When running a business, it’s easy to focus on growth, service delivery, and customer satisfaction, but getting your obligations right when it comes to paying employees and contractors is just as important.
Failing to comply with workplace laws or tax requirements doesn’t just risk unhappy workers — it can also lead to serious penalties, audits, and reputational damage.
Here’s a breakdown of the potential consequences if your business fails to pay staff or contractors correctly, and how you can avoid falling into these costly traps.
1. Penalties for Underpaying Employees
The Fair Work Ombudsman (FWO) enforces Australia’s workplace laws, including minimum pay, leave entitlements, and conditions under modern awards. If your business underpays staff — even unintentionally — you could face:
- Back payments: You may be required to repay the full underpaid amount, including superannuation.
- Fines and infringement notices: The FWO can issue fines of up to $18,780 per breach for individuals and $93,900 per breach for companies, and more if conduct is found to be deliberate or systematic.
- Litigation and court orders: In serious cases, court proceedings may be initiated, and penalties can exceed hundreds of thousands of dollars.
- Damage to reputation: Public naming and media attention can seriously impact your brand.
2. Penalties for Incorrectly Engaging Contractors
Treating an employee as a contractor when they should be classified as an employee — commonly known as sham contracting — can result in:
- Fines and compensation orders under the Fair Work Act.
- Superannuation Guarantee liabilities: If someone is determined to be an employee, your business may owe unpaid super contributions, plus interest and penalties.
- Unpaid leave entitlements: You may also owe annual or personal leave if the worker should have been classified as an employee.
- Legal costs: Defending against claims can become expensive, even if the misclassification was not intentional.
3. ATO Penalties and Withholding Issues
If your business fails to:
- Withhold the correct amount of tax from wages or payments,
- Pay superannuation on time, or
- Report using Single Touch Payroll (STP),
the ATO may impose administrative penalties, interest charges, and disallow tax deductions for those payments.
Avoiding These Pitfalls
- Stay informed about award changes: Regularly check the Fair Work website or consult with your HR adviser or accountant to stay up-to-date with the latest updates.
- Use reliable payroll software: This helps automate award rates, super contributions, and STP reporting.
Clarify worker classifications: When in doubt, seek professional advice to determine whether a worker should be treated as an employee or contractor. - Perform regular compliance audits: A simple review of pay rates, contracts, and super obligations can save a lot of trouble down the line.
Paying your employees and contractors correctly isn’t just a legal requirement; it’s a sign of a well-managed business. If you’re unsure whether your business is meeting its obligations, don’t wait for a penalty notice or a disgruntled worker to find out.
