Supermarket giant Woolworths has been fined more than $1.2 million for underpaying hundreds of staff more than $1 million in long service leave entitlements.

Woolworths admitted in a Melbourne court last week it had short-changed at least 1,227 Victorian employees up to $1.24 million due to an error in its payroll system, which went undetected for years.

The underpayments ranged from a few hundred dollars up to $12,000, and occurred over multiple years.

Today, Magistrate Nahrain Warda described the payroll error as a "systematic and widespread failure" by one of the nation's largest private employers.

"It is expected that such a large corporation, that expands across all of Australia, would consequently have thorough payroll systems in place."

The court heard Woolworths updated its payroll system in 2014, but didn't undertake an audit until 2020 after "red flags" began to emerge in 2019.

Woolworths self-reported the underpayment errors to Victoria's Wage Inspectorate after the discrepancies were detected during the review.

In sentencing, Magistrate Warda said the large number of victims and the amount of the underpayments were "significant aggravating features", but said Woolworths had taken "proactive steps" to fix the payroll errors, and had self-reported the underpayments.

She fined the Woolworths Group $1,227,000 and its subsidiary Woolstar $36,000.

The company would have been fined $2.2 million if it had not pleaded guilty.

The court heard Woolworths had faced a maximum penalty of more than $10 billion.

Woolworths has agreed to pay back its workers what they are owed, plus interest.

In response to the judgement, Commissioner of Wage Inspectorate Victoria, Robert Hortle, said Woolworths' miscalculation of long service leave meant staff also lost out on time, not just money.

"Underpayments were as much as $12,000 which, calculated using the minimum wage, is equivalent to over 500 hours or 67 days leave," Mr Hortle said.

"It's disappointing that Woolworths, with its significant resources, has underpaid staff to such an extent."

"Today's sentence should be a warning to businesses across the state, particularly big, well-resourced corporations there are significant penalties for breaking long service leave laws, and both the Wage Inspectorate and the court take underpayment of entitlements extremely seriously."

In 2019, Woolworths admitted it had underpaid 5,700 workers up to $300 million in unpaid wages and entitlements over the course of a decade.

The company posted a full-year profit of $1.6 billion last year, an increase of 4.6 per cent.