A typical payroll process has nine key stages, and the risk of underpayment occurs within the first six.
The nine stages are:
- Employee clocks in and out using a time and attendance (TA) system.
- Supervisor reviews TA records against work schedules, makes adjustments and exports records to payroll.
- Payroll officers process pay run using guidance material to calculate penalties, loadings and allowances.
- Variance report is run and reviewed to check for inaccuracies.
- Workers’ compensation payments are added.
- Payroll manager, HR manager and financial controller review proposed payments, including deductions, pay rate changes and terminations.
- Bank payments are approved.
- Pay sequence is closed
- Employees are paid.
When and how do underpayment risks arise?
The underpayment risk commonly arises in:
- Stage 1: TA records are incomplete or obviously inaccurate because employees have neglected to ‘clock on’ or ‘clock off’ as required.
- Stage 2: Adjustments are made by supervisors that are not explained or otherwise undermine the integrity of those records (e.g. simply treating the employee as working ordinary hours only when it is clear from the records that this is not the case).
- Stages 3–6: The payroll data collected, entered and modified at various points during the employment relationship is incorrect. This might be because an employee has submitted incorrect details or it has been entered into the payroll system incorrectly. ‘Pay codes’ and ‘pay rules’ in the payroll system reflect incorrect interpretation of awards or enterprise agreements.
What risks can you face if you underpay your employees?
Underpayment can lead to legal proceedings being brought by the affected employees or unions on their behalf. The Fair Work Ombudsman can also initiate an investigation and court proceedings for underpayment.
If a court finds you have underpaid an employee in contravention of the Fair Work Act 2009 (Cth) (FW Act), it can order that you make up the underpayment together with interest. It can also require you to pay a penalty of up to $66,600 per contravention (if a body corporate employer) or $13,320 (if an individual). Persons involved in the contravention by a body corporate employer (e.g. payroll officers) may also be separately penalised as accessories to the underpayment.
In EZY Accounting 123 Pty Ltd v Fair Work Ombudsman (2018), an accountancy firm was found to be accessorially liable for a restaurant chain’s underpayments. The firm was the payroll service provider to the employer and was found to be knowingly involved in the employer’s failure to pay its workers the applicable award wage. The firm argued its role was confined to entering data provided by the employer, its client.
However, the Court observed that the firm and its sole director “had at their fingertips all the necessary information that confirmed the failure to meet the award obligations” by the employer, yet still persisted with the maintenance of its payroll system with the inevitable result that the award breaches occurred.
The firm’s director was aware the award required the payment of a base rate and penalty rates, and that the actual rate being paid was below this, yet did not make any adjustment.
How to reduce the risk of underpayment
These risks can be remedied by:
- developing guidance material and providing training to assist the payroll team to properly interpret the applicable award and enterprise agreement provisions dealing with monetary entitlements;
- encouraging employees to regularly check their pay details on their payslips and online portal;
- ensure the authority to change key employment conditions is clearly understood and documented;
- human resources controlling template employment contracts, and being the primary point of contact for the external payroll services and salary packaging providers; and
- any material changes to employee’s terms and conditions of employment being formally recorded and stored on the employee’s personnel file.