Wage theft has been a criminal offence in Australia since 1 January 2025. Criminal prosecutions remain rare — intent is hard to prove, and the threshold is high by design. But the same legislation significantly strengthened civil penalties, and that is where most employers face real exposure. This article covers where the risk sits, and what HR and payroll teams should have in place.

What the criminal offence actually covers — and what it doesn't

From 1 January 2025, intentionally underpaying an employee's wages or entitlements became a criminal offence under the Fair Work Act. This is the most significant shift in Australian workplace law in decades — but understanding exactly what falls within its scope matters as much as knowing it exists.

The offence applies when an employer:

• Knowingly pays less than the minimum entitlement owed — for example, applying the wrong award rate while aware of the correct one

• Deliberately fails to pay penalty rates, overtime, allowances, or leave loading that they know is owed

• Intentionally misclassifies an employee to reduce their pay

The offence does not apply to:

• Genuine payroll errors or calculation mistakes

• Misunderstandings of complex award provisions made in good faith

• System errors that were not intentional

The distinction is important: honest mistakes remain a civil matter, not a criminal one. However — and this is where many compliance teams misread the risk — the difficulty of proving a mistake was genuinely honest is growing. More on that in the sections below.

Who can be held liable?

Criminal liability does not stop at the company. Individuals can be personally liable, including:

• Business owners and directors

• HR managers and payroll managers who were knowingly involved

• External advisers complicit in the underpayment

If found guilty, the consequences are severe:

Source: Fair Work Ombudsman — fairwork.gov.au/criminal-prosecution

How does prosecution actually work?

The Fair Work Ombudsman investigates suspected offences and refers suitable cases to the Commonwealth Director of Public Prosecutions (CDPP) or the Australian Federal Police. The CDPP then decides whether to proceed.

Importantly, the FWO's own Compliance and Enforcement Policy makes clear that criminal prosecution is reserved for the most serious cases — those where civil action alone would be insufficient to deter the conduct. For more information on how the FWO approaches criminal referrals, refer to the Compliance and Enforcement Policy at fairwork.gov.au/compliance-and-enforcement.

The civil penalty risk that's harder to ignore

The offence captures only the most deliberate cases. For most employers, the more immediate compliance risk sits in the civil penalty framework — which was significantly strengthened alongside the criminal laws.

What changed

Two updates matter for back-office and payroll teams:


1. Penalties now scale with the underpayment

From 1 January 2025, the maximum civil penalty for underpayment-related contraventions is the higher of the standard penalty amount or three times the total amount underpaid. For businesses with 15 or more employees, a finding of serious contravention can push that to five times the standard amount.

The practical effect: a payroll error affecting multiple employees over an extended period is no longer subject to a fixed penalty ceiling. The larger the underpayment, the larger the potential penalty.

2. The bar for "serious contraventions" is lower than it was
Previously, a serious contravention required conduct that was both knowing and systemic. That second requirement — systemic — has been removed. A serious contravention now occurs where an employer acted knowingly or recklessly.

What this means for day-to-day compliance: the focus is no longer only on deliberate wrongdoing. Whether a failure to stay across award obligations or payroll settings could be characterised as reckless is a question that depends on the facts — and one best assessed with a workplace relations adviser if you have concerns.

What "honest mistake" actually requires — lessons from 2025

The criminal offence excludes honest mistakes. The civil penalty framework, however, applies regardless of intent — and whether a mistake is treated as an ordinary civil matter or a serious contravention increasingly comes down to what records and processes an employer can point to.

A significant ruling from 2025 illustrates why this matters.

Lessons from the Woolworths & Coles Case: How Records Shift the Burden of Proof

In September 2025, the Federal Court handed down its decision in Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092. The case involved salaried managers paid under contractual set-off arrangements — where employment contracts provided a higher annual salary intended to absorb award entitlements such as overtime and penalty rates — rather than formal annualised wage arrangements under a modern award.

