Fair Work Compliance Audit

When to use

Triggers:

• "Fair Work audit" / "Am I paying people correctly?"
• "Underpayment review" / "Wage theft check"
• "Penalty rates" / "Am I rostering within the award?"
• "Employee vs contractor — are we compliant?"
• "Pay slip / record-keeping compliance"
• "We got a Fair Work Ombudsman letter"

Don't fire for:

• Individual employee disputes (go to the Fair Work Commission's individual-dispute pathway)
• Enterprise agreement negotiations (industrial relations territory)
• Specific redundancy or dismissal processes (separate workflows)

Why Fair Work compliance for SMEs is high-stakes

• Underpayments are recoverable for 6 years (default) or longer in serious cases
• Maximum penalties per contravention (Fair Work Ombudsman): $21,840 for individuals, $109,200 for companies with fewer than 15 employees and $546,000 for larger companies (or 3 times the underpayment if that is more). Serious contraventions go up to $218,400, $1,092,000 and $5,460,000.
• Wage theft is now a criminal offence for intentional underpayment (nationally from 1 Jan 2025) — up to 10 years' imprisonment and larger fines
• Fair Work Ombudsman has powers to compel records, enter workplaces without warrants (for compliance), and prosecute

AU SMEs most at risk:

• Hospitality, retail, construction (high penalty-rate exposure)
• Professional services (misclassification risk — "casuals" who should be permanent; contractors who should be employees)
• NDIS / healthcare (complex awards; SCHADS Award specifically)
• Any business with >20 staff that hasn't had a Fair Work audit in 2+ years

The 8 audit domains

Run each domain in order. Stop and fix any RED before moving on.

1. Award classification

Every employee sits under either:

• A modern award (most common)
• An enterprise agreement (negotiated for the workplace)
• No award (award-free — rare; usually high-earning professionals above the high-income threshold, currently ~$175,000 base salary indexed annually)

Audit:

• Is every employee's award identified and correct?
• Within that award, is their classification correct? (e.g. Level 1 vs Level 3 in Clerks Award — different pay rates)
• Classifications must be reviewed at least annually, especially if roles evolve

Common misclassification:

• Promoting someone without updating their award level
• Hiring under an award that doesn't actually cover the work being performed
• Treating high-skilled roles as award-free when they're under $175k

2. Minimum wage + hourly rate compliance

For each award-covered employee:

• Current hourly rate for their classification (check Fair Work pay calculator)
• All-purpose allowances included in the base rate calculation
• Annual increases (typically 1 July)

Red flags:

• Hourly rate below award minimum — immediate back-pay owed
• Salary annualisation that doesn't reconcile to actual hours worked + award rates — common for "on-call" roles

3. Penalty rates + loadings

Audit by shift pattern:

• Saturday penalty: typically 25–50% loading above base
• Sunday penalty: typically 50–75%
• Public holiday penalty: typically 225–250%
• Overtime: varies by award; usually 150% for first 2 overtime hours, 200% thereafter
• Casual loading: typically 25% applied to base rate

Red flags:

• Salary arrangement that doesn't compensate penalty rates properly (if rostering weekends, overtime, public holidays)
• "Annualised salary" that falls short when compared to penalty-rate-aware calculations
• No rostering records to verify claimed penalty rates

4. Leave accruals

For each employee:

• Annual leave accruing at the correct rate (pro-rata for part-time, none for casual)
• Personal/carer's leave at 10 days/year
• Long service leave accrual (state-specific)
• Leave balance records maintained

Red flags:

• Leave balances showing zero for employees with long service
• No leave-accrual system (common in small businesses; often handled via Xero/MYOB payroll)
• Manual leave tracking with gaps

5. Superannuation Guarantee

From 1 July 2025: 12% of ordinary time earnings (OTE). From 1 July 2026 onwards: 12% (rate stopped climbing at 12%).

Audit:

• SG paid to each employee's nominated fund
• Paid each payday: under Payday Super (from 1 July 2026), contributions must reach the employee's fund within 7 business days after payday
• Interest on late SG payments ("Super Guarantee Charge") — mandatory and non-deductible
• Stapling rule — employees must be given the chance to nominate; otherwise default to their stapled fund via ATO's lookup

Red flags:

• Any late SG payments — immediately triggers SGC obligations
• Contractors receiving "no super" when the contractor test suggests they're actually employees
• Directors drawing salary from their own company and skipping super

6. Pay slip requirements

Every pay slip must show:

1. Employer's name + ABN
2. Employee's name
3. Period of the pay slip
4. Date of payment
5. Gross and net amounts
6. Any loadings, penalty rates, allowances, bonuses (itemised)
7. Deductions (itemised) including tax + super
8. Hours worked (for hourly employees) at each rate
9. Leave accruals / balances (best practice; mandatory in some awards)

Red flags:

• Pay slips missing items above (particularly ABN, or the itemisation of penalty rates and loadings)
• Pay slips issued only monthly when payment cycle is fortnightly (must match)
• No pay slips at all (happens more than you'd think)

Pay slips must be provided within 1 working day of payment.

