The supermarket giant was facing a maximum penalty of more than $10 billion, but Melbourne Magistrate Nahrain Warda on Friday found the smaller fine to be suitable punishment.
Woolworths self-reported its breaches to Victoria's wage watchdog in February 2022 after it undertook a review of its payroll systems.
It discovered some of its employees were not being paid their long service leave entitlements after leaving the company due to discrepancies in payment calculations.
The Wage Inspectorate Victoria's investigation found the underpayments happened on 3617 occasions between January 2020 and July 2022.
The company was charged for those who were underpaid more than $250, which resulted in about $1 million in unpaid leave for 1227 former Victorian staff.
Woolworths pleaded guilty on April 18 in Melbourne Magistrates Court to the more than 1000 charges laid down by the inspectorate.
The company's barrister Saul Holt KC said Woolworths had been described as a "model accused" by prosecutors as it had self-reported and self-investigated the underpayments.
He urged the magistrate to steer clear of the proposed $10 billion maximum penalty.
In sentencing on Friday, Ms Warda said long service leave entitlements were inherently important to employees and it was incumbent on corporations to ensure they were paid correctly.
The sheer number of victims, the protracted period of the offending and the amount that was underpaid were all aggravating features, Ms Warda said.
But she noted Woolworths had self-reported, co-operated with the regulator's investigation and apologised to the victims before any charges were laid.
The former employees were also compensated and offered support through a dedicated service set-up after the offending, the magistrate said.
She fined Woolworths $1,277,000 without conviction, while its subsidiary Woolstar was handed a $36,000 penalty.
The company was ordered to pay the regulator's $15,000 legal costs.
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