Navigating payroll remediation: a guide for employers on addressing underpayments and ensuring compliance

On 16 April 2025, the Fair Work Ombudsman (FWO) released its Payroll Remediation Program Guide (Guide), providing guidance for employers on how to address and remediate underpayments (payroll non-compliance).

To assist employers grappling with these issues, the FWO defines steps to execute a comprehensive and employee-centred Payroll Remediation Program (PRP). When employers adhere to guidelines published by a regulator, it facilitates a more constructive dialogue with them.

How should employers approach payroll remediation?

According to the FWO, seven elements are crucial for an effective PRP.

1. Designing your PRP

As a first step, employers must identify potential compliance issues and determine the scope and period of review of the PRP. The Guide provides that the period of review must look back as far as possible with the expectation this extends to when the non-compliance began.

The FWO treats the six-year statutory limitation period for underpayments claims as the minimum review period and expects employers to be able to explain why a remediation program has been limited to this period if non-compliances extend beyond six years.

Further, it is noted that the FWO expects employers to consult with its employees, relevant unions, workplace consultation bodies and relevant third parties about the PRP methodology at an early stage.

2. Methodology issues

As part of its review, the FWO will seek to understand the methodology used around applying terms of fair work instruments, job classifications and data sources. Employers should be able to explain reasons for the methodology adopted. In addition, the FWO will take note of the employer's approach in relation to the FWO's general position on offsetting payments.

While we are still awaiting the Federal Court's judgment in relation to the approach that Coles and Woolworths undertook in relation to the 'off-setting' of entitlements above statutory minimums, the FWO's position remains that employees must be paid in full for each pay period in accordance with legislative requirements, surplus payments in one period cannot justify underpayments in another pay period and payment of an entitlement above the minimum cannot satisfy underpayment of another entitlement.

3. Communications with employees

There is a need for a clear and comprehensive communication plan, addressing the targeted group (typically all employees including former employees), timing of communications (generally as early as possible), communication channels, transparency and enquiry pathways.

4. Making payments to employees

While this is not a legal requirement, the FWO considers it good practice and an appropriate acknowledgment of culpability, to pay employees interest on back payments or to adopt an alternative approach which benefits the employee in a way similar to making interest payments such as repayment at a higher pay rate.

The use of the Pre-Judgement Rate from the Federal Courts of Australia's Interest on Judgements Practice Notice is stated to be an acceptable approach to calculate interest. This rate is based on the Reserve Bank of Australia cash rate for each half-year period, plus an additional 4%.

Employers must be able to demonstrate the suitability of a different approach taken.

5. Former employees and outstanding payments

Employers are expected to take all reasonable steps to locate former employees owed payments pursuant to the PRP outcome. Reasonable steps may include channels such as email, social media and employee networks. Where reasonable steps have not been able to locate former employees, the FWO will generally require unclaimed monies to be paid to the Commonwealth.

6. Corrective measures

Immediate (interim) measures must be put in place to prevent further non-compliance and to correct the cause of non-compliance. Employers are required to consider measures such as implementing control systems and manual reconciliations.

7. Future compliance

Finally, the FWO highlights the importance of implementing steps and measures to enhance payroll compliance and minimise the risk of underpayments going forward. An extensive overview of example measures taken by other businesses is provided in the Guide, such as:

• conducting internal audits
• engaging external advisors
• reviewing and enhancing payroll systems
• putting the issue of 'payroll compliance' on board meeting agendas
• introducing dedicated roles to ensure compliance.

When to notify the FWO about non-compliance?

Consistent with the FWO's Compliance and Enforcement Policy, the Guide clarifies that no requirement to actively report to the FWO exists for isolated payroll issues which result in underpayments over a period of less than 12 months. This is contingent on employees being appropriately informed, receiving full back pay as soon as possible, and measures are implemented to prevent continued non-compliance.

Employers are however recommended to notify the FWO early in case of a broader and/or potential systemic non-compliance, even if all facts are not yet clear.

After the FWO has been made aware of the (potential) non-compliance, it will conduct an assurance review to ensure that the employer has taken action which likely results in accurate and timely payment of entitlements to employees, has considered and addressed the non-compliance causes and has adopted measures to ascertain future compliance and prevent continued or new non-compliance problems.

If the FWO is of the view that it cannot obtain sufficient assurance on certain issues, it may expect a higher level of involvement from employers during the investigation process or impose an enforcement action in line with its Compliance and Enforcement Policy.

What should employers do?

In case of an actual or suspected payroll non-compliance, employers should:

• engage external experts at an early stage, and consider whether such engagements should occur under legal privilege
• with expert guidance, establish a PRP in accordance with the requirements and features provided in the Guide (as summarized above)
• document and record all decisions, plans, data sources and other relevant information in relation to the PRP and the non-compliance issues
• carefully consider whether self-disclosure to the FWO is appropriate
• ensure early engagement with employees and unions.

For further information on the Guide or payroll and non-compliance queries in a broader sense, please contact our experienced workplace relations and safety team.