Wage Underpayment Class Actions and Payroll Risk in Australia

The Compliance Reckoning: Wage Class Actions in the Modern Era

There was a time when payroll was viewed as a mundane back-office function, a simple matter of arithmetic and administration. Those days are unequivocally over. In the current Australian commercial landscape, the payroll ledger has evolved into one of the most volatile sources of corporate risk.

We are witnessing a shift where wage underpayment disputes are no longer treated as isolated administrative errors, but as systemic failures. The Federal Court’s docket is increasingly crowded with representative proceedings, and the "class action" has become a recurring nightmare for the ASX-listed and the mid-tier enterprise alike.

The Unforgiving Nature of the Law

The engine driving this litigation is the Fair Work Act 2009. Its demands regarding the National Employment Standards, Modern Awards, and Enterprise Agreements are rigid, and for good reason. However, for the employer, the danger lies in the Act’s indifference to motive.

In the civil jurisdiction, an honest mistake is treated with much the same severity as a deliberate scheme.

The stakes were raised significantly on January 1, 2025. With the commencement of the "Closing Loopholes" amendments, Parliament criminalised the intentional underpayment of wages. While criminal liability requires a high bar of proof regarding intent, its introduction has handed regulators a heavier stick. It signals a cultural shift: underpayment is no longer just a breach of contract; in its worst forms, it is now a crime.

Why the Floodgates Opened

One might ask why these actions are proliferating now. It is arguably a perfect storm of regulatory complexity and commercial opportunism.

Australian industrial instruments are notoriously labyrinthine. Modern Awards contain nuances regarding allowances, breaks, and penalty rates that can baffle even seasoned HR professionals. When these complexities meet rigid, "set-and-forget" payroll software, systemic errors are almost inevitable.

Furthermore, the business of litigation has changed. Third-party litigation funders have realised that wage underpayment claims are a viable asset class. When a single payroll error affects thousands of employees, the "commonality" required for a class action is easily established. It is efficient, scalable, and, for the funders, potentially lucrative.

Common Structural and Compliance Weaknesses

Key areas that give rise to systemic wage underpayment issues include:

• Annualised salary arrangements that do not accurately reflect all award entitlements when tested against actual hours worked;

• Incorrect job classification under modern awards;

• Failure to pay penalty rates, allowances and overtime consistent with applicable instruments;

• Poor timekeeping or record-keeping systems that undermine evidence of compliance;

• Inadequate management of enterprise agreement updates and award modernisations.

Even highly resourced employers can fall foul of these issues without proactive compliance management.

The Lovisa Warning

For a contemporary illustration of this climate, one need look no further than the representative proceeding filed against the retailer Lovisa in early 2025.

The allegations against the jewellery giant are extensive and specific. Former and current staff claim they were directed to work through meal breaks, perform unpaid duties before and after their shifts, and that "Individual Flexibility Agreements" were used to undercut overtime entitlements.

While Lovisa has stated it will defend the claims, the case serves as a stark warning to the retail sector. It demonstrates that having a signed Enterprise Agreement is not a panacea. If the reality on the shop floor, the "custom and practice" of managers, contradicts the written agreement, the legal exposure remains acute.

The Path to Immunisation

For employers wishing to avoid a starring role in the Federal Court, the solution is proactive, unglamorous vigilance.

Reliance on automated systems without human oversight is a dangerous gamble. Employers must conduct regular legal audits, not just of the numbers, but of the logic behind them. Are annualised salary arrangements actually covering the award entitlements when tested against real-world hours? Are job classifications still accurate?

Governance structures must also mature. Payroll risk belongs on the boardroom agenda, not buried in the finance department. When errors are identified, as they often are, remediation must be swift, legally privileged, and precise.

The era of "she’ll be right" has passed. In a market characterised by active regulators, aggressive class action funders, and complex laws, compliance is no longer just about following the rules, it is a fundamental risk mitigation strategy, and perhaps, a core survival skill.

 Practical Steps to Reduce Wage Underpayment Risk

To mitigate the risk of wage underpayment litigation:

1. Conduct regular, legally informed payroll audits - Audits should assess not just total payroll figures, but award application, classification structures, overtime and penalty rate calculations, and compliance with record keeping obligations.

2. Strengthen governance and reporting - Payroll risk should be included in enterprise risk frameworks with clear ownership and regular reporting to executive leadership and boards.

3. Integrate legal oversight into remediation - Where potential underpayments are identified, early legal advice can help shape remediation strategies that reduce exposure to class actions and regulatory enforcement.

4. Invest in capability and systems - Payroll technology must be capable of applying complex industrial rules accurately, and HR/finance teams must be trained to understand and interpret those rules.

5. Coordinate legal and communications strategies - Given the reputational dimension, responses to investigations and class actions should include aligned legal and public communications planning.

The Road Ahead for Australian Employers

Wage underpayment class actions represent a maturing and significant litigation category in Australia’s employment law environment. The combination of complex industrial instruments, regulatory reforms, active litigation funding markets and high profile cases like Lovisa highlights the need for systematic compliance and proactive risk management.

Employers should prioritise rigorous payroll governance, structured remediation programs and early legal engagement to navigate this evolving landscape.

The content in this Article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. It should not be relied upon as such. You should seek legal or other professional advice before acting or relying on any of the content.

The solicitors at BlackBay Lawyers can provide specialised and detailed legal advice. If you require advice, please feel free to contact BlackBay Lawyers on (02) 8005 3077 or via www.blackbaylawyers.com.au  for a confidential discussion with one of our solicitors.