Home - Bad payroll administration leads to underpayment risk

UpdatesMar 25, 2021

Bad payroll administration leads to underpayment risk

10 mins read

A typical payroll process has nine key stages, and the risk of underpayment occurs within the first six.

The nine stages are:

  1. Employee clocks in and out using a time and attendance (TA) system.
  2. Supervisor reviews TA records against work schedules, makes adjustments and exports records to payroll.
  3. Payroll officers process pay run using guidance material to calculate penalties, loadings and allowances.
  4. Variance report is run and reviewed to check for inaccuracies.
  5. Workers’ compensation payments are added.
  6. Payroll manager, HR manager and financial controller review proposed payments, including deductions, pay rate changes and terminations.
  7. Bank payments are approved.
  8. Pay sequence is closed
  9. Employees are paid.

When and how do underpayment risks arise?

The underpayment risk commonly arises in:

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:

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