The $2 Billion Payroll Problem Employers Can’t Ignore In FY26/27
Over the last five years, the Fair Work Ombudsman (“FWO”) has recovered more than $2 billion in wages for underpaid employees. From small businesses to large corporates, employers across all sectors are falling foul of modern awards and other industrial obligations.
Often, payroll compliance issues occur due to innocent errors and oversights. However, these matters are not a complete defence to an underpayment claim – FWO scrutiny, financial penalties and reputational damage still arise where an underpayment is unintentional. Fortunately, there are practical steps employers can take to get ahead of these risks.
In this Insight, we set out three key actions your organisation should prioritise in the upcoming financial year to strengthen its payroll compliance.
Review Your Payroll System Configuration
A common theme in underpayment cases is an admission by the employer that their payroll system set-up was the root cause of their employees not being paid their full entitlements.
Payroll systems are underpinned by what are known as “pay rules”, which translate award and other legal requirements into payment triggers. If pay rules are wrong or become outdated, employees will be underpaid.
It is therefore essential that employers invest in getting their pay rules right from the start. Continuous reviews of pay rules are also essential to incorporate changes to the underpinning industrial instruments, case law developments and workforce practices.
Review Award Coverage & Classifications
Another common source of underpayments is where employers apply an incorrect (lower) classification to an employee. This often comes up where an employee is assigned to a particular classification on commencement, but this is not updated in future despite the employee taking on different responsibilities throughout the course of their employment.
In some cases, employers are unaware of the relevant modern award or apply the wrong one, which results in them overlooking key entitlements that are mandated by the correct industrial instrument.
If your organisation hasn’t already obtained advice on award coverage, this should be a priority in the new financial year. Further, it is critical that employers put in place a process for reviewing their employees’ classifications to ensure that role changes and progression are captured.
Conduct Proactive Pay Reviews
The most effective way of addressing risk is getting ahead of it. Rather than waiting for an employee complaint or FWO investigation to arise, employers of all sizes can benefit from pressure-testing their pay practices by conducting regular pay reviews before any issues get out of hand.
An effective pay review involves testing award interpretation, as well as examining overtime and penalty calculations, allowances and leave accruals. If an end-to-end review is not practical, employers should at least review their high-risk employee cohorts, such as casuals, shift workers and award-covered staff.
Where issues are identified, employers must act quickly to quantify exposure and remediate. Obtaining advice on the FWO’s Payroll Remediation Program Guide as well as the regulator’s expectations regarding self-disclosure are critical to the proper management of any underpayments identified and the associated risk.
If payroll compliance is not a key focus within your organisation, pay errors can arise and persist undetected, thereby compounding your exposure. However, with the right systems and regular reviews, payroll can shift from a source of risk to a point of strength for employers in FY26/27.
Cowell Clarke is pleased to offer its RemCheck service to organisations that wish to obtain peace of mind by confirming their payroll compliance. Our Employment & Workplace Relations Team can also provide advice should you have any queries or concerns. Contact Cassie Burfoot, Director, or Emily Gray, Senior Associate, for further information.