7. Record-keeping

Must be kept for 7 years minimum:

• Employment records (contracts, start date, role, award, pay rates)
• Hours worked (timesheet or roster)
• Leave taken and balances
• Pay + superannuation records
• Termination details (date, notice period, reason)

Records must be accessible in English and legible. Digital records must be retrievable within a reasonable time.

8. Contractor classification (sham contracting check)

For every person treated as a contractor:

• Does the substance of the relationship match a genuine contractor? (see australian-employment-contract for the full test)
• Is there an ABN? Insurance? Business of their own?
• Can they realistically work for others?
• Is the relationship ongoing with weekly/fortnightly pay?

If you have people on "contractor" arrangements who look like employees:

• Immediate risk — Fair Work and ATO are both actively auditing sham contracting
• Remediation — reclassify + back-pay super + back-pay applicable award entitlements
• Get legal advice before restructuring; the workers' consent to reclassification doesn't eliminate historical obligations

Findings report structure

Fair Work Compliance Audit — [Entity] — [Date]

Scope:
- [N] employees covered
- Period audited: [Date range]
- Awards in scope: [list]

Red findings (immediate action):
- [Finding] — [Impact] — [Recommended action + back-pay calculation]

Amber findings (remediate within 30 days):
- [Finding] — [Impact] — [Recommended action]

Green findings (compliant):
- [confirmed-compliant domains]

Overall risk rating: Red / Amber / Green

Remediation plan:
  Week 1: [specific actions]
  Month 1: [specific actions]
  Ongoing: [improved processes]

Evidence list for future audit:
- [records to retain]
- [systems to maintain]

Back-pay calculation

For each RED finding involving underpayment:

1. Identify the underpayment amount per pay period
2. Multiply by the number of pay periods affected
3. Add superannuation on ordinary earnings (12% as of 1 July 2025)
4. Add interest (at the general interest charge rate from the ATO — currently ~10.71% p.a., updated quarterly)
5. Factor in any leave entitlements that should have been accrued

Document each calculation. The Fair Work Ombudsman accepts good-faith calculations if they're transparent and err on the worker's side.

Fair Work interactions

If you receive any of:

• Fair Work Ombudsman written enquiry
• Request for records / inspection
• Complaint lodged by an employee
• Media enquiry about pay practices

Response principles:

• Respond promptly — silence escalates
• Be accurate — don't volunteer information beyond what's asked, but don't misrepresent
• Get advice — any FWO interaction warrants a 30-min call with an IR lawyer
• Don't retaliate against any employee making an enquiry — that's a separate serious offence

Common high-risk scenarios

• "Part of the family" hiring — paying a relative significantly below award without documentation
• Salaried retail / hospitality management — salary that doesn't cover actual penalty-rate exposure
• Interns + trial shifts — must be paid unless a genuine vocational placement under an education provider
• Post-employment fees / claw-backs — generally unenforceable; flag and remove
• Back-to-back fixed-term contracts — now capped at 2 years total under the 2023 reforms
• Casual employees with regular patterns — conversion right kicks in at 6 months (strict test)

What this skill does NOT do

• Give legal advice. For any finding with financial or criminal exposure, engage an IR lawyer.
• Lodge back-pay with Fair Work. Back-pay is paid to the worker; notify Fair Work only if explicitly required or under a compliance notice.
• Handle complex enterprise-agreement matters. EA-covered workforces have different rules.
• Replace a bookkeeper / payroll. Pay-slip mechanics and super compliance live in your payroll system.

Tier access

Pro. Compliance audits directly reduce legal exposure and the stakes compound over time. Base-tier members get the 8-domain framework; Pro-tier adds remediation planning + back-pay calculations.

Related skills

• australian-employment-contract — contract-level compliance (upstream)
• xero-myob-month-end-close — wage records and super liability reconciliation
• hospitality-rostering-demand-forecast — respects penalty rates built into the award structure

References

• Fair Work Ombudsman — Starting a business
• Fair Work — Pay slip and record-keeping
• Fair Work — Awards
• ATO — Super guarantee
• Fair Work — Wage theft