Underpayment & Wage Theft in Australia: How to Calculate and Remedy Payroll Errors

An employee is paid the wrong overtime rate. A weekend penalty is missed. An allowance never makes it into the pay run.

The immediate problem is the amount missing from the employee’s pay.

The bigger problem is what happens next.

In Australia, employers need to identify what the employee should have been paid, calculate the difference accurately, make the required correction and address the payroll process that caused the error. An underpayment that is intentionally committed can also amount to wage theft, which is a criminal offence for intentional underpayments covered by the federal wage theft provisions.

What is an underpayment?

An underpayment happens when an employee receives less than the amount they were legally entitled to receive.

The difference can come from a relatively simple payroll error or from a more complicated award interpretation issue.

Common examples include:

• incorrect minimum or classification rates
• unpaid overtime
• missed Saturday, Sunday or public holiday penalties
• incorrect casual loading
• unpaid allowances
• incorrect leave payments or leave loading
• missed entitlements when employment ends
• incorrect deductions or pay item setup

Fair Work Ombudsman guidance says employers should first identify the applicable award or agreement, then check the employee’s classification and all relevant entitlements before comparing them with what was actually paid.

Is every underpayment wage theft?

No. An underpayment can result from a genuine payroll mistake, incorrect configuration, missing information or a misunderstanding of an award.

Wage theft is specifically concerned with intentional underpayment. The federal wage theft offence commenced on 1 January 2025 and is aimed at employers who intentionally underpay workers. Government guidance explicitly distinguishes this from honest mistakes or miscalculations.

That does not mean an accidental underpayment can be ignored. An employer still needs to correct the employee’s entitlements and address the cause of the error.

How to calculate an employee underpayment

The basic calculation is simple:

Underpayment = amount the employee should have received − amount actually paid

The difficult part is determining the first number correctly.

Step 1: Confirm the employee’s applicable instrument

Start with the employment arrangement.

• Is the employee covered by a modern award?
• Is there an enterprise agreement?
• Does the employee have an award-free arrangement?
• Is the employee’s classification correct?
• Was the applicable classification different during the review period?

Fair Work recommends checking the relevant award or agreement before calculating the underpayment.

Step 2: Reconstruct the hours and work performed

Do not calculate the underpayment from the payslip alone.

Review the underlying payroll records, timesheets, rosters and attendance records.

For an award-covered employee, you may need to determine:

• ordinary hours
• overtime hours
• weekend work
• public holiday work
• evening or overnight work
• breaks
• leave
• additional duties
• allowances
• higher duties
• other award-specific conditions

This is where payroll errors often become difficult. The problem is not always the rate itself. It can be the data used to determine which rate should apply.

Step 3: Calculate what should have been paid

For example, assume an employee should have received $32 per hour for a particular category of overtime but was paid a flat $25 rate.

If the employee worked 5 hours of that overtime:

Correct pay: 5 × $32 = $160

Actual pay: 5 × $25 = $125

Gross underpayment: $35

Real-world calculations are usually more complex because the employer may need to recalculate several pay components across multiple pay periods.

Step 4: Review related entitlements

Do not stop at the base wage difference.

Fair Work specifically advises employers to check additional tax and superannuation obligations after identifying an underpayment.

Depending on the circumstances, the review may therefore need to cover:

Wages → overtime and penalties → allowances → leave → superannuation → tax → other affected entitlements

For larger historical reviews, this is one reason spreadsheets can become difficult to audit. A correction that fixes one rate can affect several downstream calculations.

How far back should an employer check?

There is no sensible one-size-fits-all answer.

The review period should reflect the nature of the error, the applicable legal requirements and the circumstances of the case.

For example, if an award classification was configured incorrectly three years ago and the same employee remained in the same arrangement throughout that period, checking only the latest pay cycle is unlikely to resolve the underlying problem.

A proper review should establish:

1. when the error began
2. which employees were affected
3. which pay rules were incorrect
4. which periods were affected
5. whether related entitlements were also affected

The longer an error remains unresolved, the more complicated the remediation can become.

How should an employer remedy an underpayment?

Fair Work’s recommended process is straightforward: identify the correct entitlement, calculate the difference, communicate with the employee, make the payment and fix the underlying problem.

