5 Tips To Prevent Wage Underpayments

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Typically, business owners must pay their employees the correct wages and salaries, including other statutory benefits. Unfortunately, there are instances wherein wage underpayment scandals happen in some companies. In essence, wage underpayment is when an employer fails to pay an employee the minimum wage and allowances, as provided for by the employment contract or the regulatory agency for labor and employment.

Whether employers deliberately or unintentionally underpay their workers, regulatory government agencies often treat it as negligent and, therefore, has serious consequences. These can include hefty fines for the business, unpleasant exposure in the media, and legal action against the company in extreme cases.

With this said, there’s no doubt that underpayment of wages can be a severe offense to companies. Fortunately, there are ways to ensure your business complies with the minimum labor standards in your state, including paying proper wages and allowances.

If you’re an employer, below are the five tips to prevent wage underpayments:

1. Familiarize The Wage Underpayment And Theft Laws In Your State

One of the essential things to do to prevent wage underpayments in your company is to educate yourself about the applicable wage underpayment and theft laws in your state. When you know and understand these rules and regulations, you can ensure that your organization complies with the necessary labor standards requirements. These can include payment of wages and salaries, overtime, and leave credits.

For example, if you’re running a business in Australia or wherever you may be, you need to follow the requirements for payment entitlements. Otherwise, your company will more likely be subjected to an investigation by the Australian Taxation Office or the designated regulatory agency that protects labor rights.

Hence, to avoid wage underpayment scandals for your business, it’s essential to familiarize yourself with your state’s wage theft laws. You can seek assistance from professionals, including accountants and lawyers, to help you understand how these laws work and how to ensure compliance with the minimum payment entitlements prescribed by your state.   

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2. Classify Your Employees Properly

Another way to protect yourself against wage underpayment is to classify your employees. In most cases, improper employee classification can increase the risk of underpaying them. To avoid this, check the employment agreements from time to time to verify your workers’ employment status. This way, you can verify their contracts and other pertinent employment records and avoid underpayment.

Generally, most team member classification errors that you need to be aware of can include:

  • Classifying an employee at a lower level but they should be at a higher position based on their employment agreement;   
  • Classifying a part-time employee as a casual employee; and   
  • Classifying a regular employee as an independent contractor.   


3. Keep Updated With The Changes In The Pay Entitlements

As an employer, you need to keep track of any changes in the pay entitlements in your state. By being aware of the changes, your business can make the necessary modifications in computing your employees’ pay entitlements. Consequently, you can prevent a wage underpayment scenario within your organization.

To stay updated with the changes in the pay entitlements and other compliance updates, you can subscribe to the government agencies involved, attend industry forums, join industry associations, and other similar undertakings.


4. Use A Reliable Payroll System

Manually calculating your employees’ wages and salaries is susceptible to errors, resulting in a wage underpayment scenario. Although the underpayment is unintentional, your business will more likely be liable for negligence.

Because of this, a reliable payroll system within your company can help reduce the risk of wage underpayments. Generally, a payroll system is software designed to automate the payroll-making process. It’s integrated with attendance and leave tracking systems to keep track of the workers’ work hours, calculate wages and taxes, and make the necessary deductions.

So, having a payroll system in place can reduce the chances of human error in calculating your employees’ salaries and wages.   


5. Conduct A Wage Audit

Being guilty of wage underpayments can cause adverse consequences, including financial and reputation ruin. So, you must perform a wage audit regularly to avoid this. It’s a procedure that businesses should carry out to know and understand the minimum pay entitlements and other significant employment conditions.

After conducting the audit, you can have the opportunity to rectify any wage underpayments committed in the past, ensure compliance with the labor and employment standards, and make your employees happy and motivated with their pay entitlements.   



Your business can be in trouble if you commit a wage underpayment. It can adversely affect your business’s financial health and ruin its reputation. Luckily, by keeping the tips mentioned above in mind, you can prevent a wage underpayment situation to ensure your business is safe from financial and legal risks.