Employee Underpayment Identified: What Should an Employer Do Next?

Discovering a potential employee underpayment can be uncomfortable, particularly when the issue may affect several employees or extend across multiple years.

Underpayments are not always caused by an incorrect base rate. They can arise from a missed allowance, an outdated classification, an incorrectly configured overtime rule, incomplete time records or an annual salary that no longer covers the employee’s award entitlements.

The most important response is to act promptly and carefully. The business needs to understand what happened, identify everyone who may be affected, calculate the correct amounts and address the process that allowed the error to occur.

First, prevent the underpayment from continuing

Once a potential issue has been identified, review the next payroll cycle immediately.

The business may need to update an employee’s:

• Base rate
• Modern award classification
• Overtime calculation
• Weekend or public holiday rate
• Shift penalty
• Allowance
• Minimum engagement rule
• Annual salary
• Payroll profile

If a permanent system correction cannot be completed before the next pay run, a temporary manual adjustment may be needed.

Any interim arrangement should be documented and checked once the permanent correction has been implemented.

Understand what caused the problem

A payroll difference is not always caused by the payroll team or payroll software. The system may have calculated the payment correctly based on incorrect information provided to it.

For example, payroll may have applied the rate attached to an employee’s recorded classification. The real issue may be that the classification was never reviewed after the employee began performing more complex work.

Common causes of employee underpayments include:

• Applying the wrong modern award
• Using an incorrect or outdated classification
• Failing to implement an award rate increase
• Incorrect overtime or penalty-rate settings
• Missing allowances
• Automatic break deductions
• Incomplete time records
• Part-time employees working outside agreed hours
• Incorrect public holiday calendars
• Unreported higher duties
• Salaries that no longer cover award entitlements
• Changes to rosters that were not reflected in payroll

Understanding the cause helps determine whether the issue is isolated or part of a broader payroll problem.

Check whether other employees may be affected

An error found for one employee may also affect other people who share the same classification, roster, payroll rule or working arrangement.

If a Sunday penalty rate was configured incorrectly, the business should review every employee who worked Sundays while that rule was active.

If a particular allowance was missed, the review should include all employees who performed the qualifying duties, including former employees where relevant.

Useful questions include:

• Do other employees use the same payroll code?
• Are there other employees in the same role?
• Does the issue affect a particular location or shift?
• Did the problem begin after a system or roster change?
• Are former employees affected?
• Could the error affect related entitlements?
• Is the incorrect rule still active?

The affected population should be identified using consistent criteria rather than being limited to employees who raised a concern.

Confirm the correct award and classification

Before calculating an underpayment, confirm the industrial instrument applying to the employee.

This may be:

• A modern award
• An enterprise agreement
• Another registered agreement
• The National Employment Standards
• A contractual entitlement

If a modern award applies, confirm the employee’s correct classification by reviewing their actual duties, responsibility, supervision, skills and decision-making authority.

Do not rely only on the classification recorded in payroll. That classification may be the source of the error.

The review should also consider whether the employee’s role changed during the affected period. An employee may have been correctly classified when they commenced but moved into a higher level as their responsibilities increased.

Establish how long the issue continued

Payroll and employment records should be reviewed to determine when the underpayment began.

The relevant starting point may be:

• The employee’s commencement date
• The date their responsibilities changed
• The introduction of a new roster
• A payroll system implementation
• The date an allowance-triggering duty commenced
• The start of an incorrect salary arrangement
• The effective date of an award change

If the starting date is unclear, the employer may need to review the employee’s entire employment period.

Employees generally have six years from the date an entitlement should have been paid to commence a small claim. Employers dealing with a material or long-running issue should obtain appropriate advice about the required review period.

Historical records should be preserved. Do not overwrite or remove information that may be needed to reconstruct the employee’s entitlement.

Gather the information needed for the calculation

A reliable back-payment calculation often requires information from HR, payroll, timekeeping systems and operational managers.

Relevant information may include:

• Employment contracts
• Position descriptions
• Award and classification records
• Salary and pay-rate history
• Records of promotions or duty changes
• Rosters and timesheets
• Starting and finishing times
• Overtime approvals
• Break records
• Shift schedules
• Public holiday work
• Allowance records
• Leave records
• Payslips and payroll registers
• Superannuation records

Information from different systems should be compared carefully.

A roster may show the hours an employee was expected to work, while the timesheet shows what they actually worked. The calculation should use the most reliable evidence available.

Calculate each entitlement separately

The calculation should show what the employee should have received and what they were actually paid during the same period.

Depending on the employee’s award and working pattern, the review may need to include:

• Ordinary wages
• Overtime
• Weekend penalties
• Public holiday penalties
• Shift payments
• Casual loading
• Minimum engagement payments
• Award allowances
• Annual leave loading
• Paid leave
• Higher duties
• Final pay entitlements

Each entitlement should be calculated separately so the result can be reviewed and explained.

The calculation should use the award rates and provisions that applied during each historical period. Current rates should not be applied retrospectively unless they were also effective at that time.

Calculations should be based on gross amounts before tax rather than the net amount deposited into the employee’s account.

Consider the wider financial impact

The wage difference may not be the only amount requiring correction.