1. Document the calculation

Keep a clear record showing:

• the period reviewed
• the applicable award or agreement
• employee classification
• hours considered
• rates applied
• actual amounts paid
• amount owing
• any related super or tax adjustments

Employers should be able to understand how the amount was calculated.

2. Tell the employee what happened

Fair Work recommends discussing the underpayment with the employee and explaining how the amount was calculated and how it will be corrected.

3. Make the back payment

The underpayment should be corrected as soon as possible. This may be made in the next pay cycle or as a separate payment.

4. Correct the payroll process

This is the step employers often miss. Paying the employee back fixes the historical problem.

It does not necessarily stop the same problem from happening again. If the cause was an incorrect award classification, timesheet process, pay rule, allowance setup or roster-to-payroll workflow, that process needs to be corrected.

What causes recurring underpayments?

Recurring underpayments are usually process problems rather than isolated arithmetic mistakes.

A hospitality employer, for example, may have:

Roster → Attendance → Timesheet → Award interpretation → Payroll

If one stage contains the wrong information, the payroll result can be wrong even when the payroll officer performs the final calculation correctly.

Typical failure points include:

• an employee assigned to the wrong classification
• a roster not reflecting actual hours
• manually edited timesheets
• missed breaks
• overtime approved outside the payroll workflow
• outdated award rates
• manual penalty-rate calculations
• new employees set up with the wrong pay category
• changes to employee conditions not reflected in payroll     

The real lesson from an underpayment

An underpayment is not just a number that needs to be added to the next payslip.

It is evidence that somewhere in the payroll process, the employee’s entitlement and the amount actually paid diverged.

The correction should therefore have two parts:

Fix the employee’s pay. Fix the process that produced the error.

That is how an employer moves from simply resolving an underpayment to reducing the risk of repeating it.

How payroll software can reduce underpayment risk

Payroll software cannot replace proper award interpretation or management oversight.

It can, however, reduce the amount of manual work between attendance and payroll.

For example, Workstem connects rostering, attendance, award interpretation and payroll so attendance data can flow into pay calculations instead of being repeatedly re-entered. Its award interpretation platform supports automated calculations for ordinary hours, overtime, penalties and allowances, with award updates through the Fair Work API.

That matters because the best time to detect a payroll error is before the pay run, not months later during a remediation exercise.

Frequently Asked Questions

Q1: What is the difference between underpayment and wage theft in Australia?

A1: An underpayment occurs when an employee receives less than their legal entitlement. Wage theft is a specific offence involving an employer intentionally underpaying an employee covered by the federal wage theft provisions. An accidental payroll error is not automatically wage theft, but it still needs to be corrected.

Q2: How do I calculate an employee underpayment?

A2: Start by identifying the applicable award or agreement, employee classification, hours worked and relevant pay conditions. Calculate what the employee should have received, subtract what was actually paid, and then review whether the underpayment affected superannuation, leave or other entitlements.

Q3: How far back should an employer check for underpayments?

There is no single review period that applies to every situation. The appropriate period depends on the nature of the error, the applicable legal requirements and when the problem began. A historical payroll review should establish when the error started and which employees and pay periods were affected.

Q4: Does an employer have to pay back an underpayment?

A4: Yes. Where an employee has been underpaid, the employer needs to correct the amount owing. Employers should also investigate the cause of the error and take steps to prevent it from recurring.

Q5: Can payroll software prevent underpayments?

A5: Payroll software cannot guarantee compliance, but it can reduce manual calculations and improve consistency. When rostering, attendance, award interpretation and payroll are connected, there is less need to manually transfer the same information between systems.

Q6: What payroll records should employers check during an underpayment review?

A6: Employers may need to review employment contracts, award classifications, rosters, attendance records, approved timesheets, pay slips, payroll reports, leave records, allowances and superannuation information. The exact records required depend on the issue being investigated.

Q7:  What should an employer do after discovering a payroll error?

A7: The employer should determine the correct entitlement, calculate the amount owing, document the calculation, communicate with the affected employee, make the required payment and correct the payroll process that caused the error.

Q8: Can an underpayment affect superannuation?

A8: Yes. Depending on the type of payment and the circumstances, an underpayment can have flow-on effects for superannuation. Employers should review superannuation as part of the remediation process rather than treating wages as the only affected entitlement.

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