Fair Work Underpayments and Penalties: What Employers Actually Face

Key Takeaways

• Civil penalties under the Fair Work Act 2009 (Cth) routinely dwarf the original underpayment; in FWO v Sushi Bay (No 3) [2024] FCA 869, a $650,000 underpayment resulted in $13.7 million in penalties.
• Since 1 January 2025, intentional underpayment is a criminal offence under Part 3A-3 of the Fair Work Act, carrying up to 10 years imprisonment for individuals and fines of up to $7.825 million for corporations.
• Under s 550, company directors and payroll managers face personal accessorial liability for underpayment penalties if they knew of the relevant facts constituting the contravention.
• Employers who voluntarily disclose underpayments to the FWO before investigation can enter a cooperation agreement under s 327E, which provides immunity from criminal prosecution if complied with.
• Each separate contravention under s 546 attracts its own maximum penalty, and the s 557 'course of conduct' grouping does not apply to serious contraventions under s 557A.

1. 1.Section 539: Civil Remedy Provisions and Who Can Bring a Claim
2. 2.Section 548: The Small Claims Procedure and Its Limitations
3. 3.Section 546: How Civil Penalties Are Calculated
4. 4.The Cases: Real Penalties for Real Underpayments
5. 5.Part 3A-3: Criminal Wage Theft from 1 January 2025
6. 6.How Employers Can Protect Themselves
7. 7.Conclusion

In 2024, the Federal Court ordered $13.7 million in penalties against a single sushi chain for underpaying workers. The underpayment itself was around $650,000. This is not an outlier - it is the direction of Australian employment law. The Fair Work Act 2009 (Cth) ("FW Act") now provides employees with multiple enforcement pathways, civil penalties that routinely dwarf the original shortfall and - since 1 January 2025 - criminal offences carrying up to 10 years' imprisonment. At Astris Law, we act for employers navigating underpayment claims, FWO investigations and payroll compliance across all modern award classifications.

Section 539: Civil Remedy Provisions and Who Can Bring a Claim

The enforcement architecture of the FW Act is built around "civil remedy provisions" listed in s 539. This section identifies each contravention, the court that has jurisdiction and who is entitled to apply for an order. For modern award breaches, the persons who may apply include:

• The affected employee
• An industrial association (such as a union)
• The Fair Work Ombudsman (FWO)

This means an employee does not have to wait for the FWO to investigate. They can commence proceedings directly in the Federal Circuit and Family Court of Australia, the Federal Court of Australia or a relevant state or territory court.

Fair Work Ombudsman (FWO) Pathway

An employee can lodge a complaint with the FWO at no cost. The FWO may investigate, attempt to mediate a resolution or commence proceedings on behalf of the employee. However, where the FWO takes action and obtains a penalty order, the penalty is typically payable to the Commonwealth rather than the individual employee. The employee recovers their underpaid wages, but the penalty revenue goes to the government.

Direct Court Application

Employees who bring their own proceedings have access to the full range of remedies under the FW Act, including civil penalty orders under s 546. Critically, the Federal Court has held that courts may order a portion of civil penalties to be paid directly to the applicant employee. This means an employee who litigates directly can potentially recover both their underpaid wages and a share of the penalty amount.

Section 548: The Small Claims Procedure and Its Limitations

Under s 548, employees claiming unpaid wages (including modern award entitlements) up to $100,000 can elect to use the small claims procedure. This streamlined process relaxes the rules of evidence and is designed for speed. However, it comes with a significant trade-off:

• No civil penalties: The court can only order payment of the underpaid amount (plus interest) - it cannot impose additional penalties
• No legal costs recovery: The no-cost rule under s 570 applies, meaning each party bears their own costs unless the court finds the proceedings were vexatious or unreasonable

Some employees have commenced under the small claims pathway and later sought to convert to a general proceeding where penalties are available. Whether this is permitted is at the court's discretion and is not guaranteed.

