Payroll legislation and compliance
Compliance is a pertinent part of payroll processing and there is a lot of legislation surrounding compliance to consider when processing payroll. We will be providing general information that covers the majority of Australian employers, but please keep in mind that this article isn’t going to cover all employer payroll compliance obligations and doesn’t replace financial or business advice.
What is payroll compliance?
Payroll compliance is a lot more than just ensuring that you have your employees paid on time. Payroll professionals are also responsible for ensuring reporting is up to date, that payments such as superannuation are made by due dates, and to ensure that employee reporting is maintained in a secure manner.
As payroll falls somewhere between HR and Finance departments, there is a lot to factor in when we talk about compliance in payroll, and we have to take these two facets into account, and ensure that we have co-operation and communication between these departments.
Finance & Payroll
Payroll and finance work hand in hand when it comes to processing payments to employees, to the Australian Tax Office to meet Pay-As-You-Go obligations on Activity Statements and superannuation payments. You may also need to engage with finance for things like salary sacrifice payments to third parties, and state payroll tax payments.
This may look like the payroll department compiling reports on a periodic basis depending on the due dates for a payment, and providing this to finance to make the payments. Making sure this process is done on time internally ensures that superannuation payments are allocated to an employee’s account by quarterly deadlines, as an example.
HR & Payroll
When we take into account the HR side of things, we start looking at things like employee onboarding, collation of personal information, and record keeping.
During the onboarding of an employee, there are several documents such as the Tax File Declaration and Superannuation Choice form which are important for payroll. As payroll professionals, it is our responsibility to ensure that the selections made in these forms are entered correctly into our payroll software to ensure employees are paid and taxed correctly each pay period, and that their superannuation is being paid into the correct account.
This documentation may also include the employee’s contract, which includes information about their salary. The contract should outline the employee’s pay frequency, their annual salary or hourly pay rate, the award or agreement they are covered by, and how their superannuation is treated, like whether salary is inclusive or exclusive of superannuation. Payroll’s job here is to ensure that employees have been set up in the payroll software to reflect the information in the contract, to ensure payments are not in breach of any part of this agreement between the business and the employee.
After onboarding and for existing employees, we also need to consider how these documents are stored, and how long they are stored for. As payroll documentation is identifying personal information, it needs to be stored securely, and preferably electronically. We also need to take into account how long documents such as these need to be stored for payroll auditing purposes.
Similarly, when an employee leaves the organisation, we also need to record their termination information. This can be in the form of a resignation letter or a letter of termination provided to the employee by the business, which is generally stored by HR. The termination reason will be passed on to payroll to determine the employee’s final pay calculations.
Who governs payroll compliance and legislation?
We can generally break up governing bodies for payroll compliance into two organisations: The Australian Tax Office and the Fair Work bodies, which coincide nicely with the responsibilities between the HR, Finance and Payroll departments within your business. We’re going to deep dive into what parts of payroll these 2 bodies cover, how to stay compliant and what some of the consequences are if you don’t comply.
The Australian Tax Office
The ATO plays a huge role in business financial legislation overall, and serves to create governance around the payment of business taxes, and administering major aspects of the superannuation system in Australia. Since 2019 we have also seen the reporting of employee wages through STP become a huge part of payroll compliance with the ATO.
Reporting of wages through STP
The introduction of Single Touch Payroll has forced payroll professionals and businesses to really evaluate what kind of payments are being made to employees, and ensure they are being reported correctly. Reporting legislation for payroll has changed a lot over the last few years, which means compliance has also changed along with it.
STP and reporting legislation outlines that employers now must report employee wages paid to the ATO via STP on or before the day you pay your employees. STP submissions will include the details for each employee included in the pay run (including their tax file number), their Year to Date earnings, PAYG withheld from payments, and their Superannuation Guarantee amounts.
With the introduction of STP Phase two, legislation has expanded on these details to also include the reporting of payment classifications and employee income types. This provides greater visibility to the ATO on what kind of payments are being made to employees, and that PAYG is being withheld according to guidelines. This includes reporting allowances drilled down to the allowance type, bonus and commission payments, overtime payments and leave payments. If you employ working holiday makers, you will also need to report their country of residence.
