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Payroll Mistakes: The $800K Wake-Up Call for Aussie Employers
In this HR2Go episode, Karen Arnold is joined by payroll audit expert Peter Norrie to explore how small payroll errors can lead to massive legal and financial risks. With wage theft laws changing in 2025, they discuss what business owners need to know to stay compliant and avoid costly penalties.
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What You’ll Learn in This Episode
- What a payroll audit actually involves
- The 2025 wage theft laws and what they mean for your business
- Common payroll mistakes that cost businesses big
- Real-world case: $800K in penalties
- Steps every employer should take now
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Meet the Hosts
Karen Arnold is the host of HR2Go and a workplace law expert at Effective Workplace Solutions. She’s joined by Peter Norrie, a Senior Consultant who has conducted payroll audits for hundreds of Australian businesses.
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Full Transcript
Introduction
Karen Arnold Podcast Ep Payroll 20.05.25
Transcribed by . to remove this message.
Welcome to HR2Go by Effective Workplace Solutions. In this episode, we're diving into a topic that's not just critical, but absolutely essential for any business operating in Australia, and that is payroll audits. Now, if you're thinking payroll errors are just minor slip-ups, think again.
The Federal Court recently slammed Vietnamese restaurant operators with over $802,000 in penalties for underpaying migrant workers. Most of the staff were younger than 25 and working as kitchen attendants, bar staff and wait staff, and were paid as little as $15 an hour. And if that's not bad enough, they even tried to deceive Fair Work by paying $10,000 to an employee to rectify the non-compliance and then demanding the employee give it back.
What Is a Payroll Audit?
But they happen far more often than people realise. Pete, for those who might not be familiar, can you explain what a payroll audit actually involves? Thanks, Karen. A payroll audit is a thorough review of your payroll records.
We aim to determine whether the company is compliant with its industrial obligations, primarily as outlined in the award and the NES, as well as in contracts of employment that it has in place. Generally, we review a sample of the staff over a four-week period to determine if the organisation is paying its employees in accordance with their obligations under the law. We review timesheet records, rosters, payslips, deduction authorities and letters of engagement to determine if each employee is being paid at least what they should be.
After reviewing the data and creating a report, we walk the client through the results and, if necessary, assist them in identifying the required action for any issues. Excellent. So, Pete, you've been doing these payroll audits for years.
Would you say that more often than not you do find an error when you do a payroll audit? 99% of the time, we do. Yeah, wow. That's an amazing statistic, isn't it? That means that, you know, there's a potential for a lot of Australian businesses to be getting something wrong in relation to their payroll and just not be aware of it.
That's exactly right. It's really quite terrifying. Right.
Common Payroll Mistakes
That's correct, Karen. All right. So in your experience, what are some of the most common payroll mistakes that employers make? Are there specific areas where things seem to trip people up more than others? The most common things often involve a lack of understanding of what particular clauses in awards or industrial instruments mean and how they apply.
In other words, oftentimes local practise has been to do a particular thing in a certain way, but the award and maybe the rest of the industry actually do it quite differently. And that particular company might be oblivious to that difference. Sometimes it's also the application of the wrong award or the wrong enterprise agreement, and that can be very, very common.
Another common mistake is thinking that just because you pay someone more than the award, they're on a salary and somehow exempt from the award. In most cases, that's not the case if there is an award. There are a number of awards which have a provision for what's called an annualised salary, but that would include, say, the Parks Award, the Hospitality Industry Award, and the Restaurant Industry Award.
And in those cases, those annualised arrangements require some thought. Yeah, look, certainly that salaried one seems to pop up a bit, doesn't it? There's this misconception out there that if I've plucked a figure out of the air and it's more than what I think they're entitled to under the award, then that award has no application. And we've seen more than once that when we've actually done a reconciliation, the employee's been inadvertently or accidentally underpaid.
I think, too, we all acknowledge that awards are quite complex, aren't they, Pete? Certainly are. And, you know, it's not hard to misinterpret something, particularly if you're not used to reading it. So it sounds like the key there is to just be getting some advice and checking things if you're not 100% sure.
Absolutely is. Pete, how easy is it for small errors to add up? You've done a lot of payroll audits. I imagine even minor oversights can become quite costly over time.
A relatively small error of, say, $50 a week for a dozen people can, over 12 months, exceed $30,000. And that can be a big problem for smaller businesses that haven't budgeted for that additional expense. And there's a lot of small businesses in Australia and there's probably a lot of businesses that would go a little bit pale of the thought of having to pay an additional $30,000 in back pay.
I've observed significant underpayments due to the time involved and the number of individuals affected. For a larger organisation, missing an allowance for, say, 250 employees over six or seven years can add up to a really substantial amount. And there's no provision for not paying that.
