The complete guide to payroll audits for Australian enterprises

A payroll audit is a systematic review of your payroll processes to identify underpayments, overpayments and compliance gaps before regulators do.

From January 2025, the stakes changed dramatically. Intentional wage theft became a criminal offence carrying 10 years imprisonment and fines up to $7.8 million. Directors are personally exposed, even for unintentional breaches.

Large Australian enterprises now account for 60% of Fair Work Ombudsman recoveries ($213 million in 2024-25 alone). The regulatory landscape has shifted from civil penalties to criminal liability.

Australia operates one of the world’s most complex workplace relations systems (122+ Modern Awards with 180-200 rules each), yet less than 50% of employers conducted a payroll audit in the last 12 months.

This article provides the framework CFOs and CHROs need to ensure compliance and avoid catastrophic exposure.

What makes payroll audits so critical right now

The enforcement environment changed on 1 January 2025 when intentional underpayment became a Commonwealth criminal offence.

The Fair Work Ombudsman recovered $473 million in 2023-24 alone – third-highest recovery on record, with large corporate employers dominating the statistics.

Criminal penalties now include 10 years imprisonment for individuals and fines reaching the greater of $7.8 million or three times the underpayment amount.

Directors face personal liability even for unintentional breaches where they made executive decisions affecting payroll. You can be held personally liable even if you didn’t know about the underpayments.

The September 2025 Federal Court ruling

Justice Perram’s decision in Woolworths/Coles fundamentally changed how annualised salaries work in Australia.

The ruling held that contractual set-off can only operate within the same pay period, not across multiple periods. This invalidates the “pooling” approach used by thousands of employers with annualised salary arrangements (basically every large retailer, aged care provider and professional services firm in the country).

If you’ve been reconciling annually rather than per pay period, you have a compliance problem. The ruling affects manufacturing, healthcare, aged care and professional services equally.

Understanding audit triggers and FWO investigation processes

Three main triggers prompt payroll audits: employee complaints, industry campaigns and self-disclosure.

The FWO received 25,608 anonymous reports in 2024-25, with 33% from workers aged 15-24. These younger workers are increasingly aware of their entitlements and increasingly willing to report non-compliance.

Industry-specific campaigns represent the second major trigger. The FWO’s 2025 aged care investigation covers 20 organisations across 27 sites in five states. Hospitality shows 61% non-compliance rates in workplace basics campaigns.

Here’s what might surprise you: self-disclosure accounts for over 70% of major underpayment cases.

Companies proactively report after system implementations reveal historical errors, competitor disclosures prompt pre-emptive action, or internal audits identify systemic issues. Self-disclosure tends to result in better outcomes than being caught by an FWO investigation.

What happens during an FWO investigation

Fair Work inspectors exercise statutory powers under sections 708-716 of the Fair Work Act.

They can enter premises without force, inspect records, interview staff and require document production through section 712 notices. These aren’t polite requests – they’re legal requirements with penalties for non-compliance.

Investigators examine award coverage and classification, minimum wage compliance, overtime and penalty rates, allowances and casual loading, leave entitlements, record-keeping obligations and superannuation payments. They operate with a 6-year limitation period for back-payment claims.

The reverse onus provisions under section 557C shift the burden of proof to employers who failed to maintain required records. You must disprove underpayment allegations rather than the employee proving them. Poor record-keeping fundamentally changes who has to prove what in a dispute.

Core payroll audit methodology for enterprises

Enterprise payroll audits follow a four-phase framework used when auditing organisations with 1,000+ employees.

Phase 1: Understanding the payroll landscape

The first phase maps your entire payroll operation to identify where errors are most likely.

Map all key payroll processes: onboarding, terminations, pay runs, allowances, superannuation. Identify every pay obligation from Modern Awards, enterprise agreements, common law contracts and business decisions.

Most large organisations have employees covered by 5-15 different awards, multiple enterprise agreements and dozens of individual contract variations.

