Since 1 January 2025, intentionally underpaying an employee's wages, superannuation, or other entitlements has been a criminal offence under the Fair Work Act 2009 — not just a civil breach. From 1 July 2026, the penalties for that offence went up again, with companies now facing fines as high as $9.1 million. Yet in the first 15 months of the new law, the Fair Work Ombudsman opened just two criminal investigations and secured zero prosecutions, a gap significant enough to trigger a Senate inquiry and an independent government review. For a small business owner running payroll manually, or trusting a spreadsheet built years ago, that combination — real criminal exposure, but almost no enforcement track record yet — is exactly the situation that breeds costly assumptions. This is a separate statutory regime from the Payday Super changes affecting superannuation timing — wage theft is about the correctness of the pay itself. This article breaks down what the law actually requires, the compliance code that protects genuine mistakes, and where AI-driven payroll tools fit into building a defensible paper trail.
Key Takeaways
- Intentional wage underpayment has been a criminal offence since 1 January 2025, with penalties re-indexed from 1 July 2026 to up to $9.1 million for companies and 10 years' imprisonment or $1.82 million for individuals.
- The Voluntary Small Business Wage Compliance Code (employers with fewer than 15 staff) can shield genuine, self-reported errors from criminal referral — but only if you can show real effort to understand your obligations.
- Despite the criminal offence, the Fair Work Ombudsman had recorded just two investigations and zero prosecutions after 15 months, prompting a Senate inquiry and the independent Booth Review.
- The most common underpayment causes are casual/permanent misclassification, wrong award or classification level, and missed penalty rates or annual award increases — not deliberate theft.
- AI payroll platforms like Employment Hero and Deputy can generate the timestamped award-interpretation records that support a Voluntary Code defence, though no tool guarantees legal compliance on its own.
Is Wage Theft a Criminal Offence in Australia?
Wage theft is the intentional failure by an employer to pay an employee's full lawful entitlements under the Fair Work Act, a modern award, or an enterprise agreement — and it has been a criminal offence since 1 January 2025. This legal shift means deliberate non-payment is no longer only a civil matter; it is now a serious crime under Commonwealth law.
For conduct on or after 1 July 2026, the penalties increased again. Individuals face up to 10 years' imprisonment or a fine of up to the greater of three times the underpayment amount or 5,000 penalty units — approximately $1.82 million. Companies face a fine of up to the greater of three times the underpayment amount or 25,000 penalty units, around $9.1 million.
Critically, the offence requires intentional conduct. Honest mistakes, administrative errors, and miscalculations are not criminal wage theft — the law draws a clear line between deliberate theft and genuine error. That distinction is the whole reason the compliance code below exists, and it's the first thing to understand before assuming the new law puts every payroll slip-up at risk of prosecution.
What Is the Voluntary Small Business Wage Compliance Code?
The Voluntary Small Business Wage Compliance Code is a Fair Work Ombudsman framework, released 16 December 2024, that shields small employers (fewer than 15 employees) from criminal referral if they've genuinely tried to comply. A business that meets the Code's requirements cannot be referred for criminal prosecution over an underpayment it self-corrects.
To rely on the Code, a small business must: make genuine efforts to understand its pay obligations (reviewing the relevant award, using Fair Work Ombudsman guidance, or consulting a lawyer or industry association); identify any underpayment; self-report it to the Fair Work Ombudsman; cooperate fully with the resulting investigation; and rectify the underpayment, generally with interest.
The Code exists because small businesses rarely have a dedicated payroll or HR specialist parsing 120-plus modern awards for errors. As COSBOA CEO Luke Achterstraat put it when the Code was released:
"In a lot of instances, small businesses or small employers will be acting in good faith or acting with goodwill, but can potentially fall into pitfalls due to the complexity and the opaqueness of the system."
That said, the Code is not a loophole. It does not protect an employer who intentionally underpaid and then tries to invoke it after being caught — it exists for genuine errors, not a shield for deliberate conduct.