First, the Court confirmed that set-off clauses in employment contracts — which allow a higher annual salary to absorb award entitlements — are only effective within each individual pay period. Averaging or pooling entitlements across multiple pay periods is not permitted. For any employer using contractual set-off arrangements, this means each pay cycle must independently satisfy minimum award entitlements — cross-period averaging or pooling is not permitted.

Second, and of direct relevance to compliance teams: both Woolworths and Coles failed to maintain adequate records of overtime hours and penalty rate entitlements. That failure triggered section 557C of the Fair Work Act, which shifts the burden of proof to the employer. Rather than the FWO having to prove the underpayment, Woolworths and Coles were required to disprove it — a significantly harder position to defend.

The takeaway is not about the specifics of retail award interpretation. It is about record-keeping. An employer who cannot produce records demonstrating how pay was calculated is an employer who may struggle to demonstrate that any shortfall was an honest mistake.

Three practical steps for HR and payroll teams

1. Build a record trail that demonstrates active compliance

The Woolworths/Coles decision is a clear reminder that records are not just an administrative obligation — they are your primary defence if an underpayment is ever identified and disputed.

At a minimum, compliance teams should be maintaining:

• Documentation showing award obligations were checked and applied after each Annual Wage Review (every July)

• Records of overtime hours and penalty rate entitlements for employees on annualised or all-inclusive salary arrangements — even where a set-off clause is in place

• A log of any payroll system changes, including when settings were updated and who authorised them

• Evidence of internal reviews, external adviser consultations, or staff training on pay obligations

The standard is not perfection. It is demonstrating that your team took reasonable steps to get it right — and documented those steps.

2. Verify payroll settings after every Annual Wage Review

Every July, minimum award rates change, meaning payroll systems must be checked immediately. This sounds straightforward, but in practice it is one of the most common points of failure — particularly where award classifications have not been reviewed in some time, or where payroll software requires manual updates.

After each Annual Wage Review:

• Confirm the new rates have been applied correctly in your payroll system

• Cross-check employee classifications against their current role and working arrangements

• Document that the review took place, who conducted it, and what was confirmed or changed

A brief internal record of this process — even a simple checklist or email confirmation — can be the difference between a routine correction and a finding of reckless non-compliance.

3. Understand your self-reporting options before you need them

If an underpayment is identified, how it is handled matters as much as the fact that it occurred. The Fair Work Act provides two structured pathways for employers who self-report:

• For businesses with 15 or more employees — Cooperation Agreements:

  An employer who voluntarily discloses conduct that could constitute a criminal offence to the FWO may apply to enter a cooperation agreement. If the FWO agrees, it cannot refer the matter for criminal prosecution for the conduct covered by the agreement. Civil enforcement action may still apply.

• For small businesses (fewer than 15 employees) — Voluntary Small Business Wage Compliance Code:

  Small businesses that self-report, cooperate with the FWO, and rectify the underpayment — including back-paying affected employees in full — are protected from criminal prosecution. The Code does not apply to intentional underpayments.

In both cases, self-reporting is not a shield from all consequences — but it is a meaningful factor in how the FWO exercises its enforcement discretion. Identifying and correcting errors proactively, and engaging with the FWO in good faith, remains the most reliable way to manage risk.

For more information on both pathways, refer to the Fair Work Ombudsman at fairwork.gov.au/criminal-prosecution.

Getting payroll wrong is not automatically a criminal matter — but the civil consequences are significant, and documentation is increasingly what determines how a mistake is treated. For specific advice on your situation — including underpayment risk assessments, contract reviews, or complex award arrangements — consult a qualified workplace relations adviser or employment lawyer.

Official sources:

• Fair Work Ombudsman — Criminal prosecution

• Fair Work Ombudsman — Cooperation agreements

• Fair Work Ombudsman — Voluntary Small Business Wage Compliance Code

• Fair Work Ombudsman — Litigation

Last updated: July 2026