Contributed by Tiffany, Principal Bookkeeper, True Tally Bookkeeping
If you employ people in Australia, payroll compliance is no longer a back-office detail you can leave to chance. The regulator is more active than it has ever been, the penalties are now the most serious they have ever been, and the businesses most exposed are often the ones that never intended to do anything wrong.
The numbers tell the story. In 2025-26 the Fair Work Ombudsman recovered more than $453 million in unpaid wages and entitlements for over 181,000 workers, up 27% on the year before, and it nearly doubled its proactive investigations, up 86% to more than 2,680 (Fair Work Ombudsman). As Dynamic Business reported recently, the regulator also lifted its proactive investigations by 86%, to more than 2,680. "Proactive" is the word that should get every employer's attention. The regulator is not just responding to complaints anymore. It is going looking.
At the same time, the stakes changed. Since 1 January 2025, intentional underpayment of wages is a criminal offence under the Closing Loopholes changes to the Fair Work Act (Fair Work Ombudsman). For an individual, the maximum penalty is up to 10 years' imprisonment and a fine of around $1.585 million. For a company, it is the greater of three times the underpayment or $8.25 million. Those figures are reserved for deliberate conduct, but the point stands: wage compliance has moved from a paperwork risk to a personal one.
Why small businesses are so exposed
Most underpayments are not theft. They are interpretation. Australia's modern awards are genuinely complex: penalty rates, overtime, allowances, casual loading, broken shifts, minimum engagements and classification levels that change as a person's role changes. Rostering software will happily translate a messy roster into neat pay runs, and if the award rules behind it are set up wrong, it will underpay people perfectly, every single pay, until someone notices.
And here is the part owners underestimate: accidental underpayment is still a civil breach. Good intentions do not make the liability go away. Nor does "the bookkeeper did it." Under the Fair Work Act's accessorial liability provisions, a person "involved in" a contravention, which can include directors and managers, can be held personally liable, and under the new criminal regime individuals who are knowingly involved are squarely in scope. A company structure is not the shield many owners assume it is.
The real cost of getting it wrong
The evidence from the cases that make headlines is consistent. An underpayment is never just the shortfall. It is the back-payment across every affected employee, often stretching back years, plus interest and superannuation, plus penalties, plus the cost of the review to work it all out, plus the reputational damage and the time it swallows. A small, undetected error repeated weekly across a team compounds into a number that can threaten the business. The "saving" from an underpayment is almost always dwarfed by the cost of fixing it.
What a small business can actually do
The good news is this risk is very manageable with a bit of discipline.
Run a proactive payroll review. Do not wait for a complaint or an audit. Check that every employee is classified correctly under the right award, and that penalty rates, overtime and allowances are actually being applied.
Get the award interpretation right at the source. Make sure the rules built into your payroll software match the award, and that your rostering or timesheet data maps correctly into pay items. This is where most errors hide.
Keep clean records. Accurate time and pay records are both your compliance obligation and your best defence if you are ever reviewed.
Fix issues early and openly. If you find an underpayment, correcting it promptly and transparently is always better than hoping it stays buried. Intent matters, and so does good faith.
How to choose a payroll service that actually understands your award
This is the decision that protects you, so choose on expertise, not price. When you are assessing a bookkeeping and payroll provider, ask the questions that reveal whether they know your sector:
Do they understand your specific award? A provider who works across the SCHADS Award, trades awards or your industry's award will interpret the tricky parts correctly. One who does not will set up the software and move on.
Do they keep up with award changes? Awards are varied regularly. Ask whether they run continuing professional education on award and Fair Work changes as a standing process, so updates flow into your pay runs from the cycle they take effect.
Can they map your rostering or timesheet system into payroll properly? That mapping is where sleepovers, broken shifts and penalties get flattened into ordinary hours if it is done wrong.
Are they a registered BAS service provider, and will they review classifications rather than just process what they are given?
A payroll provider who asks about your award before quoting is telling you something important: they know the risk sits in interpretation, not data entry.
Payroll done properly is quiet. It is also one of the best pieces of insurance a small business can buy in 2026. Get a review done now, while it is a choice rather than a response to a letter from the regulator.