Pro tip
Common mistake: Treating the Voluntary Code as a "get out of jail free" card. It only protects businesses that self-report before an investigation starts and cooperate fully — waiting to be caught, then claiming genuine error, does not qualify.
How Many Small Businesses Have Actually Been Prosecuted for Wage Theft?
In the first 15 months after the criminal offence commenced, the Fair Work Ombudsman recorded only two criminal investigations into wage theft and zero prosecutions, according to The Conversation (April 2026). A slow start on criminal cases does not mean the risk is low.
That enforcement gap prompted two separate reviews: a Senate inquiry led by Senator Fatima Payman into how the federal wage theft laws are working, and an independent government-commissioned review by former Fair Work Commissioner Susan Booth, due to report to the Minister for Workplace Relations and Employment by 15 June 2026.
It's also worth separating criminal prosecutions from civil enforcement. Civil penalties for underpayment sit apart from the criminal offence, and the Fair Work Ombudsman continues to actively pursue civil underpayment claims regardless of whether a case ever becomes criminal. The absence of criminal cases so far likely reflects how long complex criminal cases take to build, not a weak law — and two parliamentary-level reviews signal scrutiny is intensifying, not fading. The same "genuine effort, self-reported early" logic applies across other 2026 compliance regimes small businesses are navigating, from gig economy engagement rules to modern award interpretation.
What Are the Most Common Ways Small Businesses Underpay Staff?
Most small business underpayment comes from administrative error, not malice — which is exactly the situation the Voluntary Code is built for. The recurring patterns are worth checking against your own payroll before an inspector does it for you.
The most frequent is misclassifying casual versus permanent staff, which flows straight into incorrect pay rates and missed leave entitlements. A close second is applying the wrong modern award, or the wrong classification level within the right award — with well over 100 modern awards in effect, misidentifying an employee's correct level is easy to do and easy to miss for years.
Miscalculating penalty rates, overtime, and allowances is another major source: forgetting weekend or public holiday loadings, night-shift penalties, or tool and uniform allowances. And failing to apply the Fair Work Commission's annual wage review — which typically takes effect each 1 July — can leave an entire pay run under-award for months before anyone notices.
How Can AI Payroll Tools Reduce Wage Theft Risk?
AI-enabled payroll platforms reduce wage theft risk by automating award interpretation and flagging anomalies before a pay run is finalised, rather than leaving classification and rate calculations to manual memory. That shift matters most for the honest-mistake category of underpayment described above.
Employment Hero's Smart Match feature surfaces the relevant modern award provisions the moment a new employee is added, and its Awards engine reads those provisions to calculate the correct rate for each shift automatically. Branded internally as "Hero AI," the platform also handles leave accruals and flags payroll anomalies before a pay run is submitted — catching an error while it's still cheap to fix.
Deputy is widely used across Australian shift-based industries — retail, hospitality, trades — for rostering and timesheets, and can alert an employer when someone is rostered beyond their allowed hours. Xero Payroll offers payroll automation integrated with accounting for businesses already on Xero, though its award-interpretation features are lighter than a dedicated payroll platform.
| Tool | Best for | Award interpretation | Starting price |
|---|---|---|---|
| Employment Hero (Hero AI) | All-in-one HR + payroll, any industry | Smart Match + Awards engine, automatic anomaly flagging | From $8/employee/mo |
| Deputy | Shift-based industries (retail, hospitality, trades) | Rostering compliance alerts, hours-worked tracking | From $6/user/mo |
| Xero Payroll | Businesses already using Xero for accounts | Lighter award automation, STP built in | Included in Xero ($32+/mo) |
An automated, timestamped record of award interpretation and pay calculations is exactly the kind of evidence a small business needs to demonstrate "genuine effort" under the Voluntary Code if an underpayment is later identified. That said, no payroll tool guarantees legal compliance or immunity from prosecution — it's an aid to accuracy, not a substitute for actually checking your obligations.
