If you have been paying any attention to domestic media discourse in the last number of years you’ll have an idea Australia has a problem with pay compliance. Scandals in this area are so regular and controversial we’re almost desensitized.
The reality though is decidedly serious. There has been a constant flow of companies being publicly prosecuted for underpaying their employees resulting in millions of dollars’ worth of back payments and fines. Recent developments suggest such scandals are no longer the reserve of the under equipped franchisee or rogue restaurant/hospitality chains. Four such high profile cases have shone a light on the top end of town. Commonwealth Bank, Bunnings, Woolworths and Wesfarmers have all found themselves on the wrong side of underpayment claims in the last 12 months.
Reasons or root causes for such occurrences often vary. Outside of flagrant ignorance of the law, other such reasons include lack of awareness, incorrect interpretation of awards and an overly complex Industrial Relations system. The larger corporations should not suffer from any such drawbacks so why have they got it so wrong? The rather distinct common denominator in all four cases suggests the cause is linked to payroll setup, but the commentary on the matter appears to start and end at the mere identification of that fact. We decided to delve into some of the common errors and explore the steps that need to be taken to shore up your payroll.
Broadly speaking incorrect payroll setup can occur via a handful of different areas. We have classified the main ones below
- Incorrect information flowing from HR (Classifications / Agreements etc)
- Incorrect initial payroll system setup
- Legacy payroll software making calculations difficult to administer
- Set and forget mentality in payroll departments
A frequent theme of media is on incorrect HR information being responsible for non-compliance, such media is typically centred around employee classifications and employment agreements.
As there is very little awareness on the payroll side of the equation, we have classified the main ones below.
Incorrect Initial System Setup
Your payroll system setup is the foundation of your payroll processing, getting that wrong could land your company on turbulent waters.
Let’s take a look at a few payroll system components:
1) Pay codes: pay codes determine entitlements, tax, super, and in most cases payroll tax liability, and Single Touch Payroll reporting (STP). Common areas for errors include when to use categories as ordinary hours, associated accruals or SGC to those categories and when something is considered an allowance. Similarly whether allowances are subject to SCG and more recently STP reporting rules are often incorrectly setup. The Wesfarmers case derived from a recurring setup issue in this area.
2) Deductions/backpayments: they have a direct impact on employee’s taxable earnings, Single Touch Payroll reporting (STP) and tax amount. As we know deductions can be before or after tax and there are specific rules surrounding the treatment of deductions/backpayments that should not be ignored. .
3) Leave code/category: they determine the accrual rate and entitlement period. The leave code/category should at least meet the national minimum standards or state/territory minimum for Long Service Leave (LSL). Correctly determining whether a leave category is paid or unpaid is a common oversight.
As you can see there is a lot that can go wrong with the setup. If non compliant, it could lead to inaccurate leave accruals, superannuation errors, under/over taxing employees, not meeting your company payroll tax or reporting obligations, among others.
Rectifying these errors will cost companies money, resources and its reputation.
Legacy payroll software making calculations difficult to administer
Modern software adoption in the payroll space is gaining traction but not as fast as other mainstream sectors like accounting. A recent study from the Australian Payroll Association suggested that less than 20% of Australian employers are using payroll systems developed this century. Larger organisations with deeper change management considerations appear to be falling behind their smaller ‘more nimble’ peers.
There is a strong argument to suggest the Australian payroll market has always been relatively small and too complex for sufficient software to be developed to adequately de-risk the potential for human error in processing and set up updates.
Positively, sufficient software is now available. Keypay as an example is a modern cloud based all in one rostering, payroll and reporting solution which provides for automated rules and end to end interpretation of the majority of modern awards.
Set and forget mentality in payroll departments
Payroll is a recurring activity. Errors in the setup can lead to the same inaccuracy occurring perpetually until the setup is amended. Where Australia diverges from many other jurisdictions is the frequency of evolution in its Industrial Relations system. It’s not uncommon for a modern award to be updated at least twice in a calendar year. This results in a need for additional vigilance within HR and payroll departments on an ongoing basis with regards system setup.
- “When was the last time I checked the setup of my payroll system?”
- “Have I recently gone through systems migration and did not sign off on the setup?”
- “Is my payroll system up to date with changes?”
- “Do I need to review my payroll process?”
If you are not 100% confident your payroll system is set up complaint or has the functionality required to process your payroll, we would highly recommend running a system health check as soon as possible.
If you aren’t sure where to begin or do not feel confident you have the expertise inhouse to perform a payroll system audit, we recommend reviewing the following useful tips:
If you are looking at implementing a new system
- Engaging a payroll expert removes risk and is an affordable option
- Appoint a project manager to be responsible for the payroll system setup
- Identify checkpoints/approvals during the process
- Always refer to official websites for support and information
If you are looking at auditing your existing payroll
- Review your pay codes, leave types and deductions
- Review your manual processes for automation opportunities.
- Have an internal approval process whenever a new payroll item is to be created
- Keep up to date with changes and ensure your system is updated accordingly
- Alternatively, you could engage an expert to run this audit on your behalf.
If you would like some help with your payroll setup or are looking to audit your current system for compliance, our payroll partners are experts in their field and available to help. Contact us today for assistance or phone 1300 144 120 to be immediately connected to a consultant.