Assess your payroll team structure and segregation of duties. Evaluate the balance between payroll system reliance and manual processes. This initial risk assessment identifies where you’re most likely to find errors and what the financial exposure might be.

Phase 2: System configuration compliance review

The second phase examines whether your payroll system actually calculates pay correctly.

Examine how pay codes and allowances align with pay instruments. Verify tax application to all payment types. Confirm superannuation calculation and reporting accuracy. Review casual loading and leave loading application across all employee types.

Deep dive into payroll software configuration focusing on overtime and penalty rate triggers, allowance payment determination and award interpretation rules. Test how your system responds to different shift patterns, broken shifts, sleepovers and rostering scenarios.

Most payroll systems struggle with this complexity because they’re designed for simplicity rather than award compliance.

Systems should automatically update when Fair Work Commission publishes annual wage reviews (typically 1 July) and when awards change. Review access controls – maximum 2-3 people should have administrator access. Segregate duties between those who can add employees, approve timesheets, process payroll and execute bank payments.

Phase 3: Transaction testing and data analytics

The third phase tests actual pay calculations against award requirements.

Conduct end-to-end sample testing using actual time and attendance data with real employee records. Professional services firms typically run approximately 90 different risk-based data analytics tests. Visual data analysis identifies trends and anomalies – patterns that suggest systematic errors rather than one-off mistakes.

Test calculations include base rate accuracy, penalty rate multipliers, allowance applications, overtime calculations, leave loading, casual loading and superannuation contributions. Compare system outputs against manual calculations using source award documents.

For enterprises with 1,000+ employees, sample sizes typically range from 50-100 for detailed testing. Be prepared to expand testing significantly if you start finding errors.

Phase 4: Remediation and improvement planning

The fourth phase develops action plans to fix identified issues and prevent recurrence.

Create achievable correction plans with clear timelines. Prioritise by severity: critical issues requiring immediate remediation, high-priority systemic problems, lower-priority process improvements. Focus on the issues that create the most liability first.

Quantify the financial impact of all identified errors. Include back-payments, interest calculations (Reserve Bank rate plus 4%), superannuation make-good and tax implications. What looked like a small configuration error might represent millions in back-payments once you multiply it across thousands of employees over six years.

Develop comprehensive process improvements addressing root causes, not just symptoms. System configuration changes, enhanced controls, staff training, documentation updates, ongoing monitoring mechanisms. Paying back underpayments doesn’t fix the underlying problem that caused them.

How often should you conduct payroll audits

The minimum standard is annual comprehensive audits, but less than 50% of employers meet this baseline.

Best practice organisations conduct monthly audits. Australian Payroll Association research shows monthly audits correlate with 54% high confidence in payroll accuracy compared to organisations auditing less frequently.

The problem with annual audits is finding errors 12 months after they started – which means 12 months of accumulated liability.

Leading enterprises have shifted to continuous monitoring using technology platforms that analyse every employee in every pay cycle, flagging potential issues before pay finalises. This catches errors in real-time rather than discovering them a year later.

Trigger events that require immediate audits

Certain events require immediate audits regardless of your regular schedule.

Modern Award updates (typically twice yearly) and Fair Work Commission annual wage review outcomes require verification that your system reflects new rates. If your system doesn’t update correctly, you start underpaying people immediately.

System implementations or upgrades demand comprehensive audits before going live and post-implementation validation. We’ve seen more payroll disasters caused by system migrations than any other single factor. Organisations assume the new system will work correctly without testing it against actual award requirements.

Major regulatory announcements like the September 2025 Woolworths/Coles Federal Court decision warrant immediate impact assessments. Competitor disclosures in your industry should trigger pre-emptive reviews.

Award complexity and system limitations

Australia’s 122+ Modern Awards each contain 180-200 individual rules that compound when employees work across multiple classifications.

