How to Avoid Underpayment of Wages: Award Compliance and Minimum Pay Rates

26 May 2022

Modern awards are legal documents created by the Fair Work Commission that specify employer and employee terms as well as minimum pay rates. Due to the complexity of modern awards employers often misunderstand or underestimate their obligations when it comes to award compliance. The conditions in an award vary depending on the employee classifications, skill level, and the industry. Each employee classification has a corresponding minimum wage that functions in combination with the National Employment Standards under the Fair Work legislation.

In recent years, many organisations have fallen in the spotlight due to underpayment of wages claims. An underpayment of wage occurs when an employee is not paid their minimum entitlements for the work they do and when they do it according to the industrial instrument in place – whether it be a Modern Award or an Enterprise Bargaining Agreement (EBA). One of the biggest public cases of underpayment of wages occurred when the Fair Work Ombudsman took Woolworths to court in relation to major underpayments of their salaried managers. The supermarket giant had previously disclosed, in 2019, that it had underpaid thousands of its employees more than $390 million. This prompted the FWO to carry out an investigation, by assessing a sample of 70 salaried Woolworths managers for their work between March 2018 and March 2019. The FWO alleged the underpayments for those 70 individual managers ranged from $289 to $85,905 each during the one-year timeframeit analysed. As of February 2022, this lawsuit had cost Woolworths at least $571 million in back payments to current and former staff.

The main takeaway from the Woolworths case, and other examples of wage underpayments, is that Employers must ensure compliance with the industrial instrument/s they have in place within their organisation.  Due to the perplexing nature of Modern Awards, it is possible for unpaid debt to accrue to an employee over time without either party being aware of it. If this happens, and either party becomes aware of the underpayments, an employer might find themselves the subject of an underpayment claim. A common problem that may occur is when an employer has been implementing an annualised salary that is ‘above award’, in the belief that it is compensating the employee adequately for their award entitlements. However, the ‘above award’ rate, while higher than the minimum hourly rate, is often not sufficient compensation for substantial amounts of overtime, or penalty rates, which can entitle an employee to double time or more in certain common circumstances. Failure to comply with Award obligations can result in penalties being issued against the employer, and even against the individual who controls the employer. Penalties typically exceed any actual underpayment.

How to Avoid Wage Underpayments

Each financial year the Fair Work Commission reviews and sets minimums wages in modern awards and transitional instruments, as well as the national minimum wage order. Any changes that occur following this review usually come into operation on 1 July the following financial year, therefore now is the perfect time to ensure you are compliant with your industrial instrument.

  • Ensure appropriate understanding/interpretation of applicable industrial instruments.
  • Review payroll configuration to ensure the industrial instrument interpretation has been coded correctly into the system.
  • Review annualised salary practices to ensure that salaries are an appropriate payment mechanism, and where this is the case, are sufficient to cover the minimum wage to which each employee is entitled under the relevant instrument.

Are you struggling to interpret your applicable award or understand your payment obligations? For assistance with award interpretation and compliance, please contact Dean via the link below.