Minimum wage rose 3.5% in July but many SMEs still face underpayment claims despite paying above award rates.
What’s happening: Modern award rates have risen across the board, affecting not just base pay but overtime, penalty rates, loadings and allowances. Many SMEs using loaded rates or annualised salaries remain at risk of non-compliance despite paying what appears to be generous wages.
Why this matters: Since 1 January 2025, intentional wage theft carries criminal penalties including potential imprisonment. Even well-meaning employers face serious legal and financial consequences if they can’t prove their pay structures meet modern award requirements.
The 3.5% minimum wage increase that took effect on 1 July 2025 has created a compliance minefield for small and medium businesses, with 2.6 million workers now covered by higher rates. But paying above award wages doesn’t guarantee protection from underpayment claims, and the stakes have never been higher.
Stephen Roebuck, Associate Director of Consultancy at Peninsula, warns that SMEs often fall into a dangerous compliance trap. “For employers paying loaded rates or annualised salaries, the risk of non-compliance is higher than many realise. Despite paying ‘above the award’, businesses can still face underpayment claims if wages don’t correctly reflect entitlements under the applicable modern award.”
The risks extend beyond financial penalties. “Indeed, intentional wage theft now carries the threat of criminal charges and potential imprisonment,” Roebuck emphasises.
“That’s why it’s so important for SMBs to stay on the front foot with payroll checks, before small errors can turn into serious issues.”
The wage increase affects more than just hourly rates. “From 1 July 2025, modern award rates have risen in line with the new minimum wage. Employers need to understand this does not just affect base pay, it can also impact overtime, penalty rates, loadings and allowances.”
Failing to update pay structures, contracts or rosters could result in accidental non-compliance. “And if a business continues using outdated pay rates or makes assumptions based on previous years, it risks falling short of legal minimums, even if it appears to be paying above award.”
Loaded rates risks
Loaded rates, which combine base pay with expected extras like overtime and penalties into a flat hourly or weekly amount, present particular challenges. Similarly, annualised salaries that aim to cover all entitlements can create compliance gaps.
“A loaded rate is a flat hourly or weekly amount that includes base pay plus expected extras like overtime and penalties. Similarly, annualised salaries are set yearly amounts that aim to cover all entitlements,” Roebuck explains.
“On paper, these can seem like easier ways to manage pay. But without clear records and reconciliation, these methods often fall short of the modern award’s requirements.”
The reconciliation requirements are specific and demanding. “For example, some awards require employers to compare actual hours worked with what the employee should have earned under the award. If there’s a shortfall, even with a loaded rate or salary, businesses are legally required to top it up.”
Industries most at risk include hospitality, healthcare, retail and trades, where overtime and shift work are common. “In my experience advising SMBs, these industries may unintentionally underpay due to poorly documented pay structures or assumptions that ‘flat’ rates are sufficient,” Roebuck says.
The documentation requirements are stringent. “Additionally, employers that choose to pay the loaded rate style of payment must ensure that their documentation is watertight with each employee having an agreement in writing that sets out what’s included in and offset by the above award rate. Get your agreements and contracts drafted by an expert!”
Common dangerous myths
The biggest myth catching SMEs is believing that paying above award rates guarantees compliance. “One of the biggest myths I see is the belief that paying above the award rate guarantees compliance. That’s simply not true. Without documentation to prove entitlements are met, employers remain exposed,” Roebuck warns.
Record keeping presents another critical challenge. “And don’t forget, records of hours worked need to be kept in line with the Fair Work Act 2009. Many SMBs fall short when working backwards to prove that there was no underpayment because their record keeping was not up to scratch.”
Good intentions provide no legal protection. “Ultimately, good intentions don’t protect a business. If you can’t prove you’ve paid what’s legally owed, you could be liable, even if your employee never raises a complaint.”
Simple audit process
For businesses uncertain about their compliance status, Roebuck provides a practical solution. “If you’re unsure where your business stands, here’s a practical four step audit to help ensure compliance.”
The process involves identifying the applicable modern award by reviewing “employee classifications and relevant rates of pay, including the July 2025 updates.”
Second, compare pay structures by matching “your loaded rates or salaries against what employees would earn under award.”
Third, check actual hours worked by using “rosters, timesheets or digital tools to confirm hours worked.” Finally, “adjust and document: Recalculate any shortfalls, adjust contracts if needed and keep clear records of all changes.”
Regular monitoring is essential. “It’s also best practice to conduct payroll audits at least twice a year to catch issues early and stay ahead of regulatory changes.”
When underpayment happens
Swift action is critical when underpayment is discovered. “If you identify an underpayment, act quickly and transparently. Calculate the backpay owed, communicate openly with the employee and document your steps to fix the issue.”
Contract clarity helps prevent future issues. “You may also want to update your employment contracts to clearly outline how pay is structured and what’s included. This can reduce confusion for both you and your staff.”
The criminal penalties add urgency. “Importantly, since 1 January 2025, intentional underpayment of wages is a criminal offence, so taking early proactive action is critical. When in doubt, seek advice from your HR partner or legal representative to ensure everything is resolved properly.”
Roebuck emphasises that today’s compliance focused environment demands proactive management. “This year’s wage increase is a timely reminder that even well meaning employers can make mistakes. Paying ‘above award’ is not a free pass.”
The solution lies in better systems and understanding. “In my experience, most SMBs want to do the right thing, they just need the right tools and a better understanding of the rules. Proactive payroll reviews don’t just help protect your business from penalties, they build operational confidence, improve staff trust and work towards safeguarding your brand.”
The investment in compliance pays dividends. “It’s worth taking the time now to check your systems, small changes today can make a big difference to your compliance and confidence tomorrow.”
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