The processing of an employees pay is a fundamental component of any company’s operations. It is imperative to ensure you are paying your employees correctly and on time to safeguard employee engagement and retention. With the advanced support, technology and systems available for use to assist a company with their payroll processing, a large portion of this process has become automated, taking some of the pressure off Managers and administrative staff. But what happens when it goes wrong?
Whilst the advancement of systems and technology streamline the payroll process, there is still a portion of payroll that relies on clerical and administrative skills. This may be in order to alter an employees’ pay rate, change their employment type or to update their contracted hours. Regardless, these manual changes can often be the source overpayments and underpayments.
Overpayments are a common payroll error that occurs during the processing portion of payroll. This may occur for a number of reasons such as an incorrect pay rate being entered for an employee, incorrect timesheets being entered and processed, or perhaps an employee mistakenly received funds they were not entitled to. Irrespective of how the overpayment occurred, the Company must then commence the recouping process with the employee.
It is important to remember that you cannot deduct an overpayment of wages from an employee’s wages. For this reason, the initial step in the recoupment process is to have a discussion with the employee about what has occurred. This can prove to be a difficult conversation, particularly when the overpayment amount is quite high. Employees are often shocked and sometimes upset when they find they have been overpaid, particularly in scenarios where the overpayment has been occurring for an extended period of time. To assist this conversation, it is important that you come prepared. Ensure you have all the information relating to the overpayment including how much they have been overpaid, why the error occurred, and how you are going to ensure this does not happen again in the future.
After the employee has been made aware of the overpayment, it is then time to discuss repayment methods. The rate at which the outstanding amount will be repaid will often depend on how big the sum of money owing is. In the instance where there is a large sum owing, it may be more practical to create a repayment plan for the employee to follow. For example, if feasible the employee may pay back $50 per week until the total amount has been recouped. It is important the repayment amount you are asking for is reasonable to ensure the employee can stick to it. Factors to consider here are the employee’s average earnings and how proportionate your repayment amount is to their weekly, fortnightly or monthly wages. Remember, you don’t want to cause unnecessary stress to the employee, particularly if the overpayment is due to your error. Once the repayment plan has been determined, the method of repayment can then be decided.
There are two main ways the funds can be recouped. Firstly, the employee may choose to directly transfer the outstanding overpayment back to the Company. This method is ideal when the overpayment amount is not too high, and the employee can repay the entire outstanding amount in one transaction. This method may also be used when the employee is no longer employed with the Company and wages therefore cannot be deducted. Secondly, the overpayment amount can be deducted from an employee’s wages by agreement. This is managed through payroll and is to be automatically deducted from an employee’s ordinary earnings. Before doing so, you need to ensure that a deduction is allowed under the applicable registered agreement, award, legislation, or court order applying to the employee.
When recouping an overpayment it is important to set expectations early with the employee. Be clear on what has occurred and how the error is to be rectified. Provide opportunities for the employee to express their concerns and ensure you are flexible yet firm with the recoupment process. It is imperative that everything is agreed to by the employee, in writing.
Underpayments, whilst less common than overpayments, pose a potential risk to companies depending on the circumstances. Underpayments occur when an employee receives less pay than what they are entitled to under applicable employment legislation. This can occur due to various issues including missed or incorrect timesheets, or misclassification of an employee under a relevant modern award or enterprise agreement. Once it has been identified that an underpayment has occurred, the following steps should be followed:
- Determine the affected period. When did the underpayment occur?
- Determine how much the employee was paid versus what they should have been paid
- Calculate the total amount that has been underpaid
- Inform the employee of the underpayment. Include how this occurred, the effected period and the total amount owing to them
- Write and send a letter to the employee about the underpayment stating all relevant information
- Organise back payment to the employee
It is imperative that an underpayment is rectified as quickly as possible after it is identified. In some instances however, depending on the size of the underpayment, this may need to be repaid over several instalments. In this instance, be transparent with your employee and seek their agreement to a repayment plan. Explain to them that you will pay the amount owing back to them, however due to the extent of underpayment you will be doing so over a period of time. Be specific on what this period will be and ensure you include this information in writing to the employee.
How to Avoid Overpayments and Underpayments
Depending on the size of the Company, the responsibility for processing and managing payroll may fall solely on one individual. Despite this, it is strongly recommended there is some form of information analysis prior to payroll being processed in order to avoid overpayments and underpayments. This may involve putting the responsibility for employees’ timesheets and pay increases onto their Manager and then having someone in the payroll team check the information entered. Although this may seem like a tedious process, it will ensure the accuracy of employee pay information and consequently reduce the likelihood of employees being paid incorrectly.
The utilisation of a sophisticated payroll platform will comprehensive award interpretation will take a large amount of the manual interpretation and potential guess work out of your payroll processing. Partnering with HR and Payroll professionals can also ensure that you have access to compliant and up to date information.
About Employment Innovations
Employment Innovations is one of Australia’s leading providers of employment services designed to increase productivity and ensure compliance. Its services and solutions include all the tools that every Australian small to medium sized employer needs – including workplace advice, legal services, payroll solutions, migration, human resource management and HR software.
The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.