Most HR managers will tell you they feel reasonably on top of payroll. The runs go out on time, no one's complained lately, the software does its thing.
But the Fair Work Ombudsman's data says differently: in 2024–25, it recovered $358 million in underpaid wages for more than 249,000 workers. And 60% of that came from large corporate employers who almost certainly had dedicated HR teams, payroll specialists, and compliance processes in place.
This is a story about a system that got structurally complex, and HR's role in either getting ahead of it, or cleaning up after it.
And that the cost of cleaning up has crossed a threshold most organisations can't absorb anymore. From criminal liability for directors to a $1 billion-plus remediation bill for two of the country's most recognisable supermarkets, payroll compliance in Australia and New Zealand is now a full-blown governance conversation.
Here's what HR professionals need to know, and do, before the next wave lands. ⬇️
Why "Payroll Compliance" Now Means Something Different
The phrase used to cover the basics: pay on time, withhold the right tax, send super contributions by the quarterly deadline. That version of payroll compliance still exists, but it's now nested inside something much larger.
The shift from administrative function to criminal liability
Australia has surged into the top three most complex payroll environments in the world, according to Strada's 2025 Global Payroll Complexity Index.
The drivers are:
- An expanding web of broader deduction frameworks
- Greater regulatory data access requirements
- Varied payment structures under the Modern Award system
- And the shift to criminal enforcement from January 2025.
What the Closing Loopholes Act changed
➡️ From 1 January 2025, intentionally underpaying employees became a federal criminal offence under the Fair Work Act 2009, following the passage of the Closing Loopholes legislation. For employers, contraventions can attract a maximum penalty of $7.8 million or three times the underpayment amount, whichever is greater. For individuals (including directors and senior managers) the maximum penalty is up to ten years' imprisonment, $1.56 million, or three times the underpayment amount.
But the most significant payroll issues are driven by the complexity of Modern Award interpretation and the limitations of payroll systems, rather than a lack of care or diligence.
As Marcus Zeltzer, founder of Yellow Canary, put it in the 2026 State of Payroll Confidence Report: most organisations want to pay correctly. The problem is that the system is hard enough that wanting isn't enough. ⚠️
The Woolworths and Coles Ruling Changed the Game for Every Employer
If you haven't already read the details of Fair Work Ombudsman v Woolworths Group Limited; Fair Work Ombudsman v Coles Supermarkets Australia Pty Ltd [2025] FCA 1092, this is the moment to pause and do that.
On 5 September 2025, the Federal Court delivered a 195-page ruling that invalidated one of the most common payroll management practices across Australian industry: the annualised salary "set-off" arrangement.
Both Woolworths and Coles had employed thousands of salaried managers under contracts that paid above-award annual salaries, relying on a contractual set-off clause to cover any award entitlements (overtime, penalty rates, allowances) that might fall due.
The Court ruled that contractual salary set-off arrangements can only discharge minimum payment obligations within a single pay period, not between pay periods. Entitlements must be met within each individual pay cycle, full stop.
The record-keeping trap that reversed the burden of proof
That ruling has a direct consequence for virtually every Australian employer who pays award-covered staff an annualised salary and assumes the above-award component will cover whatever comes up.
There's a second lesson buried in that judgment that's just as important. The Court found that a clock-in, clock-out system combined with rosters is not sufficient to meet record-keeping obligations under the Fair Work Regulations. Where an employer fails to maintain the required records, the burden of proof reverses. The employer must disprove allegations of underpayment, rather than the Fair Work Ombudsman having to prove them.
Which industries are exposed beyond retail
Coles and Woolworths are facing potential total remediation exceeding $1 billion. Woolworths had already paid over $300 million before the ruling was handed down. And following the judgment, class action proceedings were flagged against Super Retail Group (owner of Supercheap Auto, Rebel, BCF, and Macpac) for the same pattern of behaviour.
If your organisation has award-covered employees on annualised salaries, you need to review those arrangements now. ⚠️
Payday Super: The Operational Earthquake Landing on 1 July 2026
The compliance wave doesn't stop at wage theft laws. The next big structural shift arrives on 1 July 2026, and it will fundamentally change how payroll, HR, finance, and treasury must work together.
What Payday Super is and why it was introduced
Payday Super – legislated under the Treasury Laws Amendment (Payday Superannuation) Act 2025, which passed Parliament on 4 November 2025 – requires employers to pay superannuation guarantee (SG) contributions on every payday, not quarterly. From 1 July 2026, super contributions must reach the employee's nominated fund within 7 business days of each payday.
The government's policy rationale is straightforward: as of December 2025, the ATO estimates a net super guarantee gap of $6.25 billion for 2022–23 – approximately 6% of total SG owed.
Payday Super closes the gap by making non-payment visible in real time. The ATO will match STP data with fund reporting, giving earlier visibility of unpaid or late super.
