What to Do When Your Employee Claims They Have Been Underpaid

What do you do when there is a claim of an underpayment?

1. Respond to any pay question as soon as an employee raises it.
2. In the first instance, ascertain whether there has been an underpayment; if there has been, identify how much is involved.
3. where there is a confirmed underpayment, both parties should reach an agreement on how that is to be paid – i.e. as a lump sum or instalments over time.
4. Sometimes, calculating back pay requires a lot of time and effort; and remember that backpay may also require adjusting superannuation contributions and payroll tax.

What can employees do if they want to take the matter further?

If the matter can’t be resolved and/or the employee still considers they may be owed back pay, they may apply either to the Fair Work Ombudsman (FWO) or to the Fair Work Division of the Federal Circuit and Family Court of Australia (FCFCA).

Both bodies have the power to deal with underpayment claims by employees and ex-employees going back up to six years.

They can also investigate breaches with respect to:

• the National Employment Standards
• a modern award
• an enterprise agreement
• a workplace determination
• a national minimum wage order
• an equal remuneration order, or
• an unauthorised deduction.

Both FWO and the Small Claims Court prefer to promote their mediation services to settle matters wherever possible. Where that fails, they may resort to using their full powers to impose measures upon employers where appropriate.

Fair Work Ombudsman (FWO)

Once an employee submits an underpayment claim to the FWO the matter typically proceeds as follows:

1. the FWO takes a statement from the employee and then submits that to their employer asking the employer to send a statement in response back to the FWO.
2. there will then be a mediation session where the FWO will try to resolve the matter between the employee and the employer.
3. once agreement is reached at mediation, the agreed actions must be completed within the time frame specified by the FWO.

The agreed actions are not complied with or the matter was unresolved at mediation, the FWO will decide what action, if any, to take next in accordance with their Compliance and Enforcement Policy – e.g.

1. 1. educating and advising both parties
   2. issuing an employer with a notice to produce documents and/or send inspectors to gather evidence and interview workers and management and even widen the scope of their investigation beyond the original complainant
   3. where contraventions are confirmed the FWO may accept an Enforceable Undertaking from an employer who agrees to remedy the matter in a specified time, or.
   4. if an undertaking is not made, or not honoured, the FWO may decide to issue a Compliance Notice to an employer specifying action they should take to promptly remedy the matter (for example back paying an employee a specified amount) or an Infringement Notice i.e. a fine, or litigate e.g. take the employer to the Federal Small Claims Court.

Note: Under the Fair Work Act (section 361) there is a reverse onus of proof on the employer, meaning the FWO may not actually require an employee to prove their claim, but can instead require the employer to disprove their employee’s claim.

Small Claims Court

The Federal Circuit and Family Court of Australia has a Fair Work Division offers a ‘one-stop shop’ for employees seeking to recover employment entitlements with a quick, informal process (lawyers rarely allowed) facilitated by the court’s experienced registrars and judges.

Note: On 1st July 2023 The Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022, Part24 – Enhancing the Small Claims Process will amend section 548 of the Fair Work Act to:

• increase the limit on underpayment claims with the Fair Work Division of the court from $20,000 to $100,000
• allow the awarding of interest payments on top of that claim limit
• order filing fees incurred by the employee to be paid by the employer, in cases where the court has found in favour of the employee.

These changes are expected to significantly increase the number of small claims made by employees.

Employees who have failed to resolve their claims in other ways can make a claim directly to the court themselves and be granted a ‘directions’ hearing or a mediation with a registrar of the court who is trained in dispute resolution. Usually, the matter is resolved at that stage, but if not, a final hearing is scheduled before a judge who will consider the evidence presented by both sides and any other matters the Judge deems appropriate, before deciding whether to make a legally binding court order

The Bottom Line

Getting employees’ pay and entitlements right can be both complicated and expensive so it’s important to keep on top of this. Respond to any employee questions on their wages as soon as practicable. The alternative if you don’t is that the employee can lodge a claim with either the FWO or the Small Claims Court costing you a lot more than the original (and usually unintended) underpayment.