Step 1: stop it repeating
The next pay run is the one thing you still fully control. Correct the configuration, rate or classification now so the error does not extend by another cycle. Every additional period adds to the liability and weakens the picture of a business that acted promptly.
Step 2: find out how big it really is
This is the step most often done too narrowly. You found one person, in one pay period. The question is not what that person is owed, it is how far the same root cause reaches.
- Who else is on the same configuration? If a pay item, classification or template was wrong, it was wrong for everyone attached to it.
- How far back does it go? Usually to whenever the setting was created or last changed. Recovery generally runs six years, and records must be kept seven.
- Is it one error or a pattern? A wrong classification often travels with wrong penalties, wrong overtime and missing allowances, because they all derive from the same base.
Fixing the current cycle while leaving four years of the same error unaddressed does not resolve the liability. It postpones it, and it removes your ability to say you dealt with it properly.
Step 3: repay
The wages are a debt, separate from any penalty question. Repay as soon as you reasonably can, including any interest. Prompt rectification is explicitly one of the factors the Fair Work Ombudsman weighs, and for employers with fewer than 15 employees it is one of the factors in the Voluntary Small Business Wage Compliance Code.
Tell the affected employees what happened, what you are paying them and why. It is the right thing to do, and an employee who has been dealt with straightforwardly is markedly less likely to escalate.
Step 4: write it down while you still remember it
This is the step that changes your position and the one people skip. Create a dated file containing:
- What the error was, and the root cause in plain terms.
- How and when it was discovered, and by whom. A quarterly audit finding is a materially different fact from an employee complaint.
- Who was affected, over what period, and the calculation showing how you arrived at each figure.
- What you paid, and when.
- What you changed so it cannot happen again.
- What you had done previously to try to get it right: which award you checked, what advice you sought, when you last reviewed rates.
That last point matters more than it looks. The difference between a mistake and a deliberate act is proved with evidence, and the evidence is a record of reasonable steps taken before anything went wrong.
Step 5: fix the process, not just the number
A repayment closes one incident. It does nothing about the fact that nothing in your systems was checking. Ask what would have caught this earlier and put that in place, whether that is a scheduled review each 1 July, a classification review when roles change, or an independent check on each pay run.
If the same error recurs after you have repaid it once, the story changes from an honest mistake to something harder to characterise that way.
Step 6: decide about self-reporting, with advice
Now, and not before, consider disclosure.
If the underpayment is plainly an honest mistake, the criminal offence does not apply, and your priority is rectification and evidence rather than disclosure. If there is a realistic prospect the conduct was intentional, whether by you or by someone in your business, a cooperation agreement may be worth pursuing.
How cooperation agreements work
An employer, business or individual who voluntarily tells the Fair Work Ombudsman about conduct that could amount to the criminal underpayment offence can request a written cooperation agreement. While it is in force, the Ombudsman cannot refer the conduct covered by it for possible criminal prosecution.
| What it does | What it does not do |
|---|---|
| Stops a referral for criminal prosecution of the covered conduct | Stop compliance notices, enforceable undertakings or litigation |
| Applies to the party that entered it | Cover other individuals or entities, who need their own agreements |
| Is assessed case by case, with evidence | Affect the Ombudsman's other powers or its inspectors' powers |
Two cautions the Ombudsman itself raises. It encourages independent legal advice before voluntarily reporting that you may have committed an offence, including about the information you provide. And knowingly or recklessly giving false or misleading information during the process can attract a civil penalty and is a serious offence under the Criminal Code Act 1995.
Note also that a small business employer who satisfies the Code cannot enter a cooperation agreement about the same conduct, because the Code protection already covers it.
What not to do
- Do not quietly correct it going forward and say nothing. The historical liability does not expire because the current cycle is right.
- Do not ask employees to sign something waiving entitlements in exchange for a payment without legal advice.
- Do not alter or backdate records. This turns a civil problem into a much more serious one.
- Do not guess the number. An underpayment calculation that is itself wrong is not a fix, and it will be re-run by someone else later.
Common questions
What is a cooperation agreement with the Fair Work Ombudsman?
It is a written agreement between the Fair Work Ombudsman and an employer, business or individual who has voluntarily told the Ombudsman they engaged in conduct that may amount to the criminal underpayment offence. While the agreement is in force, the Ombudsman cannot refer the conduct it covers for possible criminal prosecution. Civil enforcement options remain available, including compliance notices, enforceable undertakings and litigation. Each agreement is entered into with one party only, so where several entities or individuals were involved, separate agreements may be needed.
Should you self-report an underpayment to the Fair Work Ombudsman?
It depends on whether there is any realistic prospect that the conduct was intentional, and it is a decision to take with legal advice rather than alone. The Fair Work Ombudsman itself encourages people to seek independent legal advice before voluntarily reporting that they may have committed an offence. Where an underpayment is plainly an honest mistake, the criminal offence does not apply and the priority is rectification and evidence. Where intent is genuinely arguable, a cooperation agreement may be worth pursuing, but the disclosure is real and its consequences should be understood first.
How far back do you need to go when fixing an underpayment?
Far enough to cover the whole error, which usually means back to when the incorrect configuration or classification started. Underpaid wages can generally be recovered through the courts for six years from when the entitlement fell due, and employee records must be kept for seven years, so a review that only covers recent pay periods will understate the exposure. Fixing the current cycle while leaving four years of the same error unaddressed does not resolve the liability, it just delays it.
Step 2 is the one people get wrong
Quantifying the real reach of an error, across everyone on the same configuration and back to when it started, is exactly what FairCheck is built to do, with a dated record of every check for your file. In beta now, with early access opening to the waitlist first.
Join the waitlist What the penalties actually areFairCheck provides general information about Australian pay rules and does not provide legal advice. Decisions about disclosure and self-reporting carry legal consequences and should be made with independent legal advice. Official information is available from the Fair Work Ombudsman at fairwork.gov.au.