Under quarterly payments, employers could delay for months before regulators noticed. Under Payday Super, a missed payment surfaces within days.
The operational implications for Australian HR teams
What HR teams need to understand is that this is not a simple timing adjustment. Consider the operational reality:
- A business on a fortnightly pay cycle currently makes 4 super contributions a year. From July 2026, it must make 26 – each with a 7-business-day window to reach the fund.
- The Small Business Superannuation Clearing House (SBSCH), designed for quarterly payments, will close on 1 July 2026. Businesses using it for super payments will need to find an alternative SuperStream-compliant solution.
- Qualifying Earnings (QE) replaces Ordinary Time Earnings (OTE) as the basis for calculating super contributions. QE is broader than OTE – it includes salary sacrifice amounts and earnings from certain contractors captured under the expanded definition of employee.
- The maximum contributions base shifts from a quarterly cap to an annual cap.
Given the interdependencies across payroll systems, clearing houses, super funds, and regulators, a Payday Super preparedness plan should involve stakeholders across tax, payroll, HR, and finance – and should focus on onboarding processes, payroll processing, remittance, and rejection management.
➡️ PwC recommends dry-run testing before go-live to check whether the 7-business-day timeframe is being met.
The cash flow impact HR needs to raise with finance now
The cash flow impact also matters. Payday Super removes the quarterly buffer that many businesses have relied on as a short-term float. For organisations in hospitality, retail, aged care, or community services (with large, variable-hours workforces) the shift to per-payday contributions will require real treasury adjustment, not just a systems change.
Payday Super readiness: what to do before 1 July 2026
- Confirm your payroll software provider's Payday Super readiness and implementation timeline
- Review all pay codes to ensure correct mapping to the new QE definition (this is not automatic, it requires deliberate code-level review)
- If you're using the SBSCH, identify and migrate to a SuperStream-compliant clearing house now
- Audit all employee superannuation fund details for completeness and accuracy – incomplete records will cause payment bounce-backs under the 7-day window
- Model the cash flow impact and update treasury practices accordingly
- Build a bounce-back governance process: a documented workflow for identifying rejected super payments and reprocessing them within the compliance window
The Modern Award Complexity That No One Talks About Enough
Australia has 122 Modern Awards. Each one contains intricate, industry-specific provisions on classification levels, ordinary hours, overtime triggers, penalty rates for nights and weekends, public holiday loadings, and allowances.
Why 122 awards create compounding risk
The Fair Work Ombudsman's online Pay and Conditions Tool performed over 5.2 million calculations in FY2025, representing over 35% of Australia's working population. Yes, this many people are regularly uncertain what they should be paid.
The most common cause of underpayment in Australia is not deliberate wage theft. It's ⬇️
❌ Applying the wrong award
❌ Applying the wrong classification level within the right award
❌ Or failing to update systems when the Fair Work Commission delivers its Annual Wage Review each July.
Where the compliance failure begins
For HR managers, this creates a specific obligation: you need to maintain a living, documented register of which awards apply to which roles, at which classification levels, and what the key provisions are. That's not something you set up once and forget. Award rates change annually at minimum. Case decisions change interpretations. Enterprise agreement interactions add another layer.
Rostering, approvals, and time capture are now recognised as the true source of wage compliance risk. If compliance rules are not enforced where work is planned and approved, payroll becomes a point of detection, not prevention.
This is the shift HR needs to internalise. Compliance failure is often set before payroll runs – in a roster that doesn't account for penalty rate implications, in a classification decision made at onboarding, in an employment contract that doesn't reflect the actual working arrangement. By the time the pay run processes, the error is already embedded. ⚠️
STP Phase 2: The Compliance Engine That's Already Running
Single Touch Payroll Phase 2 is now the permanent reporting standard for all Australian employers, and the ATO has moved firmly from education mode into enforcement. In mid-2025, the ATO announced it was developing a new Practice Statement specifically addressing penalties for STP reporting failures. Failure to lodge STP reports on time is treated as a failure-to-lodge event, and penalties are calculated per pay run, not per financial year.
What STP Phase 2 requires from HR, not just payroll
STP Phase 2 requires employers to disaggregate gross income into granular components for every pay run: base salary, paid leave, overtime, allowances by type, bonuses, commissions, directors' fees. Every pay code must map directly to a specific ATO income type. Employees on working holiday visas, directors, and closely held payees each require specific income type classifications.
How HR data quality determines STP accuracy
Where this connects to HR is data quality. STP Phase 2 accuracy depends on data that originates in HR, not payroll. Employee classification decisions, onboarding completeness, tax code assignments, contractor versus employee determinations, and pay code structures all flow through HR systems before reaching payroll.
➡️ Errors at the HR data layer propagate directly into STP reports, and now, those errors trigger ATO alerts in real time.