Most payroll systems rely on simplified rules that approximate rather than precisely calculate entitlements. Payroll system vendors will tell you their system handles award compliance – what they mean is that it handles a simplified approximation that works for straightforward scenarios.

Common configuration errors include missing penalty rate triggers, incorrect allowance applications, flawed overtime calculations and broken shift rules that don’t match award requirements.

The SCHADS Award example

The Social, Community, Home Care and Disability Services Award demonstrates why system configuration fails.

Level 2 employees have 23 possible pay rates depending on shift timing, broken shift status and sleepover provisions. A single rostering period might trigger:

• Saturday penalties (150% for first 2 hours, 175% thereafter)
• Sunday penalties (200%)
• Public holiday penalties (250%)
• Sleepover allowances
• Broken shift penalties

Most systems can’t handle this complexity without custom configuration. The September 2025 Federal Court decision added another layer – systems configured for annual salary pooling now produce non-compliant outcomes for SCHADS employees.

If you’re running aged care or disability services, this ruling directly affects you and you need to audit your annualised salary arrangements immediately.

Common audit findings in Australian enterprises

Three errors dominate payroll audit findings across Australian enterprises.

Award misclassification – Employees classified at incorrect levels result in systematic underpayment across their entire employment period. This happens most often during organisational restructures when someone’s duties change but their classification doesn’t update, or when new roles are created and someone makes a best guess without checking the award.

Penalty rate failures – Systems don’t apply Saturday, Sunday, public holiday or overtime penalties correctly. Configuration errors compound over time affecting thousands of shifts.

Missing or incorrect allowances – Exposure across meal allowances, travel allowances, uniform allowances and tool allowances. Each Modern Award specifies different allowance triggers and amounts.

Annualised salary arrangements

The September 2025 Federal Court decision exposed systematic non-compliance with annualised salary set-off provisions.

Employers using annual reconciliation rather than pay-period reconciliation face potential liability for the entire annualised salary population. This affects retail, healthcare, aged care and professional services sectors most significantly. Remediation projects now underway across major enterprises could exceed $500 million in aggregate.

Casual loading issues

Casual employees entitled to 25% loading frequently receive incorrect rates when systems apply loading to base rate only rather than base rate plus penalties.

The loading should apply to the total shift rate including penalties (which most systems don’t calculate correctly without custom configuration). Long-term casuals may be entitled to conversion to permanent employment under the Casual Employment Information Statement requirements, creating additional liability beyond just the loading calculation errors.

Calculating remediation obligations

Remediation calculations must include back-payments, interest, superannuation make-good and tax implications.

Back-payment calculations must include all underpaid amounts for the maximum look-back period (typically 6 years). Calculate each pay period separately using the applicable Modern Award or enterprise agreement rates at that time.

Interest applies at the Reserve Bank cash rate plus 4% per annum. Calculate interest on each underpayment from the date payment should have occurred until the date of remediation payment.

Superannuation make-good includes both the underpaid superannuation guarantee amounts plus interest. The ATO charges Superannuation Guarantee Charge at substantial penalty rates for late payments.

Tax treatment of back-payments

Back-payments are assessable income in the year received, not the years they relate to.

This creates potential tax disadvantages for employees who might be pushed into higher tax brackets by receiving multiple years of back-payments in a single year. The ATO provides administrative concessions allowing amended tax assessments for prior years where back-payments relate to those years and the employee would pay less tax through amended assessments.

Your remediation plan needs to include tax advice to affected employees and potentially arrange for amended assessments where this benefits them.

Self-reporting requirements and voluntary disclosure

No legislative requirement mandates self-reporting to the Fair Work Ombudsman, but there are very good reasons to do so.

Isolated unintentional payroll errors over short periods (up to 12 months) don’t require active reporting if you appropriately inform employees, back-pay them in full immediately and implement changes preventing recurrence.

Self-reporting becomes critical for broader non-compliance affecting multiple employees, classifications or locations, historical underpayments beyond 12 months, systemic issues indicating governance failures and potentially serious contraventions.