Staying Compliant with STP Legislation
Choosing an STP Phase 2 compliant software is integral to ensure you are meeting all your legislative obligations. The correct software will ensure that you are able to map your pay and deduction categories as per ATO guidelines and allow you to enter a country of residence for your Working Holiday Makers. This will also ensure that you can submit your STP reporting each pay period, and that you can send finalisations to the ATO at EOFY.
The ATO has a great list of compliant softwares grouped by employer size on their website -which can help you select a solution that is suitable and cost effective for your business.
The ATO has a range of tax tables to help you work out how much to withhold from payments you make to your employees. These tables are broken up by payment frequency of employee wages, their residency status, tax selections (whether they are or aren’t claiming tax free threshold) and if they have a HELP debt or STSL. Outside of this, the ATO also determines which allowances are subject to tax above normal employee wages.
Staying Compliant with PAYG Legislation
When an employee starts with your business, it is important to ensure that they fill in a tax file declaration form, and that the selections are accurately reflected in the payroll software when they are entered. A great way to do this in an efficient way is to use a payroll software with an employee self-service function. This allows the employee to add their Tax File Number, tax free threshold selections, residency status and whether they have a HELP debt/or Student Loan electronically.
You also want to ensure that your payroll software tax rates are updated each financial year when applicable. The change in tax rates is generally driven by the first pay period with a payment date in the new financial year, and some payroll softwares will apply the updated rates automatically when the pay run is created.
Tax legislation also applies to the payment of PAYG withheld from employee wages to the ATO. The due date of this payment is determined by the size of the business, whether it be monthly or quarterly, and the compliance side of this may fall to your finance department, such as accounts payable or your business bookkeeper or tax agent.
The ATO provides information on what parts of an employee’s wages are subject to attract superannuation guarantee, or SG, amounts. They provide tables on their website to break down these payments by type, and separate them into Ordinary Time Earnings or not, to determine whether SG applies to the payment.
The ATO sets the deadlines for superannuation payments to be made into employee’s superannuation accounts. These are due quarterly and must be paid using the methods outlined by the ATO.
The ATO also announces any changes to the SG amounts on payments made to employees, which is currently increasing by 0.5% per financial year, up to a total of 12%.
Staying compliant with Superannuation Legislation
To stay compliant with superannuation legislation, you need to ensure that all payments to employees that are deemed Ordinary Time Earnings are attracting the current superannuation guarantee amount, as a minimum.
As at today, superannuation payments are due quarterly, paid on the 28th of the month following the end of the quarter, but payments can be made monthly if this suits your business better – as long as they are still hitting your employee’s account by the quarterly deadline.
Along with this, you also need to make sure superannuation payments are made in the correct way to employee superannuation accounts. You can use a payroll system which is in line with Super Stream requirements, which will use their own clearing house to direct debit your business bank account to distribute funds through to your employee’s superannuation accounts.
You can also make payments by using a super fund’s online system for employers or by using a super clearing house such as the Small Business Super Clearing House (SBSCH).
The FWA, FWO and FWC Legislation
The Fair Work Ombudsman’s purpose is to provide education and assistance to employers and employees on the application of the Fair Work Act. The Fair Work Act and Fair Work Legislations are covered by the Fair Work Ombudsman.
The National Employment Standards
The National Employment Standards, or NES, make up the minimum requirements for all employees in Australia.
The NES covers a lot of different conditions, which span across both the HR and payroll departments of a business. It’s important that payroll is familiar with the parts of the NES that apply to payroll.
We’ll touch on some of the points in the NES that relate directly to payroll in a bit more detail, however there is more detail on all of the NES entitlements on the Fair Work Ombudsman website.