New Zealand: The Same Reckoning, Different Details
For HR managers operating across the Tasman (or supporting clients who do) the legislative direction is identical, even if the mechanism is different.
Wage theft is now a criminal offence in New Zealand too
The Crimes (Theft by Employer) Amendment Act 2025 came into force in New Zealand on 14 March 2025. The amendment allows for employers to be criminally prosecuted if it is established that they intentionally withheld wages, salaries, or other monetary entitlements. Individuals found guilty can face up to one year in prison, a fine of up to $5,000, or both. All other employers could face a fine of up to $30,000.
For larger underpayments (amounts exceeding $1,000) the maximum imprisonment term is seven years under the Crimes Act.
The Holidays Act is being replaced, but the old rules still apply
Separately, the Holidays Act 2003 – a law that has caused hundreds of millions of dollars in remediation across New Zealand's public and private sectors – is finally being replaced. The Employment Leave Bill was introduced to Parliament in March 2026. It proposes that annual and sick leave will accrue from day one in hours against standard hours, with a 12.5% upfront leave compensation payment applying in lieu of accrual for additional and casual hours. A 24-month transition period is expected after the Bill passes.
Until then, the current Holidays Act still applies in full, and employers still have an obligation to remediate employees for historical underpayments that have occurred due to non-compliance with the existing Act. You can't defer attention to the Holidays Act by anticipating the new regime. Both old obligations and preparation for new ones must run simultaneously.
Pay transparency: the NZ reform that will surface gaps quickly
New Zealand also introduced pay transparency reforms in August 2025. The Employment Relations (Employee Remuneration Disclosure) Amendment Act 2025 means any employment agreement clause that prohibits employees from disclosing their remuneration is now invalid. It is unlawful for employers to treat employees adversely for disclosing their pay.
Pay equity gaps (whether by gender, ethnicity, or disability) will be exposed through peer conversation faster than ever. HR teams need to get ahead of pay equity analysis proactively, before those conversations surface gaps they weren't expecting.
A Governance Checklist for HR Managers
Step 1: Conduct a worker classification audit
Before the next pay run, confirm:
- Every worker engagement is correctly classified: employee vs. contractor, permanent vs. casual vs. fixed-term. The legal test in Australia is based on the actual working relationship, not contract wording alone.
- Every permanent employee has a confirmed, documented Modern Award and classification level on file.
- All casual employees have been assessed against the 26 February 2025 Employee Choice Pathway reforms – casual conversion is now employee-initiated, not employer-initiated.
Step 2: Upgrade your record-keeping standard
Post-Woolworths/Coles, adequate record-keeping means:
- Overtime hours recorded per employee per day, including start and finish times
- Records specifying when penalty rates or loadings were payable
- Time and attendance data that is readily accessible, copiable, and available to inspectors on request
- Records retained for a minimum of 7 years in Australia (6 years in New Zealand)
If your current time and attendance system only captures clock-in/clock-out data, that is no longer sufficient. The system needs to capture the nature of hours worked, not just their existence.
Step 3: Implement per-period reconciliation for annualised salaries
For any award-covered employee on an annualised salary:
- Run a per-period reconciliation after every payroll cycle, confirming that their salary covered all Award entitlements due in that specific period
- Flag any period where the salary is insufficient to cover the entitlements earned in that cycle – these cannot be offset against future periods
- Document the reconciliation as an audit-ready record
Step 4: Complete your Payday Super readiness checklist
- Payroll software vendor contacted; Payday Super implementation confirmed
- Pay codes reviewed and remapped to Qualifying Earnings definition
- SBSCH migration completed (if applicable)
- All employee super fund details verified and complete
- Bounce-back governance process documented and tested
- Cash flow impact modelled with finance team
- Employee communication drafted and scheduled for pre-July distribution
- Test pay cycle run before go-live
Getting Ahead: The HR Mindset Shift
❌ There's a version of payroll compliance that HR manages as a support function – tracking legislative changes, updating policies, keeping the records required.
✅ And then there's the version of payroll compliance where HR is the architect of an organisation-wide governance system that treats every pay run as a compliance event, not just a financial transaction.
The good news is that HR already owns most of the inputs that determine payroll accuracy: workforce classification, onboarding data, leave management, time and attendance, employment contracts, and award assignment. The challenge is connecting those inputs to payroll outcomes – and creating the feedback loops that make it visible when something is wrong before a regulator or an employee does.
With underpayment now criminalised under Australia's Closing Loopholes legislation, the stakes have never been higher.
If payroll compliance hasn't made it onto your strategic agenda for 2025–26, it needs to. Not because it's a regulatory box to tick, but because the organisations that get ahead of the reckoning will do so through deliberate, systems-driven HR leadership – and the ones that don't will be spending the next several years paying for it.
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