Payroll Audits: Why, When, and How to Conduct Them

Need more help with this topic?

Not regularly auditing your payroll system can result in underlying payroll calculation issues not being picked up, which can in turn lead to underpayments, and even overpayments at times. When these issues arise, companies face penalties from both the Australian Taxation Office and the Fair Work Ombudsman. These act as a deterrent for companies to mis-manage payroll and set examples for other companies to learn from. If payroll non-compliance is committed knowingly and systematically, these fines can attract a tenfold increase in maximum penalties, as seen recently with the case of Commonwealth Bank and CommSec where regular reconciliations and top up payments were not in place. 

Regularly auditing your payroll system and the way you calculate pay your employees ensure that you are meeting your requirement to pay your workforce accurately and compliantly. Issues with payroll compliance can lead to problems on a workforce level as well. Disengagement can occur from employees not feeling adequately treated in return for their services or labour, and this can also lead to staff retention issues if it is ongoing. 

In this article we will be discussing the importance of different aspects of reporting, such as using your payroll software to perform annualised wage reconciliations, checking that your system is compliant with Single Touch Payroll reporting, calculating superannuation and paying the minimum entitlement or better than an underpinning Modern Award. We will also factor in responses from a recent survey on the payroll profession, which can present a case for evaluating your current payroll needs. Lastly, we will also look at solutions that may meet criteria for ensuring your payroll process protects your organisation from the consequences of non-compliance. 

When should you audit?

Annualised Wage Reconciliation – requirements of the Award or EA  

An annualised salary refers to when an employer chooses to pay their employee a salary rather than the conditions of the award or enterprise agreement. Some awards have a requirement for this type of employee to have their pay audited, and how often this should be performed during their period of employment, to ensure that they are being paid more than what they would have earned on the minimum award rates and conditions of the award.  

Some examples include the Clerks Private Sector Award and the Restaurant Industry Award

Clerks Private Sector Award: 

18.1 Annualised wage instead of award provisions 

[18.1(a) varied by PR719747 ppc 29May20] 

(a)  An employer may pay a full-time employee an annualised wage in satisfaction, subject to clause 18.1(c), of any or all of the following provisions of the award: 

(i)clause 13.8 (Make-up time); and 

(ii) clause 16—Minimum rates; and 

(iii)clause 19—Allowances; and 

(iv) clause 21—Overtime (employees other than shiftworkers); and 

(v) clause 22—Rest period after working overtime (employees other than shiftworkers); and 

(vi)clause 23—Time off instead of payment for overtime (employees other than shiftworkers); and 

(vii) clause 24—Penalty rates (employees other than shiftworkers); and 

(viii) clause 26—Ordinary hours of work and rostering for shiftwork; and 

(ix) clause 28—Overtime for shiftwork; and 

(x) clause 29—Time off instead of payment for overtime for shiftwork; and 

(xi)clause 30—Rest period after working overtime for shiftwork; and 

(xii)clause 31—Penalty rates for shiftwork; and 

(xiii) clause 32.3—Annual leave loading. 

 
18.2 Annualised wage not to disadvantage employees 

(a)  The annualised wage must be no less than the amount the employee would have received under this award for the work performed over the year for which the wage is paid (or, if the employment ceases earlier, over such lesser period as has been worked). 

(b) The employer must each 12 months from the commencement of the annualised wage arrangement or upon the termination of employment of the employee calculate the amount of remuneration that would have been payable to the employee under the provisions of this award over the relevant period and compare it to the amount of the annualised wage actually paid to the employee. Where the latter amount is less than the former amount, the employer shall pay the employee the amount of the shortfall within 14 days. 

(c) The employer must keep a record of the starting and finishing times of work, and any unpaid breaks taken, of each employee subject to an annualised wage arrangement for the purpose of undertaking the comparison required by clause 18.2(b). This record must be signed by the employee, or acknowledged as correct in writing (including by electronic means) by the employee, each pay period or roster cycle. 

