At a glance
A breach of workplace laws on payments is a serious matter for businesses. Individuals can be fined up to A$126,000 and companies A$630,000 per infringement of the Fair Work Act. “Employers are starting to realise they have to proactively look at their payroll operations. There’s been a set-and-forget mentality,” says Tracy Angwin, CEO of the Australian Payroll Association.
The spotlight on underpayment has prompted many organisations to perform audits, which often reveal payroll errors that can add up to a significant underpayment bill across a large workforce.
Angwin outlines seven common mistakes that can lead to employee underpayment:
1. Incorrect calculations in overtime provisions
It’s crucial to properly apply rulings from appropriate awards, particularly in sections covering breaks. Many awards and agreements stipulate that an employee must take an eight or 10-hour break between shifts to avoid being paid overtime.
“A lot of employers get this wrong and don’t pay the overtime rates,” Angwin says.
2. Underpayment on termination
The Fair Work Act requires that an employee aged over 45 who has worked at an organisation for at least two years receives an additional week of notice on termination. Payroll managers often miss this technicality.
A rule with relatively narrow application, it’s unlikely to result in millions of dollars in underpayment, says Angwin. However, a complaint can trigger an investigation by the Fair Work Commission.
“That’s really where these small problems become big problems because once Fair Work starts coming in, we see employers getting into all sorts of strife with things like penalties for not keeping appropriate records.”
3. Failing to pay overtime penalty rates to part-time employees
Some awards require overtime penalty rates to be paid to part-time employees when they work more than their contracted hours. Employers often incorrectly assume overtime is paid when a part-time employee works more than 38 hours a week.
“If I’m contracted to work 20 hours a week, any time I work more than 20 hours is paid at overtime rates,” Angwin says. “A lot of employers have been missing this.”
Another potential source of confusion is what constitutes ordinary hours, which can differ between and even within awards, says Angwin. One classification might include Saturdays in ordinary hours, while another may not.
“In the same industry, based on your type of business, you might get paid overtime provisions differently.”
4. Superannuation underpayments
Superannuation errors can be costly for employers. Superannuation should be paid on ordinary-time earnings, including bonuses, commissions and leave loading. It is not paid on overtime, but is paid when an employee receives the equivalent of overtime rates – two different pay codes. A payroll system that classifies earnings as overtime instead of the equivalent of overtime rates could lead to the underpayment of super.
The mistake must be disclosed to the Australian Taxation Office (ATO) and will incur administration fees and a fine, plus interest on the repayment.
“None of that is tax deductible,” Angwin says. “It really hurts when you get super wrong.”
5. Only paying the base rate on annual leave payments
Many employers pay annual leave at the base rate for 38 hours a week. However, annual leave payments should include any penalty rates the employee normally receives.
6. Excluding commissions and bonuses from long service leave
Long service leave is another area that commonly trips up employers. “The first thing to know about long service leave is it is always calculated in weeks. If your payroll system is calculating it in days, your long service leave liability will be wrong,” Angwin says.
Long service leave is valued according to average weekly earnings including bonuses and commissions in a set period, which varies between states and territories. “Most employers get long service leave wrong,” says Angwin. “If you change from full-time to part-time because you’ve had a baby and you come back a few years later at full-time, average weekly earnings can be quite different, so it’s important to keep it in weeks, not days.
7. Lack of payroll reviews and outdated systems
Most underpayment errors stem from outdated payroll systems. “Sometimes you see payroll systems that have been put in 10 years ago and never revisited, even though the laws change every year,” Angwin says. “I see a lot of organisations where the pay office is doing manual workarounds, even though their systems can automate some of these processes.”
A common feature of high profile underpayment cases is the lack of a qualified or experienced payroll manager.
Organisations should perform spot compliance audits and hire or train a qualified payroll manager, or outsource payroll to a high-quality managed service provider, says Angwin.
“Even if you’ve got old payroll systems and you’re in a complicated environment, you get people who know what they’re doing in the pay office and asking the right questions.
That’s the best way to ensure you don’t have payroll mistakes.”