The Consequences of Underpaying Employees

Recently, we have seen many well-respected Australian companies identified as having underpaid their employees, with Coles again under the spotlight in relation to salaried managers.

Earlier this year, Zara was also found to be underpaying their employees and as a result, have set aside $2.6 million to cover potential underpayments and costs associated with rectifying them.

Zara, along with the many other companies, would not appear to have been intentionally trying to underpay employees and probably assumed that all their employees were being paid correctly. Their mistake may have been trusting their existing Time and Attendance, Payroll and HR systems too much. Often the complex nature of the Australian employment laws and award system can create issues within these systems correctly applying employee entitlements.

When significant underpayments are uncovered it can disrupt whole organisations. Instead of focussing on improving the business, all efforts are focused towards minimising the fallout and any other negative consequences that can arise.

Unplanned costs

Underpayments, especially ones dating back many years, can incur a lot of extra costs. Firstly, when paying back the underpayments owed, interest may also need to be added on. Obviously, the larger the size of the cumulative underpayment, the larger the amount of interest will be.

Additionally, there will also be the cost paid to third parties tasked with identifying the total amount of underpayments, which can themselves be very significant, especially if calculations need to be done over a period of years, or for example if the employer has an extensive franchise network to deal with. Another major contributor to the total costs involved are any fines or penalties handed down by the courts.

Brand damage

The most valuable asset to many companies is their brand. Businesses invest substantial amounts of their marketing budgets into managing their brand and influencing the opinions of their target market. So, when an underpayment is found within the business, all of that work and previous investment is undermined. Given the heightened focus the media has on these underpayments, the damage to a brand for an employer involved in allegedly underpaying its staff, is very much increased at the current time.

One potentially catastrophic example of brand damage came when Lush was found to be underpaying its staff. The Lush brand is well-known for being highly ethical in all aspects and to all stakeholders. Underpaying their employees obviously went against that. If not for Lush’s quick and extensive response, the brand and business may have suffered a lot more than it did.

Employee trust

The impacts of underpayments are not just related to a business’s revenue and brand image. It can also affect how the company interacts with current and prospective employees. Current employees may lose trust with the management and terminate their employment. This can create a higher employee turnover, meaning more time and money spent on inducting and training employees. A loss in valued and experienced employees can also create a dip in levels of customer service and productivity.

Personal Liability 

Personal liability for underpayments is a concept made even more serious through changes to the Fair Work Act. A person can be found to be liable for underpayments if they: 

  • are aware of what is going on – or should have been – but didn’t do anything to prevent it or stop it from happening 
  • avoid getting involved, or not making an effort to ensure that they are aware of any issues 
  • are a franchisor and don’t take reasonable steps to ensure their franchisees pay their employees correctly.

The people that can be – and have been – found liable include directors, HR managers, payroll officers, or accountants. Punishments for those found guilty can include heavy fines and even jail time. Specifically, in Victoria and Queensland, wage theft laws have meant that there is a 10-year maximum sentence for so-called “Wage Theft”.  

Some Australian businesses will continue to underpay staff due to our complex laws and management either being relaxed about employment compliance, or unwilling to properly invest in it. WageSafe offers businesses – both big and small – an opportunity to have an independent, external third-party assuring against underpayments. Book in for a free, live demo now. Just click here!


Dec 6, 2021

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