Maximum weekly hours – this is 38 hours for a full time employee, or less than this for an employee who is not considered full time, and these hours should include any leave taken as agreed by the employer and employee. An employer may request that an employee works reasonable additional hours as long as adequate notice of additional hours is given to the employee, the employee is compensated for the additional hours by payment of overtime or penalties, and that it is not at risk to an employee’s health and safety for them to work additional hours, as well as some other factors.
Annual leave – Full time and part time employees are entitled to 4 weeks of annual leave per year based on their ordinary hours of work. Shift workers may be entitled to up to 5 weeks of leave depending on which award they are covered by. Annual leave accumulates from the first day of employment, regardless of whether an employee is in their probation period. Annual leave is accrued on paid leave, community service leave and long service leave in addition to ordinary hours worked.
Long service leave – Long service leave entitlements vary from state to state, State legislation outlines when an employee is entitled to receive Long Service Leave and how much long service leave they are entitled to. In some industries where employees’ employer can change frequently due to the nature of work, such as coal mining, building and construction and community services, employees may be entitled to Portable Long Service leave through a third party.
Redundancy pay – A genuine redundancy happens when an employee’s role is no longer required by the business. Redundancy payment amounts will vary depending on the employee’s length of service and their award conditions. Legislation states that if an employee has been with the company for less than 12 months, are employed for a stated period of time, task or project, or season, are casual, are terminated for service misconduct or are apprentices or trainees, they are not entitled to redundancy payments even if they meet other genuine redundancy criteria. Some employers are also exempt from having to make redundancy payments, such as some small businesses.
It’s important for payroll to be aware of these points of payroll legislation in particular, as if an employee is not being paid for additional hours, accruing the correct amount of leave, or their termination is not paid out correctly, you are directly in breach of the NES for not delivering on all employee entitlements.
Modern Award and Enterprise Agreement legislation
A modern award is a document that provides the minimum terms and conditions of employment for multiple job titles and classifications under a particular industry. An enterprise agreement sets out the terms and conditions of employment between an employee or group of employees and one or more employers.
An enterprise agreement acts in the same way as a modern award and be approved by the Fair Work Commission. The Fair Work Commission will determine whether the employees are better over overall being under the agreement rather than an award, as the agreement will replace the award conditions for the industry.
These terms and conditions in modern awards and EAs are on top of the National Employment Standards, and are created with the NES minimums in mind.
Awards and agreements will outline the minimums an employee is entitled to in the NES, but to a greater level of detail depending on the employee’s role and employment conditions. Some of these include:
- Who is covered by the award or agreement which helps to determine which award or agreement is applicable to an employee
- An employee’s pay rate based on the employee’s age, length of employment and job title, including rates for penalties, allowances and overtime payments, in line with the National Minimum Wage Order.
- Leave entitlements, with provisions for different types of employees such as shift workers, and entitlement to leave loading
- Hours of work including the span of hours an employee may work and how many hours a full time employee works in a period
- Break allowances, including what the break requirement is for employees within a shift, and whether employees are entitled to be paid for the breaks
All Modern Awards and Enterprise Agreements should be accessible to employees at any time both through their employer and from Fair Work.
Staying Compliant with Modern Awards and Enterprise Agreements
Payroll should be clear and familiar with the modern award that their employees are covered by. But to ensure a better level of payroll compliance and run payroll more efficiently when paying under an award, it may be beneficial for payroll to have access to software that includes award interpretation.
This is especially beneficial when you have a high number of employees to pay, varying conditions across multiple awards or job titles within an award and awards with complex conditions. There are a number of payroll softwares that have awards with their underlying rules built in, to interpret timesheets in line with the award. This eliminates a step for the payroll officer to interpret timesheets and manually calculate when a penalty, allowance or overtime payment applies to a shift.
Similar to Modern Awards, payroll should be clear and familiar with the agreement that their employees are covered by if there is an enterprise agreement in place. While the enterprise agreements aren’t as available in payroll softwares as modern awards are, a lot of the software will allow you to create your own set of rules to build out your enterprise agreement. This means that you can still automate things like timesheet interpretation, but it might need a bit more manual intervention to get it set up.
