Big pay, big trouble: when salaries hide underpayment

Being paid correctly and on time is a fundamental expectation in any workplace. However, underpayment is increasingly in the legal spotlight, with more companies discovering discrepancies in their payroll systems that have resulted in significant underpayments. It’s important for businesses to understand how underpayment can occur - and, more importantly, how to address it if they discover they’ve been underpaying employees.

Recent high-profile cases have demonstrated the Fair Work Ombudsman’s focus on record-keeping and payroll accuracy, particularly in sectors where employees work variable hours or site-based rosters.

How underpayment occurs

Underpayment rarely happens deliberately. More often, it results from administrative errors or misunderstandings of complex awards. Common causes include:

• Annualised salaries that fail to account for overtime, penalties, or allowances;
• Incorrect award classifications;
• Payroll systems not updated to reflect revised award rates; and
• Missing or incomplete time and wage records.

While these issues may seem minor and involve small amounts, they often compound over time and across multiple employees. This can result in large sums owed and significant legal exposure for businesses.

A recent example

In September 2025, the Fair Work Ombudsman brought proceedings against Woolworths and Coles in the Federal Court of Australia over their use of ‘annualised salaries’ and set-off clauses in employment contracts. The case involved nearly 30,000 salaried managers who were underpaid over several years, with total remediation costs exceeding $1 billion.

These mechanisms are often used to simplify payroll and provide employees with predictable income. However, the Court found that award obligations must be satisfied in each pay period - not averaged out over time. Employers cannot rely on later overpayments to offset earlier underpayments.

The decision highlighted that annualised salaries and set-off clauses are only effective when clearly drafted and properly applied. They must specify which entitlements - such as overtime, penalty rates, or allowances - they are intended to cover. A generic statement that a salary is “all-inclusive” will not suffice.

What to do about underpayment

When underpayment is identified, prompt and methodical action is critical. Employers should:

• Calculate the amount underpaid and correct it;
• Document the process thoroughly;
• Seek advice to confirm the extent of the issue;
• Back-pay affected employees, including any applicable interest; and
• Review payroll systems and employment contracts regularly.

Professional advice can help calculate underpayments and assess related superannuation and record-keeping obligations particularly when obtained under cover of legal professional privilege. Taking early action demonstrates a genuine commitment to compliance and can help reduce regulatory scrutiny.

If underpayment has been occurring for a long period or involves significant sums, businesses are expected to report the non-compliance to the Fair Work Ombudsman. However, all records and calculations should be in order before self-reporting, as doing so will place your business under closer examination.

The bottom line

Generous salaries are no shield against underpayment. Employers must ensure award obligations are met in real time and supported by accurate records.

The Court’s message is clear: good faith is not enough - compliance must be proven. Employers should have reliable record-keeping systems that are regularly reviewed. Taking this step helps identify and rectify underpayments early, limiting legal and financial exposure.

For assistance with conducting an internal audit, wage compliance, or reviewing employment arrangements, contact our employment law team.