Closing Loopholes Reforms: Key Changes for Employers

Recent changes to the Fair Work Act 2009 (Cth) have reshaped the legal landscape for Australian employers. The Fair Work Legislation Amendment (Closing Loopholes) Act 2023 (Cth) introduces criminal penalties for deliberate wage underpayment and clarifies the boundaries of employment by redefining how courts distinguish employees from independent contractors.

These reforms mark a significant shift in approach to Australian employment law, moving wage underpayment from a civil matter to a potential criminal offence. For businesses, the reforms signal that payroll compliance is now as critical to sound governance as tax and corporate reporting.

Wage Theft Becomes a Crime

Section 327A of the Fair Work Act now makes the intentional underpayment of wages a criminal offence, carrying penalties of up to ten years’ imprisonment or substantial fines. The offence targets deliberate conduct, but a sustained failure to correct known compliance issues may still be viewed as intentional. Payroll systems, rostering software, and management oversight will likely form the evidentiary focus in any prosecution.

Liability of Directors and Officers

Company officers and senior managers who are directly involved in wage-setting or payroll practices may face personal criminal exposure if they authorise, direct, or knowingly permit underpayment. Deliberate inaction after receiving compliance warnings could be construed as participation in the offence. Directors should ensure that appropriate systems of review and delegation are in place to demonstrate due diligence.

Corporate Liability

The reforms also extend responsibility to the corporate entity itself. Under the Criminal Code Act 1995 (Cth), a company may be found guilty of an offence requiring intent if its culture, policies, or management practices effectively allow underpayment to occur. A failure to implement adequate compliance programs, payroll audits, or staff training may be treated as implied authorisation of the conduct. In such cases, criminal liability can attach to the company even when no individual officer acted with deliberate intent.

The Small Business Compliance Code

Recognising the compliance challenges faced by smaller employers, the government introduced the Small Business Wage Compliance Code. This Code allows small businesses that identify and rectify underpayments to avoid criminal prosecution if they self-report, repay employees in full, and implement stronger compliance measures.

While the Code provides flexibility for small employers who make genuine mistakes, it will not protect businesses that deliberately ignore obligations or misuse it as a shield. Businesses seeking to rely on the Code should act transparently and rectify underpayments without delay to demonstrate genuine compliance.

Closing Loopholes for Casuals and Contractors

Beyond wage theft, the reforms target long-standing “loopholes” in how employment relationships are defined.

Section 15AA restores a substance-over-form test for distinguishing employees from independent contractors. This change reverses the effect of recent High Court decisions that prioritised written contracts over the practical realities of work. Courts must now consider the real substance of the relationship, not just the terms on paper.
Section 15A updates the definition of casual employment, limiting the ability to label workers “casual” when their engagement is regular, predictable, and ongoing.

These changes respond to concerns that some employers have relied on contract wording to avoid paying entitlements. Businesses using contractors or long-term casuals should now review their arrangements to ensure that classification reflects practical reality, not convenience.

Key Lessons for Employers

Given the expanded legal and reputational risks introduced by the Closing Loopholes reforms, employers should adopt proactive measures to ensure compliance and mitigate potential exposure:

1. Review payroll systems: Conduct independent audits to ensure award interpretation, overtime, and penalty rates are correctly applied.
2. Re-examine employment structures: Assess whether any “contractor” or “casual” relationships could be re-characterised under the new tests.
3. Train management and HR staff: Ensure decision-makers understand their obligations and the serious implications of deliberate underpayment.
4. Document compliance efforts: Maintain evidence of advice, audits, and corrective actions to demonstrate good faith if underpayment issues arise.
5. Act quickly when errors occur: Prompt rectification and transparent engagement with employees can help avoid enforcement action.

ABKJ Lawyers: Experienced in Employment and Commercial Compliance

ABKJ Lawyers has decades of experience advising Queensland businesses on commercial law and regulatory compliance. Our team assists with governance, structuring, and risk management to help businesses operate with confidence under Australia’s evolving legislative landscape.

If you are unsure how the Closing Loopholes reforms may affect your business, contact our Commercial Law team on (07) 5532 3199 or enquire online for tailored advice.