Modern Awards and Enterprise Agreements also cover other key conditions when it comes to paying wages -one of which is the frequency of pay. Employees must be paid according to the frequency outlined in their award or agreement, or you will be breach of the award or agreement legislation.
Record Keeping Legislation
Payroll records must be kept for at least 7 years, and must be accessible to Fair Work Inspectors if they are to conduct an audit. The records must be legible and also be in English to meet Fair Work requirements. You must also ensure that any time and wage records kept have not been falsified and have not been updated unless it is to correct an error. Payroll records that need to be kept include the following:
- Employee’s employment basis, commencement date and their full name
- The rate paid to the employee
- Gross and net pay amounts
- Deductions taken from the gross amounts
- Details of any incentive based payment, including bonuses, allowances or loadings
- Penalty, overtime and loading rates paid to an employee, including the number of hours paid and the duration of the hours
- The hours an employee works if they are working an irregular work pattern
- Leave balances
- Leave taken by an employee
- Agreements if an employee has had leave cashed out to them
- Superannuation payments, including the amount paid, period, dates paid, name of the super fund and the type of superannuation payment
These records must be kept secure and only be accessible by the employer, payroll staff, the employee, and other authorised individuals, such as an accountant.
What to do if you have breached legislation
What happens if you do an audit of your payroll, and you realise you’re in breach of Fair Work Legislation? Fair Work recommends that it is best to report an underpayment of an employee, to them as soon as possible. This is especially important where an underpayment has been occurring over a long period, or the underpayment is of a high amount.
Self-reporting may initiate an investigation by Fair Work, even if steps have been taken to backpay affected employees and rectify the issue. However, self-reporting and cooperation with the Fair Work Ombudsman can reduce the likelihood of them using legal actions to resolve the matter. Self-reporting justifies the FWO’s use of less public resolutions, such as contravention letters or compliance notices for your business to address, keeping the business out of the spotlight.
Measures and Resources to help you stay compliant with payroll legislation
EI has developed a payroll compliance checklist which goes through 10 points for you to tick off as a Yes, No or Unsure when looking at your business’ payroll compliance. The purpose of the checklist is to give you a snapshot of where you do compliance well, and where you may need to improve.
In addition to the checklist, we have also put together a payroll compliance best practice guide which will take you through 7 important processes you can look at adopting or improving within your business. Both of these resources will be sent out to everyone who has registered for the webinar.
Staying up to date with legislative change
The ATO has a newsletter you can sign up for, which will give you alerts as well as the newsletter, based on your preference, such as superannuation and updates to tax.
The ATO website has a huge amount of information around superannuation and PAYG legislation and have things like calculators that can help with simple checks and questions. The ATO website also lists several ways you can contact them, by phone or in writing on their ’Contact Us’ page.
You can also subscribe to the Fair Work Ombudsman email updates, which also allows you to choose which topics you would like updates on, whether it be about pay rates and entitlements, or media releases.
The Fair Work Ombudsman website is the place to go for questions about pay rates, workplace problems like underpayments, and leave and employment conditions. They have a number of resources such as the pay and conditions tool which can help you find pay rates and conditions based on an employee’s award, and step-by-step guides on how to handle workplace issues.
There are some organisations that exist to help payroll professionals keep up to date on changes, and also help apply payroll legislation. The Australian Payroll Association also has a newsletter you can sign up for, and TAPS (The Association for Payroll Specialists) also has email updates available for their members.
The Australian Payroll Association and TAPS are the biggest within Australia, with both of them offering membership options for businesses, which include personalised payroll advice and training options for payroll employees.
You may also be thinking that this is all way too much to think about, you don’t have time to keep up to date, or maybe you don’t know where to start. There are many organisations that can become a part of your business, to advise on the application of HR legislation such as the application of awards, or a team of professionals can take over your payroll processing and handle a lot of the payroll compliance. This leaves you with more time to focus on the day to day operations of your business. You can also use online blogs and resources to keep up to date with all things Payroll and HR.
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.
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.