By Greg Smith, Partner

Australia’s Employment Law regime has been described as a minefield. One aspect, though, stands above the rest in M&A, and that is the issue of payroll compliance. Payroll compliance has attracted significant regulatory and political attention from 2015, when the Fair Work Ombudsman (FWO) conducted a high-profile inquiry into systemic non-compliance in franchise network and corporate groups. Since then, there has been significant legislative change and incremental increases to the severity of its punishment. In any acquisition of a company, the buyer risks inheriting any non-compliances and their legal consequences.

One of the biggest issues is Australia’s unique “award” system. Very simply, awards provide minimum terms and conditions of employment for specific industries and occupations over and above the legislative universal minimums (like the minimum wage).

We will focus on the award system here for a number of reasons:

1. No other country has anything like it as far as we know.^[1]
2. Non-compliance is extremely common – between 1 July 2023 and 30 June 2025 the FWO recovered over $1.34 billion in underpayments to over 650,000 Australian workers (about 4.5% of the Australian labour market) – and that figure is just what is known.
3. The sums involved to rectify across a workforce can be massive, both to remediate underpayments and to implement systems to prevent re-occurrence.
4. Non-compliance carries a (predicable) risk of fines and penalties, which, perversely, is made worse in the M&A process itself.

Why is non-compliance so common? It’s not easy to navigate the law. In a case of bitter irony, even the Commonwealth Department of Workplace Relations – the department that writes the employment laws and operates the employment regulator – admitted to underpaying its staff in 2022-23. Key difficulties are:

• Most obviously, the system is not simple. There are 122 awards, many with overlapping coverage or peculiar exclusions.
• Employment Law is its own beast. An ‘industry’ for the purposes of Employment Law, for example, may mean something completely different to common usage – which results, for example, in restaurants not being considered to be in the ‘hospitality’ industry.
• There is a lot of historical baggage. The current 122 awards are derived, ultimately, from old disputes between employers and unions about workers’ entitlements which were recorded in over 5,000 older awards (some dating back to the 1950s), which were then mixed together in 2008-09 to create the awards we have today. Because of this, the awards assume a certain degree of pre-existing familiarity with Australian industrial relations informed by far older industry practices. Any business in Australia without this understanding (or being well-advised) is at far greater risk of non-compliance.
• Finally, it is often assumed that paying someone a salary – even a salary above the award minimum – stops the award from applying to them. This is a common misunderstanding and could not be more wrong, something that some of Australia’s largest employers are now learning to the tune of $500 million.

While payroll non-compliance may seem minor when looked at on an employee-by-employee basis, in large workforces even small non-compliances add up to large sums of money. An error of $5 a fortnight, multiplied by 26 fortnights, multiplied by six years (the limitation period) may only be $780 per employee, but multiply that across a 500-strong workforce and that becomes a $390,000 liability before penalties.

Payroll non-compliance can attract civil penalties of up to $990,000 per contravention or theoretically uncapped criminal fines and even prison terms. With how the legislation is written, wilful blindness or even reckless lack of due diligence in an M&A process can attract the more serious civil penalties or even criminal sanctions.

With the increasing focus on payroll non-compliance, and an increasingly more punitive toolbox, the FWO is highly proactive – in 2024-25 it commenced 73 court proceedings and issued 1,220 compliance notices and 743 infringement notices, with a further 1,442 “proactive compliance activities”. In terms of higher risk sectors, the FWO’s strategic priorities include the building and construction, aged care, disability support, agriculture, fast food/restaurant and university sectors, as well as a separate investigative branch dedicated to investigating non-compliance by large corporates.

What can be done about these issues in an M&A deal? There are a few options, not all mutually exclusive, but they all have weaknesses:

• Get a purchase price adjustment – liability for non-compliance might be treated as a debt-like item (or, where completion accounts are used, be the subject of a specific accounting policy) to be deducted from the headline price. If the amount of the liability can be quantified with precision at the time of signing of the Sale and Purchase Agreement (SPA), then a figure can be hardwired into it. However, if the amount cannot be so quantified, this will not be possible on a locked box deal (where the purchase price is fixed) and may not be a good option on a completion accounts deal (the parties may be walking into a completion accounts dispute).
• Get W&I insurance – a W&I insurance policy may be able to be put in place which will provide coverage for payroll non-compliance, and, in recent times, we would say most policies will not have a blanket exclusion for this (as was common in the past). However, for a policy to be put in place at signing of the SPA, the insurer will usually require a law firm to carry out a classification exercise (are employees classified under the correct award?) and an accounting firm to carry out payroll sampling. This all needs to be completed in tandem with other due diligence, and, if, at the end of it, a material issue or systemic non-compliance is found, W&I insurance will not cover such issue(s).
• Get an indemnity – It is possible to draft an indemnity to cover losses arising from non-compliance. Sellers can be allergic to indemnities in general, but we are seeing this more often. From sellers prepared to give such indemnities, payment under them may also be able to be secured by a hold-back or escrow.^[2]
• Restructuring the target group – If a group of companies is being acquired, and employees sit within a service company (quarantining liability in relation to the employees within it), the service company could be transferred out of the target group to be retained by the seller, and the employees transferred to a new group company. As liability in this case remains at all times with the entity which was the employer at the time the underpayment occurred, such arrangements are generally treated neutrally by the regulator.
• Asset sale – In a similar vein, if employees sit together with assets in a company, employees and assets could all be transferred to a new company, leaving liabilities, including any relating to non-compliance, behind. However, for a large business, this will vastly complicate the completion mechanics, as every single asset will need to be transferred individually, with certain assets needing third party consent (which may not be forthcoming).
• Stop ongoing breaches to minimise exposure – a buyer may avoid any significant regulatory action if they can show that they have “cleaned house”. This does not, however, affect the ability of the company the buyer acquires for historical non-compliance. As a general rule, this will have to be done, as a regulator will not look kindly on failing to rectify known non-compliance (which is why we said earlier that the risk around non-compliance is made worse in the M&A process itself).

We hope this has helped you understand why payroll compliance (as just one part of Australia’s Employment Law) is such an issue on M&A deals, and gives you some options to explore in terms of what to do about it.

[1] New Zealand did, but got rid of them in 1991.

[2] For completeness, we note that a warranty as to no non-compliance, where that is known by the buyer to be incorrect, will have claims under it prevented by the usual limitation in SPAs in Australia for matters disclosed in the data room.