 

Restaurant Industry Award: 

20.1 Annualised wage instead of award provisions 

(a) An employer and a full-time employee may enter into a written agreement for the employee to be paid an annualised wage of an amount that is at least 25% more than the minimum wages prescribed in clause 18 multiplied by 52 for the work being performed in satisfaction, subject to 20.1(b), of any or all of the following provisions of the award: 

(i)18—Minimum rates; 

(ii) 21.3—Split shift allowance; 

(iii) 23—Overtime; 

(iv)24—Penalty rates; and 

(v) 25.3—Payment for annual leave. 

20.2 Annualised wage not to disadvantage employees 

(a) The annualised wage must be no less than the amount the employee would have received under this award for the work performed over the year for which the wage is paid (or if the employment ceases or the agreement terminates earlier over such lesser period as has been worked). 

(b) The employer must each 12 months from the commencement of the annualised wage arrangement or, within any 12 month period upon the termination of employment of the employee or termination of the agreement, calculate the amount of remuneration that would have been payable to the employee under the provisions of this award over the relevant period and compare it to the amount of the annualised wage actually paid to the employee. Where the latter amount is less than the former amount, the employer shall pay the employee the amount of the shortfall within 14 days. 

See also: An employer’s guide to annualised wage arrangements in the hospitality and restaurant industries

 Anyone that is responsible for payroll processing should understand the calculation of an annualised salary, but also the requirements of the Modern Award or Enterprise Agreement in order to ensure that payroll reconciliations are performed in line with these requirements. 

What system requirements are needed?

A system that can perform the Award or Enterprise Agreement annualised salary reconciliation is crucial to performing this task. Record-keeping requirements such as tracking leave and hours worked for these employees in the form of timesheets allows the payroll processor to perform an award reconciliation. The payroll processor should have the ability to perform this task, and compare it to what has been paid using an annualised salary arrangement, to ensure that employees are paid in a more advantageous way in comparison to the Modern Award. 

Access to an HRIS to check what conditions are included on the employee level within the award also allows the payroll processor to identify anything that may be missing within the annualised salary calculation, such as if certain penalty rates were included within the calculation but not others (e.g. if the employee was not expected to perform shiftwork at night rates however did end up working these regularly) – So this can be reported back to Human Resources or the person responsible for allocating the employment contract and salary calculation requirements

What to do if there is an underpayment?

If an underpayment is identified, there are several steps that the organisation can take to rectify this issue. This includes: 

  • Notifying the employee in writing of the underpayment 
  • Backpaying the employee within the Modern Award timeframes and calculating PAYG and Superannuation accordingly 
  • Self reporting to the ATO and Fair Work 
  • Checking if other employees employed under annualised salary arrangements may be at risk of underpayments 
  • Reviewing internal procedures with annualised salary arrangement calculations at the point of hiring staff 
  • Having an internal discussion with relevant stakeholders to confirm employees are working in line with their employment contract (e.g. not working excessive overtime hours) 

Payroll System Audit

Performing a payroll system audit also ensures that the system is set up in accordance with the legal requirements payroll must follow. This can include checking system set ups and ensuring your pay conditions (such as award conditions and rates of pay) are up to date.

Single Touch Payroll

Single Touch Payroll Phase 2 introduced a number of reporting requirements that are sent to the ATO prior to or at the time of closing a payroll. This includes disaggregating gross wages into different reporting categories, such as Gross Wages, Types of Allowances, Overtime and Leave Categories. Payroll systems should be regularly checked and updated if required to ensure that payroll information is recorded and then reported to the ATO in the correct way. A great resource for performing this is the ATO’s STP Phase 2 Quick Reference Guide

If an issue is found, a typical way to fix this is to update the conditions of your pay type and perform an update event for all employees (including any employees that were terminated through the financial year) – However, as each payroll system can work differently it is best to check with your payroll system provider. An appropriate time to perform this task is in the lead up to End of Financial Year processing, but best practice would also be performed on a regular basis as this information can affect an employee accessing government services outside of their employment.

