Deliberately underpaying employees is now a criminal offence in Australia, not just a civil one. Intentional underpayment of wages or entitlements can expose a business, and potentially individuals, to criminal penalties including substantial fines and, in serious cases, imprisonment, a significant escalation from the civil back-payment-and-penalty regime that applied before. From 1 January 2025, the criminal underpayment offence has sat alongside civil penalties that already scaled with the size of the underpayment and the quality of the employer’s conduct. Two things matter most for SMEs: the offence targets intentional conduct, not honest mistakes, and small businesses have access to a safe harbour through the Voluntary Small Business Wage Compliance Code. This guide explains what changed, who is at risk, how the safe harbour works, what underpayment really costs in dollars, and what a compliant payroll system looks like. It is general information only. Given the stakes, specific situations warrant professional workplace-relations or legal advice.
Published: July 2026
For most of Australian workplace-relations history, underpaying staff was a civil matter: if the Fair Work Ombudsman or an employee established underpayment, the remedy was back pay, plus interest and civil penalties. The consequences were financial and reputational, not criminal. That has changed. Intentional wage underpayment is now a criminal offence under the Fair Work framework, which means that in the most serious cases, deliberately failing to pay employees their correct wages or entitlements can result in criminal prosecution, substantial fines, and imprisonment for individuals involved.
The critical word is intentional. The criminal offence is aimed at employers who deliberately underpay, not at those who make genuine errors, misinterpret a complex award, or discover a historical mistake and move to fix it. An honest miscalculation remains a civil matter to be remediated. A deliberate, knowing failure to pay correct entitlements is what the criminal regime targets. That distinction is the whole architecture of the reform: it raises the stakes dramatically for the minority who underpay on purpose, while preserving a path for the majority who want to get it right and occasionally get it wrong.
Civil penalties remain live for underpayment even where conduct is not criminal. Multiple contraventions can stack across employees and pay periods. For larger underpayments by non-small employers, penalties can be set as a multiple of the amount underpaid. Serious contravention pathways exist for knowing and systematic failures. Criminalisation sits on top of that civil architecture. It does not replace it.
Recognising that small businesses lack in-house payroll and legal teams and are most exposed to inadvertent error, the reform provides a safe harbour for small businesses through the Voluntary Small Business Wage Compliance Code. Broadly, a small business employer that complies with the Code, which is centred on taking reasonable steps to pay employees correctly and acting in good faith, will not be referred for criminal prosecution for an underpayment, because compliance with the Code indicates the underpayment was not intentional.
The practical significance is large. The safe harbour turns “did the business try to get it right” into a defence against criminalisation, which means the reasonable steps a small business takes to pay correctly (checking awards, seeking advice, correcting errors when found) are not just good practice but protective. A small business that can demonstrate genuine, good-faith effort to comply is operating inside the safe harbour. One that ignores its obligations or deliberately underpays is not. This reframes payroll compliance from a pure cost centre into an insurance policy against the most serious consequences.
If you are building that evidence trail, pair this guide with Scale Suite’s human resources services capability and with practical payroll cost context such as how much managed payroll costs in Australia.
The criminal regime should not panic the well-meaning employer, but it should sharpen the careless one. The businesses truly exposed to the criminal offence are those that underpay knowingly, structure arrangements to avoid paying correct entitlements, or ignore clear obligations. The businesses exposed to the civil regime, and to reputational and remediation costs, are the far larger group that underpay through error: award misclassification, misconfigured payroll, unreconciled superannuation, annualised salaries that were never reconciled against award entitlements.
The uncomfortable reality is that inadvertent underpayment is widespread, not because employers are dishonest, but because Australian awards are complex and payroll is easy to get subtly wrong. The criminal reform does not turn those errors into crimes, but it does raise the overall temperature: sharpening enforcement, increasing scrutiny, and making the difference between a business that can show it tried and one that cannot far more consequential. The safe harbour rewards the former. Nothing protects the latter.
A hospitality group with 22 staff discovers that a weekend penalty rate was configured $2.40 per hour too low for three years. Twelve staff regularly worked 8 weekend hours a week. Rough shortfall:
12 × $2.40 × 8 × 52 × 3 ≈ $35,942 of base underpayment.
Add superannuation on the shortfall at roughly 11% to 12% across the period (about $4,000 to $4,300), plus interest, plus the project cost of recalculating every pay period, and the civil remediation can sit near $50,000 before any civil penalty discussion. That is not a criminal case if the business can show good-faith systems and prompt correction. It is still an expensive lesson in configuration discipline. Use the employee cost calculator when modelling correct loaded costs going forward, not as a substitute for award interpretation.
Staying safe, and staying inside the safe harbour, is about demonstrable, good-faith compliance. In practice that means a payroll system with several features.
None of this is exotic. It is payroll run properly: awards configured correctly, rates maintained, super reconciled, and the whole thing documented. What the criminal reform changes is the consequence of not doing it, and the value of being able to demonstrate that you did.
