SCHADS Award Underpayments: A Guide to Payroll Remediation & Disputes for NFPs

Introduction

Employers in the not-for-profit sector face significant challenges in achieving payroll compliance under the Social, Community, Home Care and Disability Services Industry Award (SCHADS Award). Ambiguous award provisions, frequent payroll errors, and complex penalty rate and classification requirements have led to a surge in underpayment claims, Fair Work Ombudsman (FWO) investigations, and costly remediation programs.

This practical guide provides employers with key updates and actionable steps for managing payroll remediation, dispute resolution, and compliance with the SCHADS Award. Engaging a not-for-profit lawyer is essential to help interpret award provisions, oversee remediation, and protect your organisation during NFP investigations or underpayment disputes.

Why the SCHADS Award is a Compliance Minefield for NFPs

Understanding the Four Employee Groups & Classification Levels

The Social, Community, Home Care and Disability Services Industry Award 2010 (SCHADS Award) organises employees into four main groups based on the work they perform. An incorrect classification is a primary driver of underpayment issues for any employer.

The four employee groups are:

• Social and Community Services employees: This is the largest stream, with eight distinct classification levels.
• Crisis Accommodation employees: This group has four classification levels.
• Family Day Care employees: A specific stream for those in family day care settings.
• Home Care employees: Covers workers providing care in a client’s home.

Misclassifying an employee creates a systemic underpayment that grows with every pay cycle. For example, incorrectly classifying a Social and Community Services employee at Level 2 instead of Level 3 can lead to an annual underpayment of between $8,000 and $13,500, even before accounting for superannuation and penalty rates.

The Impact of the Equal Remuneration Order on Pay Rates

A significant complexity of the SCHADS Award is the Equal Remuneration Order (ERO), which applies substantial uplifts to the base pay rates. These ERO-enhanced rates become the new ordinary rate of pay for all purposes, including the calculation of penalty rates and overtime.

The ERO uplifts apply to:

• Social and Community Services employees from Level 2 to Level 8.
• Crisis Accommodation employees from Level 1 to Level 4.

Failing to apply these enhanced rates leads to considerable underpayments. For instance, a Level 2 employee’s base rate might be significantly lower than their actual ERO-uplifted rate. Using the incorrect base rate means every hour worked, including those attracting penalties, is underpaid.

Complex Rules for Allowances & Penalty Rates

The SCHADS Award contains numerous allowances and penalty rates that present ongoing compliance challenges for an employer. Many payroll systems are not adequately configured to track these varied entitlements, leading to errors and potential disputes.

Common allowances that cause confusion include:

• Sleepover allowance: Paid as a flat rate for employees required to stay overnight at a client’s premises.
• Broken shift allowance: An additional payment for employees who work two or more distinct periods in a day separated by an unpaid break.

Furthermore, a range of penalty rates must be correctly applied to an employee’s ERO-enhanced ordinary rate. These include:

• Loadings for afternoon and night shifts
• Higher rates for work performed on Saturdays, Sundays, and public holidays

The complexity of these rules requires diligent payroll compliance to avoid underpayment.

Common Underpayment Triggers Under the SCHADS Award

Misclassification of Employees & Incorrect Pay Point Progression

Incorrectly classifying an employee is a primary trigger for systemic underpayment, as the error multiplies with every pay period. For instance, classifying a social and community services employee at Level 2 instead of Level 3 can result in an annual underpayment of between $8,000 and $13,500, even before accounting for superannuation and penalty rates.

Another common issue is the incorrect application of pay point progression rules. Except for Level 1 Social and Community Services employees, progression is not automatic. After 12 months of continuous service, an employee becomes eligible for consideration, but the employer has the discretion to grant progression based on:

• Demonstrated competency
• Satisfactory performance over the previous 12 months
• The acquisition and use of new or enhanced skills

Failing to start employees on the correct pay point based on their qualifications also leads to underpayment. Specific starting points include:

• Level 2 with a Certificate IV: Must commence at Pay Point 2.
• Level 3 with a three-year degree: Must commence on at least Pay Point 3.
• Level 3 with a four-year degree: Must commence on at least Pay Point 4.

The Ambiguity of Sleepover Allowances & Shift Penalties

Significant legal uncertainty surrounds sleepover shifts, creating a major compliance risk for any employer. A sleepover occurs when an employee is required to stay overnight at a client’s premises. They receive a flat sleepover allowance and are only paid for any active work performed during that time.

The core of the dispute is whether a sleepover period breaks the continuity of a shift. Previously, the FWO guided that if an employee worked immediately before or after a sleepover, the entire period was a single continuous shift, attracting relevant shift penalties. However, the Federal Court decision in Jats Joint Pty Ltd v Fair Work Ombudsman [2025] FCA 743 found that sleepovers are separate from ordinary shifts and do not attract shift penalties.

