Underpayment, the wage theft offence and payroll software: what software can and cannot protect you from

Since 1 January 2025, intentionally underpaying an employee's wages and certain other entitlements is a criminal offence under the Fair Work Act 2009 (s 327A, inserted by the Fair Work Legislation Amendment (Closing Loopholes) Act 2023). The offence targets intentional conduct; honest mistakes are dealt with under the civil regime, where underpayments must be back-paid and civil penalties can apply. Payroll software cannot make you compliant, but well-configured and regularly tested software, plus records of your checks, is one of the strongest pieces of evidence that an error was not intentional and that you took reasonable steps. Small businesses with fewer than 15 employees can also rely on the Voluntary Small Business Wage Compliance Code: if the Fair Work Ombudsman is satisfied an employer complied with it, the conduct is not referred for criminal prosecution.

This guide is part of payroll software pitfalls and official sources. It is general information, not legal advice. If you think you may have underpaid employees, get advice from an employment lawyer.

The two regimes: civil and criminal

	Civil regime	Criminal offence (since 1 January 2025)
What triggers it	Failing to pay wages and entitlements correctly, for any reason	Intentionally engaging in conduct that results in failing to pay certain amounts in full on or before the due date
Who acts	Fair Work Ombudsman, employees, unions, courts	Referral to the Commonwealth Director of Public Prosecutions or the Australian Federal Police
Consequences	Back pay, interest, civil penalties; higher penalties for serious contraventions	Fines for companies and individuals, and imprisonment of up to 10 years for individuals
Small business protection	None from back pay	Voluntary Small Business Wage Compliance Code for employers with fewer than 15 employees

For companies, the Fair Work Ombudsman states the maximum fine as the greater of three times the underpayment and a fixed maximum amount, which is set in penalty units and is indexed; check the Ombudsman's current figure rather than relying on older articles. The offence can also cover superannuation contributions that the Fair Work Act or an award or agreement requires, with some exceptions; super guarantee shortfalls themselves are also dealt with through the super guarantee charge and ATO enforcement. Check the Act and get advice on how this applies to you.

What the Small Business Wage Compliance Code expects

The Code is a legislative instrument (Voluntary Small Business Wage Compliance Code Declaration 2024). Broadly, a small business employer complies if the underpayment was not intentional and the employer took reasonable steps in areas such as:

finding out the correct pay rates and entitlements;
keeping up to date with changes;
using reliable sources of information or advice;
taking steps to fix the underpayment once aware of it.

The Fair Work Ombudsman assesses compliance by considering the circumstances as a whole. Compliance does not remove the obligation to back-pay.

How payroll software fits each step

Code area	What good software practice looks like	Evidence to keep
Finding correct rates	Award and classification recorded for each employee; award templates from the vendor checked against the Fair Work Ombudsman's pay guides	Award test results, pay guide used
Keeping up to date	Rates updated from the first full pay period on or after 1 July; award variations tracked	Change log, date of update, notification from vendor
Reliable sources	Configuration reviewed by a payroll adviser or using official tools	Adviser report, pay calculator printouts
Fixing problems	Back-pay calculated and paid, super added, STP updated, employees told	Back-pay calculation, payment records, correspondence

Common ways software causes underpayment

Classification never updated. An employee completes a qualification or the period that moves them up a level, but payroll still uses the old rate.
Annual wage review not applied correctly. For 2026–27, award minimum wages rose by 4.75% from the first full pay period on or after 1 July 2026. Custom rates, allowances or enterprise agreement rates may not update automatically.
Part-time hours not recorded. Overtime for hours beyond agreed hours is missed.
Minimum engagement ignored on short shifts.
Annualised salary arrangements not reconciled against what the award would have paid.
Manual overrides: a manager-requested custom rate overrides the award engine and is forgotten.
Time-clock rounding that always rounds in the employer's favour.

Illustrative cost of a small error

A café pays 20 casual employees under an award. The weekend penalty for casuals is configured at an illustrative 125% instead of 150% of the base rate. Each casual works an average of 8 weekend hours a week at a $28.00 base rate.

Shortfall per hour: $28.00 × (1.50 − 1.25) = $7.00.
Per week: 20 × 8 × $7.00 = $1,120.
Over two years (104 weeks): $1,120 × 104 = $116,480, before super on the shortfall and interest.

These rates are illustrative; check your award. The point is that a single configuration error, repeated every pay, becomes a large liability quickly.

A routine that protects you

At set-up: test every award and classification with real timesheets (how to test).
Every pay run: review exceptions and large variances.
Each July: confirm the annual wage review increase applied from the right pay period; re-test.
Each quarter: sample 5–10 employees and recalculate by hand or with the Fair Work Ombudsman's pay calculator.
Always: keep evidence of these checks with your payroll records, which must be kept for 7 years anyway.

If you find an underpayment

Stop the error from continuing: fix the configuration.
Work out how far back it goes and calculate the back pay, including super on the shortfall where it applies.
Get advice if it is large, long-running or affects many employees.
Pay employees promptly and explain the correction.
Update STP reporting and payslips.
Consider contacting the Fair Work Ombudsman; it has processes for employers who self-report.

Related: leave errors are a common hidden form of underpayment, see leave accrual set-up errors; a rushed system change can also introduce errors, see switching payroll software mid-year. Keep the evidence of your checks even after you leave a vendor, see contracts and data export.

Frequently asked questions

Can I go to jail for a payroll software mistake?

The criminal offence requires intentional conduct. A genuine mistake is dealt with under the civil regime. Get legal advice if you are worried about a specific situation.

Does the Code apply if I have 20 employees?

No. The Code applies to small business employers with fewer than 15 employees, counted under the Fair Work Act's small business rules.

Is the vendor liable if its award template was wrong?

Your obligation to employees remains. Whether you can recover costs from the vendor depends on the contract, which often limits liability.

Do underpayment rules cover super?

Partly. Intentionally failing to pay super contributions required under the Fair Work Act or an industrial instrument can fall within the offence, subject to exceptions, and super guarantee shortfalls also attract the super guarantee charge from the ATO, which under Payday Super is assessed per pay day.

Sources

Fair Work Ombudsman — criminal prosecution for intentional underpayment, small business help and pay calculator
Federal Register of Legislation — Fair Work Act 2009 s 327A; Voluntary Small Business Wage Compliance Code Declaration 2024 (F2024L01635); Fair Work Legislation Amendment (Closing Loopholes) Act 2023
Fair Work Commission — Annual Wage Review 2026 decision
Australian Taxation Office — super guarantee charge