Wage underpayment class actions: How to prepare for what is coming next

Wage underpayment class actions are on the rise in Australia, targeting both large corporations and systemic issues in industries such as hospitality and retail. These actions, which can impose significant costs and operational burdens on employers and the broader economy, often go beyond recovering alleged underpayments and may expose employers to substantial penalties, complex compliance challenges and reputational risks, even where breaches are unintentional.

This article explores the trends driving wage underpayment and the increasing employment class action risk for Australian employers. It examines the factors shaping these developments and offers insights into how employers can navigate this evolving landscape.

Wage underpayment in Australia

Wage underpayment occurs when an employer fails to pay an employee the full amount they are entitled to under applicable laws, industrial instruments, or agreements. This includes entitlements such as minimum wages, penalty rates, overtime, and other monetary benefits prescribed by the Fair Work Act 2009 (Cth) (FW Act) or relevant awards and agreements.

Wage underpayment is a risk which spans a wide range of industries. However, industries that rely heavily on casual, part-time, and migrant workers – who are more likely to have precarious employment status or lack awareness of their rights – are particularly vulnerable. These industries include retail, hospitality, food services, the gig economy, and healthcare.

Although the causes of wage underpayment vary, key contributing factors include:

• Complexity of Australia's Industrial Relations framework: can lead to payroll errors, even for well-resourced employers.

• Lack of awareness or deliberate non-compliance.

• Vulnerability of certain worker groups: migrant workers, young workers, and casual workers are often less likely to report concerns regarding underpayments due to a lack of understanding about their rights which means the issue may not be identified until it presents a class action risk.

The role of the Fair Work Ombudsman

The Fair Work Ombudsman (FWO) has a broad remit to promote harmonious, productive and cooperative workplace relations, and to inquire into compliance with the FW Act.

The regulatory model engaged by the FWO is a tiered approach which aims to encourage voluntary compliance through education, guided compliance (where investigation has identified non-compliance), including issuing compliance notices, and enforced compliance through litigation. In relation to underpayment, the FWO:

• Educates and raises awareness: by campaigning and publishing resources to help employers and workers understand minimum pay rates, award classifications, and overtime and penalty entitlements.

• Investigates potential breaches: by investigating breaches of the FW Act, including failure to pay minimum wages, non-payment of leave, and other entitlements. This includes intentional underpayments, misclassifications under Awards, misclassification of contractors who meet the new statutory definition of an employee and sham contracting.

• Takes enforcement action: by taking various enforcement steps based on the severity of non-compliance. This can include enforceable undertakings (where employers voluntarily agree to fix issues, pay back wages, and improve compliance) or litigation in the Federal Court of Australia to recover underpayments and seek penalties. The FWO may bring litigation not only against employers and registered organisations, but also individuals who may have been involved in a contravention, such as directors, managers and external consultants.

Expanded powers under wage theft laws

The Fair Work Legislation Amendment (Closing Loopholes) Act 2023 amended the FW Act to introduce criminal offences for intentional underpayment of employees’ wages and certain entitlements. These provisions came into effect from 1 January 2025. Intentional underpayments, where it can be demonstrated that employers knowingly engaged in the conduct, can result in criminal charges, including jail time and significant fines.

A number of high-profile cases have drawn significant media attention to this issue, raising public awareness of wage underpayment and increasing pressure on employers to comply with workplace laws. This heightened focus has also resulted in strong interest from plaintiff law firms and litigation funders, who see these matters as lucrative claims to pursue on behalf of allegedly affected employees.

Underpayment class actions

Traditionally, employees seeking unpaid wages relied on complaints to the FWO, union-backed court proceedings, or small claims in lower-level courts. These approaches can be slow, inefficient, and often inaccessible for vulnerable workers.

Elliott-Carde v McDonald’s Australia Limited (Stay Application) (2023) 301 FCR 84

The Federal Court confirmed in the McDonald's 'rest break' class action that class actions are an efficient way to enforce employment rights. The Court managed overlapping claims by the Shop, Distributive and Allied Employees’ Association (SDA) and a class action, both alleging that McDonald's workers were denied ten-minute rest breaks in breach of industrial instruments and the FW ACT.