A $4 million revenue services business with 18 staff budgets $4,000 to $8,000 for a structured classification and payroll compliance review (internal time plus external support). That review finds two classification drift issues and a casual loading configuration error, fixed prospectively with a modest back-pay of $11,200 including super. Compare that with the same errors running six years: back-pay can exceed $70,000, super and interest stack further, and professional remediation time multiplies. The review is the cheap option. The unexamined payroll is the expensive one. For broader context on late or broken payroll, see what happens if payroll is done late in Australia.
No article can replace legal advice on intent, but the practical markers are clear enough for business owners. Conduct that looks intentional includes: knowing the correct rate and choosing a lower one; ignoring repeated employee queries about underpayment; structuring “all-in” cash arrangements to avoid entitlements; or continuing a known error after clear advice. Conduct that looks inadvertent includes: a documented award mapping process, annual rate updates, prompt correction when issues surface, professional advice sought on grey areas, and records that show the business was trying to pay correctly.
The Voluntary Small Business Wage Compliance Code is designed around that evidence of reasonable steps. A small business that can produce the Code trail is in a categorically different place from one that has no award file, no rate history, and no correction process.
Self-identified, fully corrected errors sit in a better position than discovered ones on every axis that matters: criminal referral risk, civil penalty risk, reputation, and staff trust.
For an SME without in-house capacity to maintain all of this, demonstrable compliance is exactly what an embedded payroll and HR function provides: correct configuration, current rates, reconciled super, documented process, and prompt correction of errors. That keeps the business paying its people correctly and, if something is ever missed, keeps it firmly inside the safe harbour. Given the seriousness of the criminal regime, any specific concern about underpayment should be discussed with an adviser promptly.
Is underpaying employees a crime in Australia now?
Intentional underpayment of wages or entitlements is now a criminal offence, exposing businesses and potentially individuals to fines and, in serious cases, imprisonment. This is an escalation from the previous civil regime of back pay and penalties. The offence targets deliberate conduct, not honest mistakes. Civil underpayment liabilities still apply separately.
Does this mean I can be jailed for a payroll error?
No. The criminal offence targets intentional underpayment, not genuine errors, award misinterpretation, or historical mistakes a business moves to fix. An honest miscalculation remains a civil matter to be remediated. Deliberate, knowing failure to pay correct entitlements is what the criminal regime addresses.
What is the small business safe harbour?
A protection through the Voluntary Small Business Wage Compliance Code: a small business that complies with the Code, by taking reasonable steps to pay correctly and acting in good faith, will not be referred for criminal prosecution for an underpayment, because Code compliance indicates the underpayment was not intentional.
How does a small business stay inside the safe harbour?
By demonstrating genuine, good-faith effort to pay correctly: checking awards, maintaining current rates, reconciling super, reconciling annualised salaries, keeping records, and correcting errors promptly when found. These reasonable steps evidence that any underpayment was inadvertent rather than intentional.
Who is actually at risk of criminal prosecution?
Employers who underpay knowingly, structure arrangements to avoid correct entitlements, or ignore clear obligations. The much larger group that underpays through error faces the civil regime and remediation costs, not criminalisation, provided they can show good-faith compliance.
What does a compliant payroll system look like?
Correct award mapping and classification, rates updated at each increase, superannuation reconciled and paid on time, annualised salaries reconciled against award entitlements, thorough records, and a prompt correction process. It is payroll run properly and documented, which both prevents underpayment and evidences good faith.
What should I do if I discover a historical underpayment?
Correct rates going forward immediately, quantify the shortfall properly, take advice on remediation and disclosure, pay the back-pay with super handled correctly, and document the whole process. Acting to fix a discovered error is the opposite of intentional underpayment and reinforces the safe-harbour position.
How far back can underpayment claims go?
Underpayment claims commonly reach back up to six years. Remediations are often calculated on that horizon for base shortfalls, penalties, overtime, allowances and superannuation, before interest and any civil penalties are considered.
Does “we pay above award” protect us from underpayment risk?
Not automatically. Over-award pay only offsets specific entitlements where the contract and arithmetic support a proper set-off and the actual work patterns are covered. Above-award pay without reconciliation is a narrower gap, not a closed one.
Is this legal advice?
No. This is general information about a serious and evolving area of law. Any specific concern about wage underpayment or your compliance position should be discussed promptly with a qualified workplace-relations or legal adviser.
Scale Suite is a Sydney-based provider of outsourced finance teams and fractional CFO services for Australian SMEs. We deliver weekly bookkeeping, payroll, BAS/IAS lodgement, cashflow reporting, management accounts, and strategic fractional CFO oversight, all as a fully embedded team that works inside your business.
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We review and check this guide periodically. At the time of writing (July 2026), all information was current. Scale Suite is a registered BAS Agent, not a licensed tax advisor or financial advisor. This content is general information only and does not constitute professional tax, financial, or legal advice. Some details may change over time.
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
Employment Hero Gold Partner, CA-qualified, and Xero Certified, we replace fragmented finance and HR processes with one responsive, senior-level function at a fraction of the cost of full-time hires. We serve growing businesses across Sydney, Melbourne, Brisbane, and Perth, with packages starting from $1,500 per month and no lock-in contracts.
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