generating credit towards the employee’s course and a clear start and finish date.

Bonus Tip: Ensure your contractors are not employees

If an employer engages individual workers as contractors, it is important to make sure they are not employees in the eyes of the law.

Improperly characterising employees as contractors exposes businesses to backpay claims for employment entitlements such as leave, allowances and overtime, as well as breaches of any applicable modern awards.

Prevent this mistake

To prevent this mistake, employers should:

  • Ensure contracts are appropriately drafted to establish the desired relationship.
  • Assess the true nature of the relationship in practice, to ensure it accords with the contract.
  • Read more about this topic in our recent article:

Leave a comment

Ready to Go?

Let's build together

Construction Law
Employment, Industrial Relations and Safety
Commercial and Corporate

Batch Mewing provides all the legal services your building and construction company needs.

Head Office

Level 11, 215 Adelaide St
Brisbane QLD 4000

GPO Box 518
Brisbane QLD 4001


Batch Mewing serves clients in all States and Territories of Australia.

Get In Touch

Construction industry specialists


Click Here to Sign up to receive the latest news and trends from our company.

More questions? Get in touch