Have you just discovered you’ve overpaid or underpaid an employee?

Payroll mistakes happen more often than most business owners realise. Whether it’s an incorrect pay rate, a payroll system error, a missed overtime payment or an Award interpretation issue, how you respond is just as important as the mistake itself.

With the Fair Work Ombudsman continuing to focus on wage compliance and wage theft laws becoming increasingly significant across Australia, businesses need to ensure they act quickly, transparently and in accordance with the law.

The good news? Most payroll issues can be resolved professionally when they’re managed correctly.

Don’t panic – Assess the situation

Before speaking with your employee, take the time to understand exactly what has happened.

  • Is this an overpayment or an underpayment?
  • Which employee(s) are affected?
  • How long has the issue been occurring?
  • What caused the error?
  • Has the problem now been corrected in payroll?
  • Are there any Award, Enterprise Agreement or contractual implications?

Avoid making assumptions or rushing into discussions before you’ve confirmed the facts.

Employee overpayments – Can you simply deduct the money?

This is one of the most common questions we receive; and the short answer is no.

Many employers assume they can simply deduct the overpaid amount from the employee’s next pay. In most cases, this isn’t lawful.

Before any deductions are made, employers need to ensure the deduction is lawful and authorised. Depending on the employee’s Award, Enterprise Agreement or employment contract, this may require the employee’s written agreement or another lawful basis. Employers should never make unilateral deductions simply because an overpayment has occurred.

What should you do instead?

Once you’ve confirmed the overpayment:

Meet with the employee and explain

  • What happened
  • Why it happened
  • How much was overpaid
  • The period affected
  • What steps have been taken to correct the error

Approach the conversation with empathy. Remember, the mistake is often not the employee’s fault.

Discuss repayment options

Where repayment is appropriate, work collaboratively with the employee to develop a reasonable repayment arrangement. Depending on the circumstances, this may include

  • A lump sum repayment
  • Regular instalments
  • Agreed payroll deductions where lawful

The repayment arrangement should always be reasonable, documented and confirmed in writing.

A practical question to ask yourself is Would this repayment arrangement place the employee under unreasonable financial pressure? If the answer is yes, reconsider the proposal.

What if the employee refuses to repay?

This can become more complicated. If an employee disputes the overpayment or refuses to enter into a repayment arrangement, employers should seek advice before taking further action. Recovering overpayments may involve contractual or legal considerations, particularly where employment has ended or significant amounts are involved.

Avoid making deductions or threatening disciplinary action without obtaining advice.

Employee underpayments – Act quickly

An underpayment is generally a much higher-risk situation. Underpayments commonly arise because of

  • Incorrect Award classifications
  • Missed overtime
  • Unpaid penalty rates
  • Payroll configuration errors
  • Incorrect salary set-offs
  • Missed allowances
  • Payroll data entry errors
  • Enterprise Agreement interpretation issues.

Once an underpayment has been identified, employers should move quickly.

Step 1 – Determine the affected period

When did the error begin?

Step 2 – Calculate the correct entitlement

Compare

  • What the employee should have received; and
  • What they actually received.

Step 3 – Calculate the shortfall

Document every calculation.

Step 4 – Tell the employee

Be transparent. Explain

  • What happened
  • How it occurred
  • The period affected
  • The amount owing
  • When payment will be made.

Step 5 – Backpay the employee

In most situations, the underpayment should be rectified as soon as reasonably practicable. Where the underpayment is substantial and immediate repayment isn’t possible, seek advice before proposing a repayment schedule. Open communication and careful planning are important, but your legal obligations remain.

Common causes we see

After assisting many organisations with payroll reviews, these are some of the most common causes of payroll errors

  • Incorrect Award coverage
  • Incorrect classification levels
  • Salary increases not updated
  • Changes from casual to permanent employment
  • Incorrect ordinary hours
  • Missed overtime approvals
  • Manual payroll adjustments
  • Incorrect leave loading
  • Payroll software configuration errors
  • Allowances not applied
  • Enterprise Agreement interpretation issues
  • Poor communication between managers and payroll

Interestingly, payroll software is rarely the problem. Most payroll issues occur because incorrect information is entered into an otherwise compliant system.

Five ways to reduce payroll risk

1. Review Award coverage regularly

  • Awards change
  • Roles evolve
  • Employees receive additional responsibilities

Award classifications should be reviewed periodically – not just when someone is hired.

2. Have someone review payroll before processing

A second set of eyes can identify issues before employees are paid. Simple checks can prevent costly mistakes.

3. Invest in quality payroll systems

Modern payroll platforms with Award interpretation functionality significantly reduce manual processing.

However, they still require accurate configuration.

4. Keep contracts current

Employment contracts should reflect

  • Current remuneration
  • Employment status
  • Hours of work
  • Any lawful set-off arrangements

5. Conduct regular HR and payroll audits

Many businesses only discover payroll issues after receiving a Fair Work complaint. Regular HR and payroll compliance reviews help identify risks early, before they become expensive problems.

The cost of getting payroll wrong

Payroll mistakes don’t just affect wages. They can lead to

  • Fair Work Ombudsman investigations
  • employee complaints
  • civil penalties
  • reputational damage
  • loss of employee trust
  • significant management time
  • expensive remediation exercises.

In many cases, the cost of fixing the problem far exceeds the cost of preventing it.

Final Thoughts

No payroll system is perfect, and even well-run businesses occasionally make mistakes. The difference is how those mistakes are handled. When an overpayment or underpayment occurs

  • Investigate promptly
  • Understand the facts
  • Communicate openly
  • Document everything
  • Seek advice where needed
  • Correct the issue as quickly as possible.

Taking a fair, transparent and legally compliant approach protects both your employees and your business.

Need help?

If you’re unsure whether your payroll practices are compliant, or you’ve identified a potential overpayment or underpayment, don’t wait for the issue to escalate.

We help businesses across Australia with

  • Payroll and Award compliance reviews
  • Wage underpayment investigations
  • Overpayment recovery strategies
  • Award interpretation
  • Enterprise Agreement advice
  • HR and payroll audits
  • Fair Work compliance
  • Employment contracts and remuneration reviews

A proactive payroll review today can save your business significant time, cost and risk tomorrow.