This legal position remains unsettled, as the Jats Joint Pty Ltd v Fair Work Ombudsman decision is subject to appeal, and there are applications before the Fair Work Commission to vary these award provisions. This ambiguity means that misclassifying a sleepover as non-continuous when it should be continuous could result in significant backpay claims for unpaid overtime and penalty rates.

Errors in Rostering & Minimum Engagement Periods

Mistakes in rostering and applying minimum engagement periods are frequent sources of underpayment. Many payroll systems are not equipped to track the complex entitlements under the SCHADS Award, leading to errors with broken shifts and other penalties.

A broken shift, which consists of two or more work periods separated by an unpaid break, attracts a specific allowance. Crucially, each period of work within that broken shift must meet the minimum payment requirements. These minimums are:

• Three hours for social and community services employees (unless performing disability services work).
• Two hours for social and community services employees performing disability services work.
• Two hours for home care employees and casual home care employees.

Issues also arise from client cancellations. If a home care or disability services client cancels within seven days of a scheduled service, the employer can direct the employee to perform other work or cancel the shift. If the shift is cancelled, the employer must either pay the employee for the rostered hours or provide make-up time, but only if at least 12 hours’ notice of the cancellation was given.

Managing Disputes Across Commonwealth & NSW Employment Laws

Responding to the Fair Work Ombudsman (FWO)

The FWO is responsible for promoting compliance with the Fair Work Act 2009 (Cth). When a payroll issue arises, your organisation may need to engage with the FWO, either through a self-report or in response to an employee inquiry.

Not all payroll errors require notification. Isolated mistakes that affect a short period (up to 12 months) and are quickly rectified do not need to be reported. However, for broader or systemic non-compliance, the FWO encourages employers to self-report at an early stage, even if all the details are not yet fully understood.

After you notify the FWO, it will typically begin an assurance process to ensure your response is adequate. During this process, the FWO’s primary focus is to verify that your payroll remediation program (PRP) will result in employees receiving their correct entitlements in a timely manner:

• Identified and addressed the root causes of the non-compliance.
• Implemented appropriate governance and compliance measures for the future.
• Developed a fair methodology for calculating underpayments.

To conduct its review, the FWO may request various documents, including project plans, data sources, calculation rules and communication plans. For pay or entitlement disputes, the FWO can also offer a no-cost dispute assistance service, where its officers help both parties understand their obligations and explore potential resolutions. A cooperative approach can lead to a less intensive investigation and is a key factor in how the FWO determines any necessary enforcement action.

Handling NSW Disputes Over Long Service Leave Entitlements

NFP employment law disputes over long service leave entitlements are frequent, often stemming from incorrect calculations and misapplication of service rules. These issues can lead to significant underpayment claims if not managed correctly.

Common triggers for long service leave disputes include:

• Continuous service for casual employees: Disputes often arise when an employer fails to recognise that a casual employee with at least seven years of continuous service is entitled to long service leave.
• Incorrect payment calculations: Underpayments frequently occur when long service leave is not paid out based on the employee’s average hours worked over the most recent three-year period; incorrectly excluding overtime from this average results in a lower payment than the employee is owed.

Your Defence Guide to Managing a Payroll Remediation Program

Designing Your Remediation Program & Defining its Scope

The initial phase of any PRP involves identifying the potential compliance issues to determine the program’s focus and scale. This can be achieved through:

• Sample testing of payroll outputs
• Analysing employee complaints
• Conducting a full reconciliation of wages paid against other data sources that reflect actual work patterns

Once the issues are identified, you must define the scope of the review. This involves deciding whether the PRP will be a comprehensive, end-to-end review of all fair work instruments and employees or a more targeted, risk-based assessment. The scope should be flexible enough to adapt if new issues are discovered during the process.

A critical element is determining the review period. The FWO expects a PRP to look back as far as possible to when the non-compliance began. Key considerations for the review period include:

• The six-year statutory limitation period under the Fair Work Act 2009 (Cth) is considered a minimum, not a maximum.
• If underpayments occurred before the six-year mark, the FWO will expect a clear justification for limiting the review period.
• The availability of employee records and other reliable data sources will influence how far back the review can practically go.

Early and effective consultation is a feature of a model PRP. Engaging with employees, unions, and workplace consultative bodies can:

• Provide valuable information about work practices
• Build trust in the remediation process

Establishing a Fair Methodology for Calculating Underpayments

A clear and fair methodology is essential for accurately calculating underpayments and ensuring the PRP is credible. The FWO will closely examine the business rules and logic used to determine what employees are owed. Your methodology should rely on the best available evidence of actual work patterns, not just what should have happened.

