A Melbourne SaaS startup — 22 people, Series A closed nine months ago — reruns a payroll audit ahead of a Series B data room. The finance manager’s spreadsheet flags four customer-success staff on annualised salaries of $78,000 who have been rostered for a rolling Saturday on-call for the last fourteen months. The award — Clerks — Private Sector Award 2020 — was never checked; the annualised-wage arrangement in clause 20 was never elected in writing; weekend penalty rates at 175% and public holiday loadings at 250% were never separately identified in the payslips. The gross shortfall across the four employees comes in at $184,000 over the review period. The founder-CEO opens the Fair Work Ombudsman’s Voluntary Small Business Wage Compliance Code page, reads the eligibility line — fewer than 15 employees — and closes the tab. What she has just discovered is that a shortfall that would have been an ordinary civil recovery matter for a five-person startup is now a candidate for referral to the Commonwealth Director of Public Prosecutions under section 327A of the Fair Work Act 2009 (Cth), that the safe-harbour Code her startup was designed for does not apply, and that the only remaining protective mechanic — a cooperation agreement with the Fair Work Ombudsman — is discretionary and gone the moment the FWO opens an inquiry of its own motion.
That gap between what founders assume the Closing Loopholes wage theft regime catches and what section 327A actually catches sits behind most of the exposure we see. The offence commenced on 1 January 2025; eighteen months in, the enforcement architecture is fully built out and the first referrals are working through the CDPP. Here is what Australian startup employers need to understand in 2026.
Section 327A — The Elements of the Offence
The Fair Work Legislation Amendment (Closing Loopholes) Act 2023 (Cth) inserted a new section 327A into the Fair Work Act 2009 (Cth), operative from 1 January 2025. The offence has four elements the prosecution must prove beyond reasonable doubt:
- The employer was required to pay a required amount to an employee — wages, allowances, penalty rates, overtime, leave loading, or superannuation guarantee — by the date required under the Act, a modern award, an enterprise agreement or a workplace determination.
- The employer engaged in conduct — an act or omission.
- The conduct resulted in a failure to pay the required amount in full by the required date.
- The employer intended both to engage in the conduct and that the conduct would result in the failure to pay.
The intent element is the pivot on which everything else turns. Recklessness is not enough; carelessness is not enough; the inadvertent underpayment that has been the mainstay of civil enforcement for a decade is not caught. What is caught is the founder who reads the award, understands the entitlement, and decides — expressly or by settled practice — that the entitlement will not be paid.
Penalties — Individual and Body Corporate
The penalties are stratified between individuals and companies, and both tiers include a proportional cap tied to the size of the underpayment:
- Individuals — a maximum of ten years’ imprisonment and a fine the greater of $1.565 million (5,000 penalty units at the 2026 rate) or three times the underpayment.
- Body corporates — a maximum fine the greater of $7.825 million (25,000 penalty units) or three times the underpayment.
The individual limb reaches founders, directors and payroll-decision-makers in their personal capacity where the intent element is made out against them. Directors’ and officers’ liability insurance does not indemnify criminal penalties, and the Corporations Act 2001 (Cth) does not permit a company to indemnify a director for a criminal fine. A startup that undertakes to cover a director’s exposure has to do it as an ex gratia payment, and every dollar is taxable in the director’s hands.
Prosecution — Who Refers, Who Prosecutes, How Long They Have
Referrals are made by the Fair Work Ombudsman. Prosecutions are conducted by the Commonwealth Director of Public Prosecutions or, in complex matters, the Australian Federal Police. The limitation period under section 327A is six years from the commission of the offence — materially longer than the six-year civil recovery period under section 544, and long enough that a shortfall discovered in a Series C data room in 2029 is still within scope for conduct that started in 2025.
The Voluntary Small Business Wage Compliance Code — Safe Harbour for < 15 Employees
The Voluntary Small Business Wage Compliance Code, declared by the Minister and commenced on 1 January 2025, is the statutory safe harbour under section 327B. If a small business employer — an entity with fewer than 15 employees at the relevant time, counted on the ordinary Fair Work Act basis — has complied with the Code in relation to the shortfall, the FWO cannot refer the conduct for criminal prosecution.