The business should also determine whether the underpayment affects:

• Superannuation
• PAYG withholding
• Payroll tax
• Leave accruals
• Leave payments
• Workers’ remuneration premiums
• Final pay
• Other entitlements linked to ordinary earnings

Tax and superannuation treatment can depend on the nature of the back payment and the period to which it relates. These elements should be confirmed with payroll, an accountant or another appropriately qualified adviser.

Correcting the employee’s gross wages does not necessarily correct every related obligation.

Have the calculation independently checked

Before processing a back payment, another suitably experienced person should review the calculation.

The review should cover:

• Award coverage
• Employee classification
• Historical pay rates
• Hours and roster assumptions
• Overtime and penalty calculations
• Allowance eligibility
• Payroll data
• Calculation formulas
• Tax and superannuation treatment
• The affected employee population

For a larger remediation, calculation assumptions and changes should be recorded clearly. A sample of employee calculations should also be tested manually before the model is applied across the full population.

Communicate clearly with affected employees

Employees should receive a clear explanation of what happened and how the business is correcting it.

The communication should cover:

• The nature of the error
• The entitlement affected
• The period reviewed
• How the amount was calculated
• The gross value of the back payment
• How tax and superannuation will be handled
• When the payment will be made
• What the business has changed
• Who the employee can contact with questions

Avoid unnecessary technical language. Employees should be able to understand the outcome without having to interpret the entire modern award themselves.

If the calculation is still being completed, the employer can acknowledge that a potential issue has been identified and explain the review process. An estimated amount should not be presented as final until it has been validated.

Make the back payment promptly

The Fair Work Ombudsman advises employers to pay an underpayment as soon as possible, either through the next pay cycle or as a separate payment.

The back payment should be processed through payroll, recorded correctly and supported by the required payslip information.

If a business cannot pay the full amount immediately, the Fair Work Ombudsman indicates that a written payment plan may be agreed with the employee. The agreement should specify the amount, payment frequency and payment method and should be signed by both parties.

A payment arrangement should not be imposed on the employee. Employers considering this option should obtain appropriate advice.

Consider whether the matter should be reported

The Fair Work Ombudsman indicates that reporting an underpayment may be appropriate when the issue has continued for a long period or is extensive.

Factors to consider include:

• The number of employees affected
• The total value of the underpayment
• How long the issue continued
• Whether records are complete
• Whether the issue is still occurring
• The cause of the problem
• The proposed remediation approach
• Whether the conduct may have been intentional

Since 1 January 2025, intentional underpayment of wages or entitlements can constitute a criminal offence. Honest mistakes are treated differently, but significant, prolonged or potentially intentional matters should be managed with appropriate legal advice.

Back paying employees does not necessarily prevent the Fair Work Ombudsman from investigating or taking further action if it becomes aware of non-compliance.

Correct the process, not only the payment

A remediation is not complete when the employee receives the money owed.

The business should correct the process that allowed the error to occur. Depending on the cause, this may involve:

• Updating employee classifications
• Correcting payroll rules
• Revising employment contracts
• Introducing time recording for salaried employees
• Creating an allowance register
• Training managers
• Reviewing part-time agreements
• Introducing annual salary reconciliations
• Improving roster approvals
• Testing public holiday calendars
• Reconciling HR and payroll information
• Scheduling regular award compliance reviews

Each corrective action should have a responsible owner and completion date.

The first payroll cycles following the correction should also be tested to confirm that the problem has been resolved.

Common mistakes when responding to an underpayment

Employers should avoid:

• Correcting only the employee who raised the concern
• Reviewing base rates without checking other entitlements
• Using current award rates for the entire historical period
• Estimating hours without documenting the assumptions
• Paying a shortfall without correcting the payroll rule
• Communicating an amount before it has been checked
• Excluding former employees without reviewing their circumstances
• Waiting for every detail to be finalised while the underpayment continues

Underpayment remediation involves more than a payroll adjustment. It also requires careful governance, employee communication and process improvement.

Employee underpayment checklist

When an underpayment is identified, confirm that the business has:

• Prevented the error from continuing
• Identified the underlying cause
• Confirmed the applicable award or agreement
• Reviewed the employee’s classification
• Identified all potentially affected employees
• Determined the appropriate review period
• Preserved payroll and time records
• Calculated each entitlement separately
• Reviewed tax, superannuation and leave impacts
• Independently checked the calculations
• Communicated clearly with employees
• Arranged payment as soon as possible
• Considered whether reporting is appropriate
• Corrected the underlying process
• Tested future payroll results
• Documented the remediation

A careful response can prevent a larger problem

Identifying an employee underpayment is serious, but it also gives the employer an opportunity to address the issue before it becomes larger.

The strongest response combines accurate calculations with clear communication and practical process improvement. Employees should receive what they are owed, while the business should understand why the error occurred and how it will be prevented in the future.

Remunera supports Australian employers with award coverage reviews, employee classification assessments, current pay comparisons, underpayment calculations and remuneration cost modelling. We help businesses translate complex award requirements into practical and transparent pay outcomes.

Learn more about Remunera’s Modern Award Compliance and Employee Classification Review.

This article provides general information and does not constitute legal, tax or financial advice. Employers should obtain advice appropriate to their circumstances, particularly where an underpayment is significant, long-running, disputed or potentially intentional.