Where primary data sources like timesheets or rosters are incomplete or missing, you are expected to explore other sources of information, such as:

• Security or building access logs
• IT system access records
• Service delivery records or job logs
• Consulting with employees about their typical work patterns

If assumptions are necessary to fill data gaps, they must be employee-favourable. This means giving employees the benefit of the doubt, particularly where the employer’s own record-keeping has been deficient. The FWO’s general position is that an employer should not benefit from its poor records.

A common issue in remediation is the offsetting of payments. The FWO’s stance is clear:

• Overpayments in one pay period cannot be used to offset underpayments in another
• Paying an employee more than the minimum for one entitlement, such as a higher base rate, cannot be used to satisfy an underpayment of a different entitlement, like annual leave loading

Communicating with Employees & Making Back-Payments with Interest

A comprehensive communication plan is vital to the success of a PRP. Clear and timely communication helps:

• Manage employee expectations
• Reduce disputes
• Provide confidence in the process

Communications should be sent to all affected employees, including former staff, as early as possible.

When communicating with employees, it is important to be transparent about the issues, the process, and the expected timeframes. A multi-channel approach using email, SMS, and post can maximise reach, especially for former employees. You should also establish a clear point of contact, such as a dedicated hotline or email address, for handling enquiries.

When making back-payments, the FWO expects that interest will be included to compensate employees for the loss of use of their money. While not a strict legal requirement outside of court proceedings, it is considered good practice and a tangible sign of the employer’s acceptance of responsibility. An acceptable method for calculating interest is using the Federal Court of Australia’s Pre-Judgement Rate, which is the Reserve Bank of Australia cash rate plus 4%.

Minimising Director Liability & Class Action Risks

Effective governance and senior-level oversight are crucial for managing a PRP and understanding the risks and responsibilities of a director. A good PRP has accountability at the board or senior executive level, which sends a positive message to employees, stakeholders, and the FWO about the organisation’s commitment to rectifying the issues

Proper oversight helps ensure the PRP is adequately resourced and that decisions are documented, which can be a key factor in how the FWO assesses the employer’s cooperation and contrition. This can influence the severity of any potential enforcement action.

Systemic underpayments can also expose an organisation to significant legal risks beyond regulatory penalties. There has been a rise in class actions related to unpaid time, such as employees not being paid for work performed before or after their official shifts. These seemingly minor issues can accumulate into multi-million dollar claims across a large workforce.

Furthermore, since January 2025, intentional underpayment has become a criminal offence. Individuals found guilty can face up to 10 years in prison, while companies face financial penalties that can be the greater of $7.825 million or three times the underpayment amount. Strong governance and compliance is therefore essential to demonstrate due diligence and mitigate the risk of severe penalties.

The Critical Role of a NFP Lawyer

Seeking Expert Advice on Award Interpretation

Strategic legal support for Australian NFPs can provide essential clarity on ambiguous terms within the SCHADS Award, helping to prevent unintentional underpayments. Legal experts can also offer specific advice on applying complex provisions—such as those governing sleep-over shifts—which are a common source of payroll compliance issues.

Early legal engagement offers several advantages:

• A lawyer helps your organisation understand its obligations and pinpoint key risks within existing systems and processes.
• Proactive advice allows you to address potential problems early, preventing escalation into formal disputes or costly remediation programs.
• Counsel can advise on whether to engage under legal professional privilege, thereby protecting sensitive communications.

Managing Communications with Regulators & Unions

Legal counsel plays a vital part in managing communications with the FWO and unions, especially when an underpayment may have occurred.

When deciding whether to self-report, a lawyer can:

• Guide your organisation in assessing the merits of self-disclosure to the FWO, noting that early disclosure is encouraged for systemic non-compliance.
• Oversee the self-reporting process so all communications are handled strategically and consistently.

In addition, counsel can:

• Facilitate early, constructive engagement with employees and union representatives—an expectation of any model PRP.
• Help build trust, often leading to a more cooperative resolution.

Protecting Your Organisation During a Formal Investigation

During a formal FWO investigation for an NFP, a lawyer is crucial for safeguarding your interests. The FWO can issue statutory notices compelling production of information and documents, and legal counsel can manage your response to ensure compliance while protecting sensitive material.

Key protective measures include:

• Advising on claims of legal professional privilege, which allow organisations to withhold confidential communications made for the dominant purpose of legal advice.
• Identifying privileged documents and asserting privilege effectively, a critical step in any regulatory investigation.

Conclusion

Successfully managing SCHADS Award compliance requires a deep understanding of its complex provisions, from employee classifications and sleepover allowances to the specific steps in a PRP. A structured approach to identifying underpayment triggers, handling dispute resolution, and engaging with the FWO is essential for any not-for-profit employer.

To ensure your organisation is fully prepared, contact our not-for-profit lawyers at LawBridge for trusted expertise. Our specialised services are tailored to help you implement a proactive compliance strategy and effectively manage any underpayment dispute, providing peace of mind.

Frequently Asked Questions