Superannuation Guarantee

Checking the calculation of superannuation is also an important aspect of auditing a payroll system. When superannuation is underpaid, there are legal ramifications for this. The payroll processor should be familiar with what aspects of payroll is superable under SGR 2009/2 and how this is reflected within the setup of the payroll system. If a pay type is found to be calculating superannuation incorrectly, a full audit on the employees that have been paid under this should be undertaken. Checking that the system is applying the correct quarterly superannuation contributions and that payments are being made in line with superannuation processing requirements (as well as the Employment Contract, in case this is stipulated as more regularly). 

Where superannuation is found to be underpaid, employers must pay the superannuation guarantee charge and also fill out a statement to the ATO. At times the ATO may require super to be recalculated on all earnings and not just Ordinary Time Earnings, so the total superannuation payable may exceed the amount that originally should have been paid.

Modern Award Conditions

The conditions of Modern Awards can change regularly, so it is also important to ensure that the Modern Award you are paying employees under is up to date. When an update is released, such as pay rate increases, this is usually applicable to the first full pay period after a particular date. In addition, the requirements might fall on 1 January or 1 July. Keeping up to date with changes to the Modern Award can be done by signing up to Fair Work’s updates, which can be tailored to your business needs – such as states that you operate within and Modern Awards that are relevant to your payroll. Payroll processors are then able to schedule any relevant changes to their payroll system at the right time. Some payroll systems that have Modern Awards managed within the system may notify you that there is an award update and how this should be implemented. 

Where it is picked up that an award change has been missed, a reconciliation of all employees under these conditions should be performed, and any backpays are processed as soon as possible. As pay conditions and changes in rates of pay affect superannuation conditions, this should also be included and reporting the under-contribution process discussed above should be paid.

Best Practice for a Pay Query

When an employee queries their pay, the payroll processor should be familiar with how all calculations have been made to meet the Gross, PAYG, Superannuation and Net Wages figures. Prior to responding to the employee a crucial step is to check this and validate it against the modern award and relevant set ups (such as if a particular pay item should be taxable or superable). Where an issue is found an employee should then be notified and back paid accordingly – however, if correct, this also assists the payroll processor in responding to the employee with a breakdown and supporting information to validate those payments. 

When a calculation issue has been identified, best practice is to follow a set of steps such as: 

  • performing a check on all employees that have been affected, and notifying and backpaying if affected 
  • Identify where in the payroll process that this issue was caused. This could include a system set up error or a lack of payroll processes. This should be rectified prior to the next pay run 
  • Re-training stakeholders in the payroll process on system use (e.g. training managers on time and attendance) 
  • Re-training payroll processors on award, PAYG or superannuation knowledge

Solutions for Managing Payroll Non-Compliance Risk

Equip your team

A source of payroll non-compliance causes can quickly be identified when reviewing the resources that your team have. Considering that payroll begins at the hiring of an employee, through to using time and attendance, ongoing maintenance of the employee file with any changes and then processing payroll, it is important that all stakeholders involved in payroll are trained to utilise the system effectively. Holding regular training sessions or making training videos available to managers and employees on the use of timesheets, for example, can be a simple solution to ensuring data entered for the pay run is correct. 

Ongoing education in the payroll space is also crucial to keep up to date within the payroll profession. In 2023, Australian Payroll Association reported survey results that indicated only 17.1% of payroll professionals have a Nationally Accredited payroll qualification at a Certificate or Diploma level. Providing your payroll staff with an avenue to upskill can be valuable to an organisation to avoid any incorrect payroll calculations resulting in non-compliance. Some solutions to this include membership to a professional payroll organisation that can provide support, and also access training from your software supplier. 

