Could a payroll error put a business owner in prison? It is the question behind many of the wage theft headlines, and the answer matters more than the headlines do. For an honest mistake, the answer is no. For an employer who knows what is due to be paid and chooses not to pay it, the answer, since the start of 2025, is yes: up to 10 years in prison, and fines that scale with the size of the shortfall.
That line between the honest mistake and the deliberate choice runs through the entire regime, and understanding where it sits is the most useful thing an SME owner can take from this guide. Daniel Holbrook of Brookvale HR Solutions works with employers on exactly this exposure, and what follows is the legislation explained: what the new wage theft laws changed, who they reach, what the penalties actually are, and what the sensible response looks like when a pay problem surfaces.
What the new wage theft laws changed
Employers who underpay their employees have always been acting unlawfully. What changed is the consequence. Until 2025, a shortfall in the federal system was a civil matter: back-payment, civil penalties, enforceable undertakings. The Fair Work Legislation Amendment (Closing Loopholes) Act 2023 added a criminal layer, inserting section 327A into the Fair Work Act 2009. From 1 January 2025, intentional underpayment of wages or entitlements is a criminal offence under Australia's federal workplace laws for the first time.
The elements of the offence
The elements are worth stating precisely, because the precision is the protection. The wage theft offence applies where an employer is required to pay an amount to an employee, on their behalf, or for their benefit, under the FW Act, a modern award or an enterprise agreement, and the employer intentionally engages in conduct that results in that amount not being paid on or before the day it is due. The required amounts are broader than base pay: overtime, penalty rates, allowances and other entitlements under an award or enterprise agreement are all capable of being criminally withheld, and so are superannuation contributions where they are payable under those instruments.
Two structural points complete the picture. The new offence is not retrospective, so it applies only to conduct from commencement onwards. And Australia's new wage theft laws did not hand the regulator a prosecutor's role: the Fair Work Ombudsman investigates and refers matters, and any prosecution is brought by the Commonwealth Director of Public Prosecutions or the Australian Federal Police.
Intentional versus inadvertent: where the criminal line sits
The word carrying the weight in section 327A is intentionally. The offence captures an employer who intentionally engages in conduct, knowing the amount is owed, that results in employees not receiving what they are due. It does not capture the employer who misreads an award, applies the wrong classification in good faith, or inherits a payroll setup with a buried error.
Where a mistake becomes a choice
The FWO's guidance on the criminalisation of wage underpayments states the position plainly: the offence applies to intentional underpayments, and honest mistakes are not a crime. A shortfall that begins as an honest mistake stays on the civil side of the line. Where it can change character is after discovery. An employer who finds a pay error and decides not to fix it is no longer making a mistake; from that point, the conduct that leaves employees unpaid is a choice. That is why the response to a discovered shortfall matters so much, and why this guide deals with it in its own section below.
None of this softens the civil side. An inadvertent error still means back-payment in full, potential civil penalties, and a record that follows the business. The criminal tier sits beneath the existing framework; it did not replace it.
The penalties for wage theft
The criminal maxima are designed to be quoted in boardrooms, and as at July 2026 they compute as follows. The Commonwealth penalty unit increased to $364 on 1 July 2026, and the unit value applied to any charge is the one in force when the conduct occurred.
The criminal maxima
For an individual, the maximum is 10 years in prison, a fine, or both. The fine is the greater of 3 times the amount of the underpayment, where the court can determine it, or 5,000 penalty units, which is $1,820,000 at the current unit value. For a body corporate, the maximum fine is the greater of three times the underpayment or 25,000 penalty units, which is $9,100,000. The multiplier limb means exposure scales with the conduct: a company that deliberately withholds $2 million in wages faces a ceiling calculated from the underpayment amount, not a flat cap.
Individuals are squarely within reach. Company directors and managers who intentionally engage in conduct that results in employees being underpaid can be prosecuted personally; the corporate structure is not a shield against a crime committed by the people directing it.
Civil penalties also increased
The same reform package raised the civil stakes for pay contraventions by larger employers. Since 1 January 2025, the maximum civil penalty for a company that is not a small business employer is the greater of 1,500 penalty units, which is $546,000 at the current value, or 3 times the amount of the shortfall. For serious contraventions, the ceiling is the greater of 15,000 penalty units, currently $5,460,000, or three times the amount involved. Civil penalties do not require intent, which is why "we did not mean to" is a defence to the crime but not to the contravention. Failing to pay correct wages carries real cost at every level of culpability; intent determines which level applies.
How a prosecution actually starts
Where wage theft occurs, the pathway to a courtroom has more steps than the headlines suggest, and each step is a decision point. The FWO investigates, using the same information sources that drive its civil work: employee complaints, anonymous reports, payroll audits in targeted industries, and self-disclosures. If investigators form the view that conduct may amount to the offence, the FWO can refer the matter to the Commonwealth DPP or the AFP, and the prosecutors then apply their own tests before charging. Proceedings can commence up to 6 years after the commission of the offence, which means conduct from January 2025 onwards carries a long tail.
Two features of the design deserve an SME owner's attention. First, the referral filter matters: everything the regulator publishes about the regime points enforcement at deliberate, concealed conduct, not at businesses that engaged with the new laws and got something wrong. Second, the same design gives employers two formal ways to take a criminal referral off the table before it is ever made, and both reward the same behaviour: finding problems, fixing them, and being able to prove it. The first is built for small business, the second for everyone, and they are covered in turn below. What neither protects is the employer who knew and did nothing, because that is the exact conduct the offence was drafted to reach.