Section 546: How Civil Penalties Are Calculated

Where an employer contravenes a civil remedy provision (such as underpaying wages contrary to a modern award), the court may order a civil penalty under s 546. The maximum penalties per contravention are:

• For an individual: 60 penalty units (currently $18,780)
• For a body corporate: 300 penalty units (currently $93,900)
• Serious contraventions (s 557A): Where the contravention was deliberate and part of a systematic pattern, the maximum is 600 penalty units for an individual ($187,800) and 3,000 penalty units for a body corporate ($939,000)

Each separate contravention attracts its own maximum. An employer who underpays 10 employees across 52 weeks may face hundreds of individual contraventions, each carrying a separate penalty. This is why the total penalty in major cases reaches the millions.

Section 557: Course of Conduct

Section 557 provides some relief by treating multiple contraventions arising from a single "course of conduct" as a single contravention. However, this does not apply to serious contraventions under s 557A. Courts interpret "course of conduct" narrowly. In FWO v South Jin Pty Ltd [2015] FCA 456, the court held that underpayments of different employees under different award provisions did not constitute a single course of conduct, meaning each contravention attracted its own penalty.

Section 550: Accessorial Liability for Directors and Managers

A person who is "involved in" a contravention is treated as having contravened the provision themselves under s 550. A person is involved if they aided, abetted, counselled or procured the contravention, induced it, or were knowingly concerned in it. In practice, this means company directors and payroll managers can be personally liable for underpayment penalties if they knew of the relevant facts constituting the contravention - even if they did not personally process the payroll.

The Cases: Real Penalties for Real Underpayments

The following cases demonstrate the scale of penalties that Australian courts are imposing for modern award breaches:

The courts have identified several factors that increase penalties: the deliberateness of the conduct, the vulnerability of the employees (particularly visa holders), the size of the employer, the duration of the contravention and whether the employer cooperated with the investigation. In Sushi Bay, the court emphasised that the contraventions were "systematic, deliberate and sustained over a lengthy period" - factors that pushed the penalty well beyond the underpayment itself.

Part 3A-3: Criminal Wage Theft from 1 January 2025

The Closing Loopholes No. 2 Act 2024 inserted Part 3A-3 into the FW Act, creating federal criminal offences for intentional underpayment. Under s 327A, an employer commits an offence if they intentionally engage in conduct that results in a failure to pay an amount required under a fair work instrument (such as a modern award or enterprise agreement) and the employer knew of or was reckless as to the relevant circumstances.

The maximum penalties under the criminal provisions are:

• For an individual: Imprisonment for up to 10 years or a fine of up to the greater of 3 times the underpayment amount or 5,000 penalty units ($1.565 million)
• For a body corporate: A fine of up to the greater of 3 times the underpayment amount or 25,000 penalty units ($7.825 million)

Prosecution requires the consent of the Commonwealth Director of Public Prosecutions (CDPP). The FWO retains responsibility for referring matters to the CDPP and has indicated it will focus on the most serious and deliberate cases of wage theft. The criminal offence only applies to conduct occurring on or after 1 January 2025 - it does not have retrospective effect.

The Cooperation Agreement Alternative (s 327E)

Employers who identify underpayments and voluntarily disclose them to the FWO may enter a cooperation agreement under s 327E. If an employer enters a cooperation agreement before being investigated and complies with its terms (including repaying the underpayment), the employer will not be prosecuted for the criminal offence. This creates a strong incentive for employers to self-audit and remediate before the FWO comes knocking.

Interaction with State Wage Theft Laws

Victoria and Queensland had already enacted state-level wage theft criminal offences. The federal regime now operates alongside these state laws. However, the federal provisions include a mechanism to avoid double jeopardy: where conduct is covered by both the federal offence and a substantially similar state offence, the federal offence takes precedence.

How Employers Can Protect Themselves

The penalties and case studies set out above paint a confronting picture, but they do not tell the whole story. The employers who end up in the Federal Court with seven-figure penalty orders are overwhelmingly those who ignored the problem, refused to cooperate or deliberately exploited their workforce. Employers who engage early and take the right steps are in a fundamentally different position, and the outcomes reflect that.

