Big pay, big trouble: when salaries hide underpayment

Being paid correctly and on time is a fundamental expectation in any workplace. However, underpayment of wages 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 underpayments can occur - and, importantly, how to address underpayments once they have been discovered

Recent high-profile cases have highlighted 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 underpayments occur

Underpayments rarely happen deliberately. More often, they result from administrative errors or misunderstandings of complex Modern 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 affect many employees. This can result in large sums owed and significant legal exposure (including to penalties) 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 legal entitlements 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. The decision also highlighted the need for good record keeping, including in respect of overtime hours worked by salaried employees.

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;
• Review payroll systems and employment contracts regularly; and
• Consider self-reporting to the Fair Work Ombudsman.

Professional advice can help to accurately understand award obligations, calculate underpayments and assess related superannuation and record-keeping obligations. Taking early action demonstrates a genuine commitment to compliance and can help reduce regulatory scrutiny and/or penalties.

If underpayments have been occurring for a long period or involve 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 likely lead to close examination of the business’s payment practices.

The bottom line

Generous salaries are no shield against underpayments. 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 – consistent compliance must be proven. Employers should have reliable record-keeping systems that are regularly reviewed in line with award entitlements. Taking this step helps prevent or at least 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.