Skilled migration: A new paradigm for Government

With greater regulatory scrutiny, organisations can’t take risks with wage underpayments

^{Share this article}

When it comes to worker entitlements and employment taxes, regulators are growing more sophisticated and assertive. But many organisations remain underprepared to respond to this evolving posture. Leaders need to improve outdated systems and processes to avoid significant penalties and reputational fallout.

Wage underpayments - a phrase which broadly incorporates shortfalls in payments to workers, superannuation obligations and associated employment taxes - has become a common front-page headline in recent times. The Fair Work Ombudsman (FWO) has adopted a ‘name and shame’ policy even in situations where the underpayments inadvertently arise.

Employers already face frighteningly complex laws around wages which includes worker entitlements under the relevant industrial instruments, superannuation obligations and employment taxes. And the pressure on organisations to get on top of compliance is building. In response to recent revelations and increased public attention, regulators are ramping up their effort to clamp down on wage underpayment non-compliance and penalties appear likely to rise.

Employers – particularly those who have underinvested in the controls network and training of the payroll function over many years – need to respond to this challenge and fast-track investment into the critical processes that ensure they are not inadvertently underpaying worker entitlements or associated employment taxes. If they don’t, like many other employers, they could face serious financial and reputational damage. 

Regulators get active

Four recent examples highlight just how regulators responsible for ensuring that workers’ entitlements and taxes are paid correctly, are getting tougher:

• The FWO recently issued ‘nudge letters’ to Board directors of organisations in certain industries. These letters outlined areas of concern around the industry’s compliance and invited the directors to respond to these concerns. This tactic reflects a very nuanced and strategic approach by the FWO. Clearly, the FWO knows what it is looking for and is proactive in finding it.

• The State Revenue Offices (SROs) intensified their focus on wage and superannuation guarantee underpayment issues. The SROs are looking to ensure that payroll tax returns accurately reflect what employees and contractors have actually been paid, and that historic underpayments of wages are not missed.  

• There has also been a rapid expansion in the degree of information sharing between administrators and regulators. For example, a payroll tax review conducted in one state is likely to be shared with other relevant states. And regulators are not only sharing compliance data, but they are also sharing compliance strategies too. 

• The Australian Taxation Office (ATO) and Department of Home Affairs recently announced they will be sharing information on over 670,000 individuals per financial year from 2016-17 to 2022-23 which may expose companies to superannuation and other employee related obligations depending on the residency status of those workers. 

While all sectors and industries are subject to increased regulatory focus regarding wage underpayments, we are seeing regulators focus specific attention on industries which carry a higher risk of non-compliance, and are likely to have complex arrangements.

Higher penalties on the horizon 

The penalties for not correctly paying worker entitlements and/or related employment tax obligations are already significant, but organisations may be facing higher penalties in the future.

In the recent Industrial Relations Omnibus Bill, the Federal Government signalled its intention to introduce a 200% penalty for wage underpayments, up from the current maximum fine of $66,000. Even though the provision did not make it into law at this time, there was bipartisan support for these measures so the provision may be reintroduced into the Parliament in the not too distant future. In the meantime, businesses have an opportunity to rectify any historical wage underpayments while the penalty is capped. Waiting to do so might lead to penalties that are double the amount of underpayment in addition to the underpayment itself. In situations where there is a systemic underpayment arising from, for example, an incorrectly coded payroll system configuration over many years, it is possible that the penalty could run into millions.

In addition, the NSW Government recently proposed new laws targeting employers who underpay payroll tax due to underpaid worker entitlements. On top of hefty financial penalties, the proposed laws would allow Revenue NSW to name – and as a consequence, shame – employers who have had an underpayment regardless of the reason for the underpayment. If passed in NSW, the proposed laws would complement those already in Victoria and Queensland.

One would be excused for thinking that penalties for non-compliance with worker entitlement and tax laws will be waived in full, or at least significantly,  if an error was not deliberate. However, this is not necessarily the case. For example, the ATO’s penalty for underpayment of superannuation can be up to 200% of the Superannuation Guarantee Charge, and it has only limited ability to reduce this amount. Similarly, State Revenue authorities will apply a penalty (commonly 25%) to shortfalls which are not volunteered prior to an audit, regardless of whether the shortfall was unintended.

Managing the regulatory environment - what to do now

Employers should expect that it is not a matter of ‘if’ but ‘when’ one of the regulators will contact an employer to determine their level of compliance with relevant wage laws and associated employment taxes. 

Regulators are highly receptive to voluntary disclosures and there are opportunities to significantly reduce or remit in full any penalties that might apply to underpayments. However, the ability to mitigate penalties is compromised when a regulator or administrator initiates the review or audit.

Accordingly, there are some steps that can be taken now to ensure that employers are best placed to respond, or actively engage, with a regulator. These include:

• Undertaking a preliminary review of payroll systems and processes against the relevant Enterprise Agreement (if applicable) or Awards, compliance with superannuation obligations and relevant employment taxes. It is not always possible to identify potential underpayment errors by merely conducting a process review. Accordingly, we recommend that the review tests the configurations against the relevant clauses of the Industrial Instruments. Unfortunately due to the nature of the issues, shortcuts or light touch reviews can result in the issue needing to be revisited at a later stage (e.g. an employee later raises a query or payroll subsequently identifies an error). Labour costs in general are highly material to most organisations, and a commensurate level of investment should be expected, in order to assess and ensure compliance with such complex and intricate laws. 

• Upon completion of the review, determining appropriate next steps. This could include making a voluntary disclosure or engaging with regulators in a meaningful way. Given the nature of these issues, it may also be necessary to engage with broader stakeholders than just the regulators such as affected employees or contractors. 

• A critical step, and one that is a focus of the regulators in determining their future compliance strategy, is to identify changes required to business processes, in order to prevent the same issue occuring in the future. This may require investment in people, systems and processes, but it is often viewed favourably by the regulator and can prevent ongoing reviews and audits in the future. These steps can also be used effectively in negotiations with the regulators. 

The regulatory environment has clearly shifted in recent times. In addition to the risk of damaging publicity, concerns over underpayment to workers and associated taxes, the regulators have enhanced their focus on this area and are more coordinated than ever. Employers that take the above steps not only ensure they are prepared for an inevitable review by one of the regulators but also to obtain comfort that their most important asset, their workers, are being paid appropriately. The added benefit is that it will assist employers to develop a strategy for proactively engaging with the various regulators and, where necessary, position for voluntary disclosures or other early engagement options.