Pro tip
Pro tip: Export and archive your payroll system's award-interpretation logs monthly, not just at EOFY. If an underpayment does surface later, a clean paper trail showing when you caught it — and how quickly you acted — is central to any Voluntary Code defence.
How Should a Small Business Build a Wage Compliance Evidence Trail This Week?
Start by auditing current pay rates against the correct modern award classification for every employee, documenting which award and level you checked against and why. That audit record — not just the correction itself — is what demonstrates genuine effort under the Code.
Next, keep a file of the steps you've taken to understand your pay obligations: consultations with a lawyer or industry association, or guidance pulled from the Fair Work Ombudsman. This paper trail is what separates "we tried" from "we assumed" if the Ombudsman ever asks.
Set a recurring calendar reminder for the Fair Work Commission's Annual Wage Review, which typically takes effect each 1 July, so award rate increases don't slip through unnoticed for a full financial year. And if an audit turns up an error, self-report and rectify it immediately — waiting for an investigation to find it first forfeits Code protection entirely.
If you're building this alongside a broader shift to AI-assisted operations, it's worth treating payroll compliance as part of the same tech stack decision covered in our AI Productivity Stack guide — the same audit-trail thinking applies to AI governance more broadly, and to keeping payroll data secure once it's flowing through a third-party platform, as covered in this overview of AI data security practices.
Summary: Wage Theft Compliance at a Glance
| Date | What it means for your business |
|---|---|
| 1 Jan 2025 | Intentional wage underpayment becomes a criminal offence |
| 16 Dec 2024 | Voluntary Small Business Wage Compliance Code released (fewer than 15 employees) |
| 1 Jul 2026 | Criminal penalties re-indexed: up to $9.1M (company) / $1.82M or 10 years (individual) |
| 15 Jun 2026 | Independent Booth Review due to report on how the laws are working |
| Every 1 Jul | Fair Work Commission's Annual Wage Review updates modern award rates |
If your business is still relying on manual award interpretation, this is worth treating as a genuine risk-management priority rather than routine admin — it's exactly the kind of gap we help clients close at GrowthGear when we assess where AI tools can replace error-prone manual processes.
Frequently Asked Questions
Wage theft compliance means correctly paying every employee's full lawful entitlements under the Fair Work Act, the relevant modern award, or an enterprise agreement, and being able to show genuine effort to get it right if an error occurs.
Yes. Since 1 January 2025, intentionally underpaying an employee's wages, super, or entitlements is a criminal offence under the Fair Work Act, with penalties re-indexed from 1 July 2026 to up to $9.1 million for companies.
It's a Fair Work Ombudsman framework for employers with fewer than 15 staff that shields genuine, self-reported underpayment errors from criminal referral, provided the business cooperates and rectifies the error promptly.
The Voluntary Small Business Wage Compliance Code applies to employers with fewer than 15 employees. Larger businesses fall outside its protections and are assessed under the standard criminal-offence framework.
The Code does not apply. It only protects genuine, honest errors — an employer found to have intentionally underpaid and then invoked the Code after being caught receives no protection from prosecution.
Not on their own. Tools like Employment Hero and Deputy reduce award-interpretation errors and create an audit trail that supports a Voluntary Code defence, but no software guarantees compliance — you still need to check your obligations.
Modern award rates typically update following the Fair Work Commission's Annual Wage Review, which takes effect each 1 July. Missing this update is a common, avoidable cause of underpayment.
Sources & References
- Fair Work Ombudsman — Voluntary Small Business Wage Compliance Code eligibility and requirements (2024)
- The Conversation — "only two criminal investigations into wage theft" and zero prosecutions in the first 15 months (2026)
- SmartCompany — COSBOA CEO Luke Achterstraat on small business compliance pitfalls (2024)
- Fair Work Commission — Annual Wage Review process and timing
- Fair Work Ombudsman Newsroom — commencement of criminal underpayment laws (2025)
