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Underpayment of staff is a hot topic right now. Of late, we’ve seen many front-page stories about material wage underpayment within Australian businesses. Today’s business environment demands greater transparency following two parliamentary inquiries resulting in the public’s tolerance of non compliance changing dramatically. There’s also an emotional response to these revelations of underpayment, often by large profitable organisations. High profile cases of underpayment, an active union movement and class action interest has led to the Fair Work Ombudsman having a far greater focus on this issue. Clearly, reputation risk is significant in such situations.
In the past, employers were more likely to simply fix identified underpayment issues and get on with business. The Fair Work Ombudsman has signalled a less tolerant approach to non-compliance, even in circumstances of self reporting. In recent times, we’ve seen signs that the spotlight of responsibility is beginning to focus on Directors in underpayment cases.
There are a lot of reasons for putting wage compliance high on the agenda of the Audit Committee, given it has a role in ensuring appropriate governance frameworks and risk management is in place across the organisation.
So how do wage non compliance issues arise? In some cases, payroll has had under investment in resources, training and technology. Employers are now finding that small configuration issues in payroll or time and attendance systems can lead to a significant exposure when extrapolated over a large workforce and a number of years.
Non-compliance may occur for a variety of reasons including:
Lack of knowledge regarding applicable industrial instruments - employers are not aware of how Modern Awards and other industrial instruments apply to their employees, or misapply rules.
Incorrect classification of instrument-covered employees - employers apply the correct industrial instruments, but do not regularly review and update employees’ classification levels.
Reliance on annualised salaries - most industrial instruments do not expressly permit payment of annualised salary in lieu of discrete award or enterprise agreement entitlements; often amounts paid are not sufficient to offset what an employee would have been entitled to if paid discrete entitlements.
Failure to accurately record hours of work, including breaks - employers may be required to keep hours of work records, but fail to do so, making it difficult to calculate minimum entitlements.
Incorrect payroll configuration - as it relates to overtime, penalties, loadings, allowances and superannuation guarantee
Personal/carer’s leave accruing incorrectly - particularly for shift workers or part-time workers
So when it comes to payroll, what are the actions that organisations should take to review their payroll to provide Audit Committee members with confidence?
Ensure appropriate understanding/ interpretation of applicable industrial instruments, permissible payment and engagement methods, seeking legal advice where appropriate
Run a hire to retire process walk through with a payroll SME, assessing payroll process, documentation reviews and performing stakeholder interviews. This walk through should focus on identifying areas within the payroll process that require manual intervention and also gaps in the time/attendance data capture process.
Review of payroll code configuration, to ensure the Award/EA interpretation has been coded correctly into the payroll system and to ensure SGC coding is correct. This process should involve a combined team of legal, employment taxes, and payroll specialists.
Governance controls review to assess whether controls over wage compliance are adequate, risk frameworks are in place and sufficient support is provided to payroll functions.
Review of annualised salary practices to ensure that salaries are an appropriate payment mechanism, and where this is the case, are sufficient to cover the minimum wage to which each employee is entitled under the relevant instrument.
Once an issue is identified, the business should seek legal counsel regarding the nature of the challenge, whether it amounts to a contravention, and steps required to meet legal obligations. Legal advisors can also instruct internal and external specialists to assist with an investigation into compliance. Importantly, your organisation should be careful to understand when information created in the course of an investigation will be covered by legal professional privilege.
In the event that an organisation discovers that they have wage compliance issues there will be a number of challenges including:
Reviewing high volumes of historic and incomplete data. This will be a time consuming process, but a positive outcome is that the systems and processes developed during the investigation will put the organisation in a much stronger position for the future.
Managing multiple stakeholders including the Fair Work Ombudsman, the Fair Work Commission, the ATO, unions, employees and the media.
If they are a listed entity then there will be disclosure obligations.
Added to that are tax and accounting implications of identified liabilities as well as potential regulatory and employee legal action.
Underpinning all of this the need to maintain employee, customer and shareholder trust and confidence to minimise reputational damage.
As a member of the Audit Committee, what are the questions you should be asking on this issue?
How has management confirmed that they are applying the correct minimum terms and conditions of employment to our employees? Have they sought legal advice?
When was the last time we commissioned an external review of our payroll codes and configuration of our payroll system to ensure it is aligned to our underlying Awards/EAs and that SG is calculated correctly?
If we pay our employees an annualised salary, have we confirmed that this is (a) allowed under our Award/EA and (b) appropriate given their minimum terms and conditions of employment;
Do we regularly test that employees receiving an annualised salary are being paid at least what they would be paid if their entitlements were calculated based on discrete instrument entitlements?
Do we use an electronic time and attendance system to capture non-rostered hours?
What manual interventions are required by our payroll function to ensure our employees are paid correctly?
How do we monitor our compliance with workplace obligations for our migrant workers?
Do we carry key person risk in our payroll department?
How does our payroll department keep up with their professional development?
Have we received employee complaints in our organisation about our payroll’s accuracy? How often are we required to run back pay adjustments or make disclosures to the tax authorities?
Over many years a small problem can end up with a big number attached, even if the majority of employees have been paid correctly.
In the end, whether your business is compliant is not just a matter for legal minds. You also need to consider how your organisation is keeping records, configuring and governing payroll, and employment taxes. Maintaining wage compliance involves multiple skillsets and should result in an embedded level of governance that ensures such issues don’t arise again.
Partner, Payroll Consulting, PwC Australia
Tel: +61 2 8266 7261
Partner, Data Assurance, PwC Australia
Tel: +61 2 8266 1382