There's no hardship get-out-of-jail clause, as it were. That amount is owed and it's got to be punished. Of course, apart from the financial consequences, we can't forget the impact of underpayments on the employees.
And in most cases, being in full day-to-day underpayment will result in a loss of confidence in the business and often will also lead to higher turnover and sometimes a more, what I'll call, like, prestigious work environment where people start questioning everything about their payslips in future. Yeah, Pete, look, I'm one of those business owners who certainly doesn't want to be on the receiving end of an unexpected $30,000 bill. So, yeah, those figures are quite scary.
But I like that you touched upon the impact for employees. And, look, a lot of the time when we're looking at payroll audits, we're just thinking about whether the business has got it right or wrong. But there's also that very real impact for employees.
One, they've missed out on money that they were entitled to when potentially they needed it. But then that second element is that loss of trust and confidence in their employer, which we know is so critical for workplace culture. Yeah, really interesting point there, Pete, and something that maybe business owners haven't thought about when they think about payroll audits and even their obligations in relation to employee entitlements.
And then I suppose the flip side of that is if the Fair Work Ombudsman or the Fair Work Commission decide to name your business, we've got an issue with brand and reputation in the wider business community. What are the potential consequences if these errors are found during a Fair Work audit or inspection, or if you have an employee that goes and makes that claim externally to the Fair Work Ombudsman, say? I guess just as you've alluded to before this question, the consequences can be catastrophic for a business. The massive loss of reputation, the monetary costs of back pay, and of course the penalties that go with it.
The Risk of Inaction
Fair Work Ombudsman Anna Booth made it crystal clear. If you exploit your workers, you will be found out and called out. So, with the introduction of stricter wage theft laws, the stakes are higher than ever.
That's why today I'm joined by Peter Norrie, a Senior Consultant with Effective Workplace Solutions, to help us unpack what this all means. Pete, welcome. Thanks, Karen.
Great to be here. Let's get right into it, Pete. Payroll mistakes are not exactly the sort of thing anyone wants to discover, particularly after the fact.
So, we know that wage theft laws have changed the landscape quite a bit. How have these changes impacted the risk to businesses when it comes to payroll compliance, Pete? For some time, there's been hefty fines for noncompliance with awards and enterprise agreements, the NES, and other obligations. From the 1st of January 2025, intentional underpayment of wages or entitlements can be a criminal offence, and that's quite new.
The offence only applies to intentional underpayments that happen after those provisions took effect. However, this includes where they're part of a course of conduct that started before the provisions took effect. In other words, if an underpayment existed before the 1st of January 2025, but the firm decided not to address it after that date, so perhaps they thought it cost too much, then it may well be that they would fall foul of the law and be prosecuted for a criminal offence.
It's also worth noting that companies and individuals can face both criminal and civil prosecution for the same underpayment. To recap, it's probably worth restating that a mistake will not lead to criminal prosecution on its own. However, if a decision is made not to address an underpayment, then that is an intentional decision to underpay, which could lead to criminal prosecution.
Obviously, if a company or an individual sets out to underpay its employees, then they are caught up in that as well. Wow. So, you know, some big changes in that space.
So I suppose there's that element of intention, and just for the sake of clarity for our listeners, Pete, intention can include the fact that you have knowledge and you've done nothing about it. It's not just sitting down at a computer and deciding you're not going to pay someone what they're entitled to. It also includes if you discovered that there might have been something done accidentally and you continue to do nothing about it, that you may be caught up in those issues as well.
I was speaking with a gentleman recently who operated several smaller businesses and he was unaware, for example, the underpayments are now a criminal offence and many business owners are completely oblivious, making it crucial for them to examine their arrangements, I think, before facing an FWO audit or a complaint from a staff member regarding underpayment. So I love that, Pete. The first step is to act.
Real-World Impacts
You talked at the intro to this session of $800 plus thousand fines for a business. I know one major not-for-profit that had to close down one of its major service delivery arms because it had made fundamental errors that led to huge fines and huge underpayments to its very large staff. And that sort of outcome, unfortunately, is not uncommon.
Yeah. And Pete, am I right in understanding that if the Fair Work Ombudsman comes in and does that audit and finds errors, there's actually really strict timelines on making those payments to employees? Is that right? That's correct. Yeah.
But basically they're paid straight away. Yeah. So I suppose maybe one benefit of engaging someone to do a payroll audit would be that, you know, I mean obviously the outcome, the employee still needs to be paid, but that process could be managed a little bit more perhaps also to the optics around that can be managed.
So maybe there's a level of control that's gained by having a look yourself before the Fair Work Ombudsman comes in. Yeah. I mean I think as soon as we identify any underpayments, we have to pay them, but we can certainly manage that process.