Payroll processors should also be given enough time to perform auditing tasks on employee pay calculations and also system updates or reviews. In the Australian Payroll Survey in 2023, 19.65% of respondents reported that they had never performed a payroll process and compliance audit. Further to this, 2 out of 5 professionals reported burnout and 48.4% reported that they work an average of 41-50 hours per week which can coincide with not being adequately resourced time-wise to do so. Given that employment regulations change on a regular basis, allocating time for this task is crucial. 

Speaking to the stakeholders within your organisation, you can obtain important feedback on if your current solution is fit for purpose which could lead to a possible review of the systems you have in place. For example: 

  • Managers providing feedback on your time and attendance functionality 
  • Human Resources/Hiring Managers providing feedback on onboarding new staff and maintenance of existing staff 
  • Payroll processors on the functionality of the payroll system and if there are any limitations in the role that they perform. This should also identify any manual processes that are being performed outside of the system. Payroll technology was reported highest on the scale of Current Payroll Challenges within the Australian Payroll Survey 2023 at 38.71%.

Engage a 3rd Party  

Gaining assistance from a professional organisation that specialises in payroll audits can be a beneficial practice, as they seek to find errors within your payroll calculations and the set up of your payroll system. Some also review your payroll process in practice to provide feedback on how this can be optimised efficiently and compliantly. 

While the costs of non-compliance can lead to a variety of penalties such as superannuation guarantee charges (and also being penalised through paying super on non-ordinary time earnings as well), and deterrent penalties from Fair Work, engaging a third party can be considered an investment to avoid this – As these organisations take the time to best understand your workforce and payroll process, perform wage audits and system audits. 

They may not offer the ad hoc reconciliations required for annualised wage audits. Since payroll audits should be performed regularly and may not result in the underlying cause of the issue being prevented in future, this is most beneficial for one-off ad hoc audits. 

Outsource your Payroll

In reviewing your current payroll solution and processes, you may weigh up the benefits of outsourcing your payroll. This can include a number of areas such as cost efficiency, payroll compliance, better utilisation of technology and ongoing support. 

Outsourcing payroll can be more cost efficient for some organisations, as running payroll in house incurs a number of costs such as employing a payroll professional and supporting their ongoing professional development to ensure ongoing compliance, payroll software, time and attendance software (if it is not contained within your payroll system) and professional memberships to a payroll organisation to provide support. The time spent by stakeholders within your workforce such as managers utilising time and attendance or HR managing changes to your employees also counts toward the cost of processing payroll. 

Processing payroll in-house often involves one individual or a small team handling your payroll process. At times, the person responsible for payroll may also be involved in other areas of the business leaving only a short amount of time allocated to ensuring payroll is processed in line with the correct requirements or Modern Award your employees may fall under. 

In outsourcing, your payroll is often handled by an experienced team that will have professional memberships and ongoing training for their employees, in order to handle the ever changing payroll legislative landscape. An outsourcing provider that offers annualised wage reconciliations as a part of their service offering can also ensure that you have this available to use when necessary. 

Outsourced payroll providers often have all-in-one solutions, with an employee portal for self-service, time and attendance and HR Information Systems (HRIS) built in, which ensure adaptability to change for your existing employees, and therefore a better employee experience. Through understanding your business needs when it comes to technology, the payroll provider will be able to build out your system to meet those needs. 

Oftentimes when payroll is run in-house, especially within small organisations, if there is one individual responsible for the payroll processing then any absences may have an impact on the ability to process payroll. 

This may result in delays to the process, or allocating another resource to be trained up to perform the role – and this can take them away from their regular day to day tasks. The individual responsible for your payroll may also be the one specialist within your organisation that has knowledge of all systems and processes involved with the entire payroll process. Outsourcing your payroll to a professional provider ensures that there is always a procedure in place that can be handled by a team of professionals and keep the payroll process running smoothly. 

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 advicelegal servicespayroll solutionsmigrationhuman resource management and HR software.

 

Disclaimer

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.

Looking for further help?

To speak to one of our HR consultants, or find out more about our HR outsourcing services, just fill out the form below and we’ll be in touch.