Importantly, once an employer is alerted to a potential underpayment issue, whether through an internal complaint, a query from an employee, a letter of demand or contact from the FWO, they will have an opportunity to review the position before the matter escalates. This is exactly the point at which it is worth speaking to a lawyer. A significant number of the underpayment matters that eventually become class actions or result in serious civil and criminal consequences share a common thread: there were countless opportunities along the way to rectify the issue, and the employer chose not to act on them. Each ignored warning, unanswered query and deferred review narrows the options available later and increases the penalties a court is likely to impose. Treating the first alert as a genuine opportunity to review, obtain advice and take remedial steps is consistently the decision that separates a manageable problem from a catastrophic one.

The starting point is recognising that not every underpayment claim is valid. Employees and their representatives sometimes misinterpret award classifications, misapply overtime or penalty rate provisions, or calculate entitlements based on incorrect assumptions about their coverage under a particular modern award. We regularly see claims where the employee's calculation is materially overstated or where the alleged underpayment relates to an entitlement that does not actually apply to their role. Getting proper legal advice at the point a claim is received, rather than simply accepting the amount demanded, can mean the difference between paying what is genuinely owed and paying an inflated figure that has no proper basis. Astris Law has helped employers identify errors in employee calculations and reject claims that were not properly founded.

For employers who are concerned about their exposure but have not yet received a claim, the most effective step is a proactive payroll audit. An independent review of your payroll against all applicable modern award obligations will identify genuine shortfalls that can be remediated quickly and quietly, and it will also confirm the areas where the business is actually compliant. The cost of an audit is a fraction of the cost of defending FWO proceedings or civil penalty litigation, and it gives the employer a clear picture of their position before anyone else raises the issue.

Where an audit does reveal underpayments, the cooperation agreement pathway under s 327E provides a practical route to resolution. Employers who voluntarily disclose underpayments to the FWO before an investigation commences can enter a cooperation agreement that provides immunity from criminal prosecution under Part 3A-3, provided the employer complies with the agreement's terms, including repaying the shortfall. This is not a theoretical mechanism. It is the pathway Parliament specifically designed for employers acting in good faith, and it removes the most serious consequence (criminal prosecution) from the equation entirely. We assist employers through this process from initial disclosure through to completion of the agreement.

More broadly, many underpayment disputes can be resolved through early negotiation, structured back-payment agreements and compliance undertakings, without court proceedings, without penalties and without the business being publicly named on the FWO's compliance register. The key is acting before the FWO escalates its response. Delay is consistently the factor that turns a manageable compliance issue into contested litigation and a six-figure penalty order.

Astris Law works with employers to audit payroll compliance, respond to Fair Work claims, negotiate with the FWO, dispute invalid claims and, where necessary, defend civil penalty proceedings. We understand that the majority of employers who underpay do so because of genuinely complex award interpretation, not deliberate wage theft. Our role is to get employers to the right outcome as quickly and cost-effectively as possible.

Conclusion

Underpayment exposure in Australia has escalated beyond a compliance issue into a category of serious legal and financial risk. The civil penalty regime under the FW Act routinely produces penalties that are multiples of the original shortfall. Since January 2025, intentional underpayment is a criminal offence carrying imprisonment. For employers, the priority should be conducting a thorough payroll audit against all applicable modern awards, identifying any historical shortfalls and either remediating directly or entering a cooperation agreement with the FWO before an investigation commences. At Astris Law, we act for employers. Whether you have received a Fair Work claim, discovered a potential shortfall in a payroll audit, or want to check your compliance before an issue arises, we can help you understand your exposure and take the right steps. Many of the matters we handle are resolved without court proceedings. Call (07) 3519 5616 for a confidential, no-obligation discussion about your situation.

This article is for general information purposes only and does not constitute legal advice. You should seek professional advice tailored to your specific circumstances before acting on any information in this article. Liability limited by a scheme approved under Professional Standards Legislation.