Fair Work Underpayments & Penalties: Myths vs Realty

A frequent misconception in Australia is that an employee who has been underpaid can only recover the amount of that shortfall via the Fair Work Ombudsman. In reality, the Fair Work Act 2009 (Cth) ("FW Act") gives employees several options, some of which may lead to civil penalties payable direct to the employee which exceed the original value of the underpayment. In most (if not practically all) cases, the underpayment involves breaches of modern awards, which stipulate minimum wages and conditions for various industries and occupations.

From 1 January 2025, new criminal wage theft laws (at the federal level) will further raise the stakes for employers who deliberately or systematically underpay staff.

This article outlines some key myths and realities around underpayment laws in Australia.

1. Two Main Avenues for Underpaid Workers

Under the FW Act, there are generally two routes an underpaid employee can pursue:

1. Fair Work Ombudsman (FWO)
   • It's free for employees to lodge an application with the FWO.
   • The FWO may investigate potential award breaches, assist parties to resolve disputes privately, make orders and/or commence proceedings.
   • If FWO takes action and is successful, the underpaid worker recovers their missing wages, while any additional penalty (usually always) goes to the Commonwealth rather than the individual employee.
2. Direct Application to the Courts
   • Employees (or authorised persons) may file in the Federal Circuit and Family Court of Australia, the Federal Court of Australia, or a relevant State/Territory court (noting there are different jurisdictional advantages to each jurisdiction).
   • Employees can elect to apply under the "small claims procedure" in any court (these are procedures set out in the FW Act, notably departing from ordinary rules of evidence to allow for expedited outcomes).
   • Successful claimants outside of the small claims procedure may recover not only their outstanding wages (including modern award entitlements) but also civil penalties payable directly to them in some circumstances, and potentially even damages.

2. Small Claims and the $100,000 Threshold

Under section 548 of the FW Act, employees seeking unpaid wages (including entitlements under a modern award) up to $100,000 can elect to use the small claims procedure. Key points include:

• No Penalties in Small Claims: The court can only order payment of the underpaid wages (plus interest), not impose additional penalties.
• Switching from Small Claims: While some employees have managed to shift into a general claim after commencing under the small claims pathway—where civil penalties can be sought—this is not guaranteed.

Employees considering their options should be aware of the $100,000 threshold and think carefully about whether the small claims procedure is appropriate if penalties or damages are desired.

3. Civil Penalties and the ‘No-Cost’ Rule

In most Fair Work matters, a “no costs” rule applies (section 570 FW Act). This means each party bears its own legal costs, unless the court finds the action was unreasonable or vexatious. This arrangement can encourage employees with valid claims to litigate underpayments (including modern award breaches) without facing the risk of prohibitive legal costs should they not succeed.

When civil penalties do apply (i.e., outside the small claims setting):

• Multiple Contraventions
  Employers may face separate penalties for each modern award breach—such as failing to pay the correct minimum wage, penalty rates, or overtime.
• Personal Liability
  Company directors or managers involved in contraventions (s 550 FW Act) can be penalised personally.

4. Illustrative Cases: Penalties Surpassing the Underpaid Amount

Although many cases deal with underpayments under modern awards, the following examples show how penalties can mount dramatically, even beyond the wage shortfall:

These outcomes demonstrate the courts’ willingness to levy steep penalties—particularly for repeated or systemic non-compliance with award conditions.

5. Criminal Wage Theft Laws from 1 January 2025

From 1 January 2025, certain forms of underpayment (occurring from 1 January 2025) - especially where employers knowingly or systematically breach modern award entitlements—may attract criminal liability. The range of penalties includes:

• Substantial Fines: Potentially in the millions, reflecting the seriousness of the contravention.
• Imprisonment: For the most egregious offences or repeated deliberate non-compliance.

The precise scope of these laws may vary by jurisdiction, but the overarching trend is clear: the legal and reputational risks for employers who neglect award obligations are rapidly increasing.

As an aside, there's a long and complicated history on criminalising wage theft - in effect, there were difficulties for a while achieving uniform laws (as different states had passed laws for this). Victoria and Queensland still have laws to cover this at the state level, but now the new change to formalise this at the federal level will no doubt see greater numbers of wage theft claims in 2025 and beyond.

6. Practical Takeaways for Both Sides

1. For Employees
   • You are not limited to recovering the underpayment. In many cases, you can pursue civil penalties (and sometimes damages) if you commence action outside the small claims procedure.
   • Under the “no costs” rule, parties generally bear their own costs unless one side acts unreasonably or vexatiously.
   • If the sum owed is below $100,000, small claims can be faster, but no penalties are awarded in that stream.
2. For Employers
   • Failing to pay correct rates under a modern award can lead to more than just an order to repay wages - substantial penalties may follow, especially for multiple or serious breaches.
   • With potential federal criminal offences from January 2025, any outstanding pay issues should be resolved promptly, preferably with legal advice to manage liabilities and ensure compliance.

Conclusion

Modern awards in Australia set minimum wages and conditions that employers must honour. If underpayments occur—whether accidental or otherwise—employees have multiple avenues to recover not only their outstanding wages but also significant civil penalties (outside of small claims), which may be paid directly to them. As of 1 January 2025, deliberate or systemic wage theft could also attract criminal charges, further highlighting the need for rigorous compliance.

For employers, now is the time to address any outstanding payroll or award issues. For employees, it is important to understand that their rights and potential remedies extend well beyond the original shortfall—particularly if they take their case directly to a court with full jurisdiction.

Disclaimer

This article is intended only to provide general information and does not constitute legal advice. Employers and employees should seek professional guidance tailored to their unique circumstances. Liability limited by a scheme approved under Professional Standards Legislation.

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