Compliance with the Code turns on whether the small business took reasonable steps to work out and pay the correct amount. The Code’s guide sets out the practical indicia: applying the correct modern award or agreement, keeping payslip and time-and-wages records that satisfy Part 3-6 of the Act, reviewing pay rates when the Fair Work Commission varies awards, seeking advice on ambiguous classifications, and remediating shortfalls promptly once identified. The safe harbour is a shield against criminal referral; it is not a shield against civil recovery, civil penalties or infringement notices, which the FWO can still pursue against small business employers on the ordinary standard.
The 15-employee threshold is a hard line. A 16-person startup with two casual contractors on the books can find itself outside the Code even where every other indicator — founder-run, no HR function, no in-house payroll — reads as small business.
Cooperation Agreements — The Discretionary Path for Larger Employers
For employers outside the Code — 15 or more employees — the operative protective mechanic is a cooperation agreement under section 125E. An employer that self-reports conduct that could be a section 327A offence can apply to the FWO for an agreement; while the agreement is on foot, the FWO will not refer the covered conduct for criminal prosecution.
Three features of the regime materially affect founder strategy:
- Self-report first, or lose the option. Cooperation agreements are only available on voluntary disclosure. Once the FWO has commenced its own inquiry — a proactive audit, an employee complaint, a media report — the door closes.
- Voluntary, frank and complete. The FWO’s published policy on cooperation agreements says the agency’s discretion turns on whether disclosure is voluntary, frank and complete. A staged, partial or negotiated disclosure is unlikely to attract an agreement.
- Civil enforcement still runs. A cooperation agreement bars criminal referral of the covered conduct. It does not bar civil penalty proceedings, back-payment orders, or serious contravention civil penalties under section 557A — where the maximum is $4.95 million per contravention for a body corporate and $990,000 for an individual, or three times the underpayment.
What Startup Employers Should Do Now
The compliance discipline is discrete. First, run an award-mapping audit against every role — modern award, classification, allowances, penalty rates, overtime, annualised-wage arrangements. Founders most often trip on annualised-wage clauses that require an explicit written election, an annual reconciliation and a record of what would have been paid on the award — none of which the standard employment agreement provides. Second, treat superannuation timing as in-scope — section 327A extends to the superannuation guarantee and the Payday Super payroll cadence commencing 1 July 2026 tightens the required-date test. Third, document the reasonableness of every pay decision — the intent element is fought on evidence of what the decision-maker knew and when; contemporaneous records of legal advice, award reviews and remediation reads as intent-negating in a way retrospective explanations do not. Fourth, if a shortfall is found, act inside the cooperation-agreement window — voluntary, frank and complete disclosure to the FWO before any external inquiry, remediation with interest, and a written control uplift. Fifth, build the small-business election consciously — startups approaching 15 employees should map when the Code will cease to apply and layer in the equivalent protections that a cooperation agreement offers before the head-count threshold bites.
The Bottom Line
Since 1 January 2025 an intentional underpayment of wages, superannuation or entitlements is a federal criminal offence. The intent element narrows the offence to conduct that carries a decision — but startups tripped by an unread award clause, an unelected annualised-wage arrangement or a payroll decision made without advice are not obviously outside it, and the voluntary, frank and complete self-report is the only path out once a shortfall is on the books. Founders with fewer than 15 employees have the Voluntary Small Business Wage Compliance Code safe harbour if they can evidence reasonable steps; founders above the line have the cooperation-agreement discretion, and only for as long as the FWO has not moved first. The Melbourne SaaS founder discovers the regime on a Tuesday, retrospectively, at the outside edge of a Series B diligence timeline. Founders who audit awards before the FWO calls do not.
Viridian Lawyers advises Australian startups on Fair Work Act compliance, wage compliance audits, cooperation-agreement disclosures, remediation programs and the interaction between employment risk and investor diligence. If your startup has identified a shortfall, is scaling through the 15-employee small-business threshold, or needs an award-mapping review before a raise, get in touch.