The small business safe harbour: the Voluntary Small Business Wage Compliance Code
Parliament paired the offence with a protection aimed at exactly the businesses most worried by it. The Voluntary Small Business Wage Compliance Code took effect on the same day as the offence and applies to small business employers, meaning those with fewer than 15 employees.
How the Code protects a small business
Its effect is specific: where the FWO is satisfied that a small business employer complied with the Code in relation to a shortfall, it must not refer the conduct for possible criminal prosecution. The safe harbour goes to the criminal referral only. Civil enforcement remains open, and the employee is still owed every dollar.
The Code is not a registration or a certificate; there is nothing to sign up for. It is an assessment of how the business behaved, and the themes will look familiar to anyone who runs payroll conscientiously:
- Making a genuine effort to work out the correct wages and entitlements, including checking which modern award applies and the right classification under it
- Relying on reasonable sources, such as FWO tools and guidance or professional advice, rather than guesswork
- Acting promptly to fix a pay error once it comes to light, and back-paying in full
- Keeping the records that show all of the above happened
- Taking steps to prevent the same error recurring
For a small business, the Code reframes compliance with wage obligations from an abstract fear into a checklist of demonstrable behaviours. A business that can evidence those behaviours has, in practical terms, taken the criminal scenario off its own table. The Ombudsman has published a plain-language guide to paying employees correctly under the Code, and it is genuinely readable, which is not something often said about compliance documents.
Cooperation agreements with the FWO
For conduct that may cross the criminal line, the legislation created a second off-ramp, and this one is available to businesses of any size. An employer who voluntarily discloses conduct that may amount to the underpayment offence can apply to enter a cooperation agreement with the FWO. While a cooperation agreement is in force, the FWO will not refer that conduct for criminal prosecution. Civil enforcement remains available, and the agreement does not reduce what must be back-paid.
The existence of this mechanism tells you how the regulator wants the system to work: disclosure and rectification are rewarded, and concealment is what the criminal wage theft regime exists for. An employer weighing whether to disclose a significant historical shortfall should take legal advice before deciding, but should also understand that the disclosure pathway was built deliberately, and the FWO has published guidance on how to use it.
How the federal laws sit with state wage theft legislation
The Commonwealth offence was not Australia's first. Queensland criminalised wage theft in 2020 through the Criminal Code and Other Legislation (Wage Theft) Amendment Act 2020, which made employee entitlements a thing capable of being stolen and lifted the maximum penalty for stealing by an employer to 10 years imprisonment. That offence remains in force, so Queensland employers sit under both regimes. Victoria also legislated early, with the Wage Theft Act 2020, but moved in the opposite direction once the federal laws commenced: the Victorian offences were repealed in 2025 on the basis that the Commonwealth regime had made them largely redundant. The practical read for an SME is simple: the national offence is now the main game, and in Queensland the state offence still stands behind it.
What to do if you find an underpayment
Discovering a shortfall is common; wage underpayments surface in classification reviews, system migrations and July rate changes far more often than in raids. The sequence that protects both employees and the business:
- Stop the bleeding. Correct the rate or setting going forward, immediately. Every pay run that repeats a known error is conduct after knowledge, and that is the territory the offence cares about.
- Quantify it properly. Work out who was affected, over what period, and by how much, including overtime, penalty rates, allowances and super. Where the arithmetic is beyond the payroll systems in place, get help rather than estimating.
- Back-pay in full, promptly. Prompt rectification is central to the Code for eligible employers, to cooperation agreements for everyone else, and to how the regulator weighs enforcement discretion generally.
- Document everything. The error, the discovery, the calculation, the payment, and the fix that stops it recurring. The paper trail is what separates a demonstrated honest mistake from an unexplained shortfall.
- Take advice on disclosure. Whether to self-report depends on scale, duration and cause. For a small error fixed in full, disclosure may be unnecessary; for a long-running or systemic one, the cooperation pathway exists for a reason.
Not confident your payroll would pass that test? Many employers cannot say with certainty whether they are paying employees correctly, because no one has checked the award, classifications and rates against each other since the business was smaller. Businesses engage Brookvale HR Solutions for a structured review of pay rates and classifications, conducted personally by Daniel Holbrook, or start with an HR Compliance Audit at $1,500 plus GST, with the fee fully credited toward any follow-on work. Call Daniel on 1300 23 44 23.
Why July is when payroll problems begin
There is a seasonal pattern to all of this. The Fair Work Commission moved award rates and the minimum wage on 1 July, and every annual increase quietly creates new shortfalls in businesses whose payroll settings, flat rates or annualised salaries did not move with it. The payroll failures that lead to wage theft findings rarely start as villainy; they start as a missed rate update that no one examines for years, until it becomes the multi-year back-payment story that lands in the press. The compliance check in the guide to the 2026 minimum wage increase is the cheap version of that lesson, and with super now moving on payday timelines as well, pay errors compound faster than they used to.
The criminalisation of wage theft did not change what employees are owed; it changed what happens to employers who knowingly withhold it. For the business that pays attention to its payroll, checks its classifications, and fixes errors quickly and completely, the new laws are background noise. The regime was written for the ones who do none of those things. Knowing which side of that line your business sits on should not require guesswork, and after one structured look at the payroll, it will not.