Contact the FWO Corporate Assurance team by emailing corporateassurance@fwo.gov.au as soon as possible after discovery. Provide details about the nature of non-compliance, approximate employee numbers, estimated quantum, time period and proposed remediation plan.

Timing is everything

If the FWO learns about issues through other channels before your notification, your subsequent report will not be regarded as voluntary disclosure.

Once an employee complains or a journalist starts asking questions, you’ve lost the advantage of voluntary disclosure. Self-reporting doesn’t guarantee immunity but demonstrates good faith.

The difference between self-reporting early and being caught can mean millions in reduced penalties and avoiding criminal prosecution.

Director liability and personal consequences

Directors and company officers face personal accessorial liability under section 550 of the Fair Work Act.

You are “involved in” contraventions if you aid, abet, counsel or procure them, induce them through threats or promises, or are knowingly concerned in them. Personal penalties reach $18,780 per contravention (non-serious) or $187,800 per contravention (serious). Multiple contraventions multiply this exposure rapidly across affected employees and pay periods.

The Priority Matters case imposed $210,000 penalties on directors personally. The Matcraft case held directors personally liable with $15,000 awarded even for unintentional underpayments where directors made executive decisions.

Criminal liability from January 2025 creates imprisonment risk. Directors who authorise, permit or are knowingly concerned in intentional underpayments face 10 years imprisonment plus $1.565 million fines.

The corporate veil provides no protection – personal liability exists without needing to prove fraud, inadequate capitalisation or failure of corporate formalities. Directors cannot be indemnified by companies for criminal penalties. Civil penalties may be covered by directors’ and officers’ insurance depending on policy terms, but Employment Practices Liability Insurance typically excludes unpaid wage coverage.

When to engage specialist external auditors

Three circumstances warrant engaging external payroll auditors: lack of internal expertise, complex remediation situations and board assurance requirements.

Engage external auditors when you lack internal expertise in Modern Award interpretation. Award complexity makes specialist knowledge essential for accurate compliance assessment.

When you discover potential systemic underpayments, external auditors bring experience from similar remediation projects and knowledge of Fair Work Ombudsman expectations. They know what the FWO will accept and what they’ll challenge.

Directors facing personal liability require independent validation that payroll compliance is adequate. Annual external audits provide this assurance and create evidence of good governance if things go wrong.

Selecting the right auditor

Select external auditors based on Australian industrial relations expertise, not just general audit capability.

Review their experience with Modern Awards, enterprise agreements, Fair Work Act compliance and payroll system knowledge. A Big Four firm with strong corporate audit credentials might not have the specific award interpretation expertise you need.

Big Four accounting firms (Deloitte, PwC, KPMG, EY) offer comprehensive frameworks, technology platforms and large teams. Specialist payroll consultancies (Payroll Experts Australia, ER Strategies, BDO Australia) provide deep subject matter expertise and potentially faster response times.

The key question is whether they’ve done Modern Award audits for organisations similar to yours. Ask for specific case studies, not just general credentials.

Case studies: Major Australian underpayment scandals

Five major cases demonstrate the scale and causes of payroll compliance failures.

Woolworths – Self-disclosed $300+ million affecting 19,000 managers under annualised salary arrangements. The September 2025 Federal Court ruling against Woolworths fundamentally changed how annualised salaries can operate, requiring pay-period reconciliation rather than annual pooling.

Coles Supermarkets – Similar exposure with $31 million paid and estimated further remediation of $150-250 million. Both retailers must now reconcile all entitlements every pay period rather than annually.

Commonwealth Bank – Paid $16.1 million affecting 7,402 employees with record penalties of $10.34 million. The bank knowingly underpaid workers since 2010 by using Individual Flexibility Arrangements on a mass scale without proper reconciliation.