And the unveiling, as it were, of that process to our employees we can manage as well. Yeah. Excellent.
How to Stay Compliant
All right. So for businesses that want to stay on top of this, what steps can they take to ensure they are compliant and avoiding these costly mistakes? Karen, the best thing to do is to regularly review your payroll system and the classification of your employees. If you do this regularly, and by regularly I mean every 12 months, then you're going a long way towards limiting the extent of any possible error.
The other thing to do is to establish a relationship with a trusted advisor so you can be sure of quality and timely advice when you need it rather than just flying blind. Yeah. Excellent.
And look, I suppose you would suggest a fresh set of eyes can be really valuable. Obviously if you're a payroll operator, you're looking at this data day after day, you're interpreting the award in whatever particular way you've interpreted it, would you recommend that part of that review on an annual basis would involve a fresh set of eyes? Someone else having a look at the data just to make sure that something's not being missed? Yeah, look, I would. The reality is that payroll people don't know what they don't know and that's why mistakes come about.
Sometimes it's because the rules in the payroll system, if they have one, and most people do these days, might have been set up not quite correctly or maybe they're interpreted incorrectly, but certainly a fresh set of eyes can look at that. Effectively, we work out for that period what each person should have been paid and then compare it to what they have been paid and identify the reasons why there's a discrepancy. Yeah, excellent.
All right. Pete, can you briefly walk us through how a payroll audit is conducted? What does that process look like? So normally we look at the payroll and we pick for larger employers, say 40 employees at random over a four-week period. We can and often do add one or more employees that we feel might be strategic to review for various reasons.
So a business may say to us, can you include these employees because we think there are issues that need to be checked, just for example. We then obtain copies of timesheets, payslips, contracts, letters of engagement. These are documentation, rosters, employee classification data, the status of each employee, their hourly rate of pay, records of breaks and when they're taken in most cases and documentation supporting deductions for each employee included in the review.
We review this data to identify areas where the client might experience underpayment issues and oftentimes this can also involve overpayments. It's almost as common that we find overpayments as we find underpayments. We also strive to ensure that public holidays are included in the review because we have found that public holidays almost inevitably lead to problems with payroll.
At the end of the review, as I said before, we produce a report and we walk the client through the results and of course these results are confidential to our client. Yeah, excellent. So that process sounds really comprehensive.
I was listening to you talking about all of the data you're collecting and certainly sounds like a comprehensive process which obviously would provide the employer with peace of mind that it's been very thoroughly reviewed. You touched upon overpayments and I guess, you know, maybe that initial reaction to that is that well, better to overpay than underpay. But I suppose in reality that still flags that there is some issue within that process and that does need to be addressed.
I mean, the overpayment issue could be complicated but sometimes the employers are aware that people are being overpaid in particular ways. By overpaid, of course, I mean they're being paid more than they're entitled to. All right.
So for those business owners listening to this right now, what would you say the first step should be if they suspect there might be an issue with their payroll compliance? The first step is to act. They need to determine whether they have a problem. If you identify that you have a problem, you can take steps to resolve it and prevent it from worsening.
Final Advice and CTA
It's absolutely gold and I think that's probably, you know, the best thing I've heard in a long time. Thank you so much for sharing all those insights, Pete. It's been really informative and it really drives home how important it is to stay proactive with payroll compliance, especially now that the consequences are so much steeper.
If you're a business owner listening and you think that it is time to do a payroll health check, please reach out to us so we can book in a time to have a chat about how we can support you. Getting it right now could save your world of trouble down the track. Pete, thanks again for joining me today.
You're welcome, Kat. Thank you for listening to another episode of HR To Go. If you're a business based in Australia and you would like HR or employment law advice, visit our website, ewsolutions.com.au.
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Need Help with Payroll Compliance?
Talk to the experts at Effective Workplace Solutions. We help Australian businesses audit their payroll, stay compliant with wage laws, and avoid costly mistakes.
👉 Book a consultation: https://test.goldcoastbranding.com.au/contact
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FAQ: Payroll Compliance in Australia
- Q: What is a payroll audit?
A: A payroll audit is a review of employee wages, timesheets, rosters, and pay records to ensure compliance with awards and legal obligations.
- Q: What are the new wage theft laws in 2025?
A: From January 2025, intentional underpayment of wages may be treated as a criminal offence in Australia.
- Q: Can small payroll errors really cost thousands?
A: Yes. A $50 weekly error across multiple employees can quickly add up to tens of thousands in back pay.
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*HR2Go is the podcast from Effective Workplace Solutions for business owners who want practical, compliant, and people-first HR.*