The Court dismissed the SDA’s application to stay the class action in favour of its separate proceedings, instead ordering the matters to be managed together to resolve common issues efficiently. Justice Lee said that class actions are effective for resolving disputes involving large groups of affected individuals, particularly where the affected group includes vulnerable individuals. In this case, the class action provides a single forum for up to 350,000 current and former McDonald’s workers, avoiding the inefficiencies and duplication of resources that come with multiple individual or smaller group proceedings.

The Court also noted that class actions provide a binding resolution for all group members who do not opt out, ensuring finality and certainty for both parties. This was contrasted with the SDA’s approach, which risked inconsistent outcomes across multiple proceedings.

The decision highlights the Federal Court’s recognition of class actions as a powerful and effective tool for addressing wage underpayment claims.

The current landscape

As a result of recent enforcement actions by the FWO and related media attention on underpayments, and the decision in the McDonald's 'rest break' class action, litigation funders and plaintiff lawyers are increasingly focused on wage underpayments class actions.

Over the last 18 months, the filing of employment class actions increased dramatically compared to previous years and several high-profile class actions have settled, including:

• Victorian Junior Doctors: the Federal Court approved a $175 million whole-of-sector settlement relating to 30 class actions brought against 36 Victorian public health services with respect to claims for alleged unpaid unrostered overtime.

• NSW Junior Doctors: the Federal Court approved a $229.8 million settlement in the class action which alleged junior doctors employed in the NSW public health system were routinely required to work unpaid unrostered overtime.

• NT Stolen Wages: the Federal Court approved a settlement of up to $202 million in the class action brought against the Commonwealth Government on behalf of all Aboriginal and Torres Strait Islander people (including deceased individuals) who worked in the Northern Territory between 1933 and 1971 and received little or no wages.

Often, underpayment class actions are commenced following action taken by the FWO, as described above. This can complicate defence strategy and, if not managed carefully, result in inefficiencies leading to increased costs.

This trend means that employers currently face an increased risk of class actions, particularly in industries with systemic underpayment issues or vulnerable workforces.

Managing underpayment risks

Prevention is better than cure

To mitigate the risks of wage underpayment and the follow-on class action risks, employers should adopt proactive compliance measures. Key strategies include:

• Conduct regular payroll audits: employers should review payroll systems and processes to ensure compliance with awards, enterprise agreements, and the FW Act. This can help identify and rectify errors before they escalate.

• Invest in training and education: providing training for staff on award interpretation and compliance is essential. Employers should also educate employees about their entitlements to foster transparency and trust.

• Implement robust payroll systems: modern payroll software can help manage the complexity of Australia’s industrial relations system, reducing the risk of errors. Employers should ensure their systems are up to date and capable of handling complex award structures.

• Stay informed about legislative changes: employers should monitor developments in wage theft laws and other employment legislation to ensure compliance with both State and Federal requirements.

• Foster a culture of compliance: encouraging employees to raise concerns internally and addressing issues promptly can help prevent external escalation. Employers should also implement whistleblower protections to ensure employees feel safe reporting potential underpayment.

Managing class action risks

If suspected or actual historical underpayment means that prevention is not sufficient to manage risk, employers should take proactive steps to identify and, if necessary remediate non-compliance. Employers should also take steps to prepare for the class action risk to materialise. Key strategies include:

• Review employment records and agreements: assess contracts, awards, enterprise agreements, and payroll records for compliance and potential breaches.

• Carefully examine complaints and grievances: analyse internal records of employee concerns, such as unpaid wages or entitlements.

• Compare with industry standards: benchmark employment practices against legal requirements and industry norms.

• Review marketing and public statements: Ensure recruitment materials and employee handbooks align with legal obligations and accurately represent entitlements.

• Maintain litigation hygiene: implement document retention policies, train teams on best practices and privilege.

• Monitor media and regulatory developments: track trends, claims, and updates from regulators like the FWO.

• Develop a chronology: document key events, policy changes, and interactions with stakeholders to establish a clear timeline.