Australian Universities – Underpaid $203+ million across 30 public institutions. University of Melbourne faces $22 million back-payments for 15,000+ staff. The root cause was “piece rate” payments for marking based on assessments per hour rather than actual time worked.

IBM Australia – Back-paid $12+ million (2012-2020) after failing to apply relevant awards to salaried professionals. Individual back-payments reached $145,000 due to missing vehicle allowances, superannuation, annual leave loading and 15+ other entitlements.

What happens during an FWO investigation

Fair Work inspectors exercise statutory powers that go well beyond normal business interactions.

They can enter premises without force during business hours, inspect work and processes, interview any person, require production of records and take photographs or videos. These aren’t polite requests – they’re statutory powers backed by criminal penalties for obstruction.

Section 712 notices compel document production. Section 712A notices (via Administrative Appeals Tribunal) compel information provision, document production or attendance for questioning when other methods are exhausted. The 2017 Vulnerable Workers legislation removed the right to silence for workplace investigations.

Investigation outcomes range from:

• Assessment letters finding no contraventions
• Formal cautions for minor breaches
• Compliance notices directing corrections
• Infringement notices (on-the-spot fines)
• Enforceable undertakings
• Civil litigation
• Criminal prosecution

The Fair Work Ombudsman issued 1,220 compliance notices in 2024-25, recovering $16.9 million. Compliance notice breaches automatically become prosecutable offences with significant penalties.

Criminal wage theft legislation explained

Federal criminal wage theft offences commenced 1 January 2025 under section 327A of the Fair Work Act.

Employers commit offences where they intentionally engage in conduct resulting in failure to pay required amounts in full by due date. Criminal penalties include up to 10 years imprisonment for individuals and fines reaching the greater of $7.8 million or three times the underpayment amount.

Victoria introduced criminal wage theft laws in July 2021 with penalties up to $1.09 million for companies and $218,088 or 10 years imprisonment for individuals. Queensland wage theft laws (September 2020) extend the Criminal Code definition of “stealing” to include fraudulent failure to pay employee amounts.

Safe harbour mechanisms

The federal laws include safe harbour mechanisms that prevent criminal prosecution for employers who self-report.

Cooperation agreements prevent criminal prosecution if employers self-report underpayments before the Fair Work Ombudsman discovers them. But they require full remediation, cooperation with investigations and implementation of compliance measures.

This creates a powerful incentive to find and fix problems yourself rather than waiting to be caught.

Critical success factors for Australian enterprises

Five factors separate organisations that maintain compliance from those that face underpayment scandals.

Award complexity demands specialised expertise and technology. Manual processes cannot reliably interpret 122+ Modern Awards with 180-200 rules each. Investment in purpose-built Australian solutions is non-negotiable. The cost of getting this wrong far exceeds the cost of proper systems and expertise.

The regulatory environment makes payroll compliance a board-level governance issue, not an operational function. If your board isn’t receiving regular reports on payroll compliance, you have a governance gap.

Professional capability requires qualified staff holding Australian Payroll Association certifications or equivalent. Payroll teams need regular training on award changes, system capabilities and compliance requirements.

Continuous improvement shifts from annual point-in-time audits to ongoing monitoring. Embed compliance checking into business-as-usual operations rather than treating it as a periodic exercise. The organisations that avoid underpayment scandals continuously monitor rather than occasionally audit.

Transparent remediation following Fair Work Ombudsman Payroll Remediation Program Guide principles if issues are identified. Calculate full back-payments, pay interest, communicate transparently, self-report when required and implement preventative measures.

The investment in comprehensive payroll compliance infrastructure costs significantly less than remediation ($473 million recovered by FWO in 2023-24), penalties, criminal liability exposure and reputational damage affecting enterprise value.

If you’re assessing your current payroll compliance position or need specialist support conducting an enterprise audit, Payroll Experts Australia works with large organisations and complex workforces on payroll audits and remediation. Contact us for a confidential chat today.