In February 2023, the Fair Work Ombudsman (FWO) confirmed that seven subsidiaries of Wesfarmers Industrial and Safety Pty Ltd (Wesfarmers) were required to back-pay more than $4.8 million to over 3,400 underpaid employees. The case demonstrates why it is essential for businesses to pay employees correctly or else risk future wage disputes. This article will explain:

• what went wrong for Wesfarmers;
• common causes of underpayment;
• how your business should respond if it identifies underpayment; and
• consequences of underpayment.

What Went Wrong for Wesfarmers?

The Wesfarmers subsidiaries impacted by the underpayment include three key businesses: Coregas, Blackwoods and the Workwear Group. Collectively, these businesses supply industrial gas and installations, environmental and consulting services, work clothing and uniforms, and industrial and safety products and services.

Wesfarmers self-reported the underpayment issues in their subsidiaries to the FWO in October 2019 after discovering irregularities while rolling out a new payroll system. A broader review was conducted, revealing a series of payroll errors in 2013 and 2014 that were not corrected at the time. 

As a result, multiple permanent and casual employees were underpaid base pay and various entitlements between January 2010 and June 2020. These underpayments were as high as $38,362 for an individual and averaged $1,392 for the affected employees.

In light of these underpayments, Wesfarmers signed an Enforceable Undertaking (EU) with the FWO. It required the back-pay of all underpayments, plus superannuation and a total interest of $1,476,827. The EU also required the Wesfarmers’ entities to make a $100,000 contrition payment to the Commonwealth’s Consolidated Revenue Fund. All remediation payments required by the EU are now complete. 

An EU is an alternative to being prosecuted by the FWO. 

This is not the first time a high-profile organisation has had issues with underpayments. Likewise, it highlights the importance of businesses of all sizes ensuring proper systems and checks are in place to prevent underpayment. 

Common Causes of Underpayment

Some common reasons that facilitate employers underpaying their employees include:

• payroll errors (human or computer mistakes, miscalculated pay rates);
• changes in modern award classification (changes in duties, completion of relevant qualifications, apprenticeship movements);
• missed increases to modern award minimum wages; and
• not applying penalty rates correctly (weekend rates, overtime pay rates, allowances, loadings).

It is important for employers to be aware of these causes and take proactive steps to ensure underpayments, and associated penalties, do not occur.

Conducting a Wage Audit

If your business is investigating possible underpayments for your employees, the first step is to conduct a review of relevant internal pay records. This is also referred to as a wage audit.

Conducting a wage audit will help you to:

• identify all applicable minimum pay rates and employment entitlements;
• understand who they apply to and how;
• identify and rectify any past underpayments; and
• ensure compliance moving forward.

Your business can conduct a wage audit internally or engage external assistance from accountants or lawyers if necessary. 

Both the Fair Work Act 2009 (Cth) (Act) and the Fair Work Regulations 2009 (Cth) (Regulations) require employers to keep full and accurate employment records for seven years.

Clear record keeping is not only important in complying with the Act and the Regulations. It will also allow your business to perform accurate auditing when necessary.

What Should My Business Do if It Identifies Wage Underpayment

If a wage audit confirms any underpayment of past or existing employees has occurred, the following steps provide a guide on how to respond and rectify the issue:

1. develop a plan to manage the underpayment your audit has revealed;
2. consider the need to provide any interest payments to affected employees;
3. ensure back payments take into account any applicable PAYG taxes, superannuation payments and any other entitlements;
4. communicate with affected employees;
5. make the correct back payments to affected employees to rectify the underpayment;
6. ensure records of underpayments and back payments are maintained in line with the Act and the Regulations; and
7. consider self-reporting to the FWO.

Consequences for Underpayments

While employers are not required to report underpayments, the FWO encourages employers to self-report.

The FWO can start an investigation if they become aware of underpayments arising from an employer’s failure to comply with Australian workplace laws. Powers associated with an FWO investigation include:

• entering premises;
• interviewing relevant parties; 
• requiring the production of payroll documents; and 
• inspecting other relevant documents and records.

In the event of non-compliance by an employer, the FWO has a range of enforcement options, including:

• entering enforceable undertakings to agree to fix the underpayment and commit to future compliance measures, such as implementing a new payroll system;
• issuing of compliance notices to rectify the issue and provide evidence of compliance;
• issuing of infringement notices that include a financial penalty;
• requiring the business to attend compliance training on relevant workplace laws;
• requiring the business to publish a written public apology; and
• commencing legal proceedings to prosecute and obtain a penalty.