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One of the key risks facing businesses today is ensuring employees are being accurately paid for the work they do. To navigate through Australia’s industrial relations system in 2020, employers must ask several questions.
It’s been impossible to miss recent headlines about underpayment of workers entitlements.
People should be fully and fairly rewarded for their contribution to their employers’ success, after all. Many commentators have been quick to jump on each new revelation with accusations of corporate greed and executives lining their own pockets at the expense of their workers. But the truth is both far more complicated and far less sensational than that.
The vast majority of employers set out to do the right thing by their people, but the chances of inadvertently making a mistake are extremely high and, as we are witnessing, small mistakes made across large workforces over several years add up to very large numbers.
Some argue employers are to blame, having underinvested in payroll systems and processes, some point to the complexity of the industrial relations system, whilst others lament the declining presence and power of unions as a source of oversight within the workplace.
The reality is, it’s a combination of a number of factors that have contributed to the challenge so many employers are now facing.
For industries with a high prevalence of underpayment of workers’ entitlements, PwC has undertaken modelling using Fair Work Ombudsman data and estimates that there is in the order of ~$1.35 billion in underpayments per year. Sectors most at risk include construction (~$320 million), healthcare and social assistance (~$220 million), accommodation and food services (~$190 million) and retail (~$180 million). This estimate includes ~21% of the workforce in the selected industries, or ~13% of the total Australian workforce.
The decline of union presence in Australian workplaces has led to a decline in the policing of employee entitlements specific to particular industries, where the interpretation and operation of industry-specific entitlements often carry a long history.
Falling union participation and more stringent approval tests have also impacted on the rate of bargaining for enterprise agreements. Many employers are covered by general rules that are not bespoke to their organisation and subject to change from time to time, compounding the challenge for employers to stay on top of their increasingly dynamic and ever changing workforces.
Monitoring compliance is now largely left to the Fair Work Ombudsman, which is tasked with monitoring a large volume of industrial instruments across multiple industries. Whilst the Ombudsman has been proactive in responding to compliance matters, some industry groups have called for additional resourcing and funds to enable the Ombudsman to meet the full breadth of its remit.
The current industrial relations framework has been simplified, including through award modernisation, but complexity is still the hallmark of the system.
In the past 15 years, we have shifted from a largely state-based, arbitrated industrial relation arrangements to a national system, working through major changes introduced by separate Workchoices and the Fair Work Act regimes.
The Fair Work Act, which commenced in 2009, continued the nationalisation of industrial relations matters through the simplification of industrial awards, shrinking common rule awards from over 1500 instruments to 122 modern awards.
The resulting modern awards have multiple clauses addressing minimum rates of pay and other safety net entitlements which differ from job to job, skill level by skill level and industry by industry. Safety net entitlements such as overtime, penalty and shift rates are interdependent and may differ within a single award depending upon employment status and work type.
Some common industry awards contain over 10 separate rules that affect overtime accrual. Penalty rates, annualised salary provisions, notification requirements for change of roster rules all vary across awards, industries and sectors, creating a broad runway for errors to be made by employers.
The magnitude of errors that can potentially take place can be overwhelming.
Modern awards are subject to continuing review, initially scheduled to occur every four years. The first review commenced in 2014 and has to date produced some significant changes including changes to weekend and public holidays, penalty and casual penalty rates. But more than five years on, the first review has not yet finished; a clear indication of the remaining complexity in the system.
The magnitude of errors that can potentially take place can be overwhelming. In many cases, one small error in a system can become a multimillion dollar liability by the time it is discovered, many years down the track.
People and technology
Navigating through the system is complex but quantum leaps in data management, AI, sharing and visualisation technology have been positive. The ability to now visualise payroll data, roster patterns and hours worked across an entire workforce can bring great insight and value to an organisation. This visualisation also enables identification of small past errors; errors that were often minor but have become magnified over long periods.
In the future, these data visualisation tools will help organisations to proactively manage their compliance risk. However, ongoing investment is required not only to keep the technology up-to-date, but to increase the digital skills of payroll functions. Investment in technology is critical, but layered on top of underinvestment in the actual systems is the parallel issue of how far Australia is lagging behind on the skills people have today versus those needed for the digital world. Over-reliance on or incorrect use of technology can also exacerbate the underpayment challenge. Read more about Australia's mismatched workforce here.
Many issues, but no excuses
Complexity will not be accepted as an excuse for underpayment of entitlements. The onus is on employers to keep track of – and correctly apply – all the rules.
Small errors can become magnified over a long period, exposing organisations to the risk of substantial financial penalties, reputation damage, loss of employee trust and remediation work. In some cases, company directors, HR professionals, accountants and other individuals with responsibility for payroll could also be prosecuted.
Dangers and risks apply to businesses large and small. Leaders of SMEs face the daunting task of finding the time and resources to make sense of all the industrial relations variables that apply to their workers’ entitlements. Leaders of larger organisations have the added challenge of volume, due to the sheer number of staff and the variety of tasks they undertake. This type of complexity is requiring employers to turn to specialised third-party advisors, with deep expertise in data analytics, workplace law and payroll.
It is in everyone’s interests for government to engage with business leaders, workers, unions, regulators and other stakeholders to address the challenges in the system that are contributing to these errors.
For workers, a simpler system would be more transparent and reduce inadvertent underpayments. For employers, a simpler system would make it easier for them to do the right thing by their workers while reducing their own risk exposure and compliance work. For the wider economy, a simpler system would cut red tape, boost productivity and ensure Australians receive a fair day’s pay for a fair day’s work.
Action is required to prepare for what the economy may have in store next year. Business leaders should therefore be asking five key questions:
How are we resourcing compliance internally and have we struck the right balance between systems and people?
How regularly are we updating our HR information systems, time and attendance systems, and payroll systems?
Given the high organisational and personal risks, have we sufficiently escalated this issue within our governance and decision-making processes?
Do our people and our directors have sufficient understanding of the industrial relations landscape as it relates to our organisation?
In 2020 we will deep dive into each of these issues. Only together can we solve these important problems and navigate the country through what is predicted to be a testing year for the economy. We call this, The Together Effect. Contact us to help become part of the solution.
Partner, Payroll Consulting, PwC Australia
Tel: +61 2 8266 7261
Chief Economist & Partner, PwC Australia
Tel: +61 (2) 8266 4611
National Thought Leadership Manager, PwC Australia
Tel: +61 (2) 8266 0252