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Talk to risk and compliance expert Tom McLeod and he’ll tell you employers have two main responsibilities to their employees.
The first is to keep employees safe at work. The second? To pay them appropriate and accurate wages.
While Australia’s health and safety situation has improved over the past 30 years, paying employees adequate wages has become a major issue. New law aims to combat intentional ‘wage theft’.
Mr McLeod, chief risk officer at payroll compliance firm Yellow Canary, said Australia’s payroll system could make it complicated to pay employees. However, he said changing the payroll system itself would not solve the problem, and he suggested independent payroll verification as a solution.
How serious is the problem of underpayment of Australian workers?
Australia has been concerned about underpayment for many years. It started with a case Involving 7-Eleven, first disclosed in 2015Mr MacLeod said increased community and government awareness of the issue had led to more cases being discovered.
look: Best Practices for Maintaining Payroll Compliance
The Fair Work Ombudsman, the regulator responsible for recovering underpaid wages, said it recovered A$509 million (US$336 million) for 251,475 workers in 2022-23. It was the second consecutive year that more than $500 million in underpaid wages were recovered.
There have been several high-profile cases of wage arrears in Australia
In a recent incident, Australian law firm Slater & Gordon self-reports to the Fair Work Commission After discovering a A$300,000 ($198,000) problem with its leave rates when some current and former staff took half-pay leave between late 2011 and mid-2023.
In contrast The university wage crisisThe National Tertiary Education Union said 30 universities had confirmed underpayments of A$203 million ($134 million), while a further nine universities had set aside A$168 million ($111 million) for suspected underpayments.
Historical cases of underpayment include supermarket giant Woolworths, which Thousands of employees were underpaid $300 million ($198 million) and Qantas, 2020 Accepted Enforceable Commitments Repaid A$7.1 million (US$4.7 million) to employees.
Overpayments were also discovered during payroll audits
Australian employers also often overpay their employees. While this does not cost businesses as much in the long run as underpaying them, the Australian Payroll Association said it had found that 70% payroll compliance checks.
Mr MacLeod said the payment issue was a problem faced by all organisations in Australia, whether they were “big or small, government or private, listed or unlisted, not-for-profit or for-profit”. More than half of the Fair Work Commission’s 22-23 recovery cases came from large corporate and university employers.
Why is wage arrears so common in Australia?
In Australia, wage underpayments are often the result of mishandling by employers. That’s because Australia’s industrial relations system is “extremely complex,” with wage payments based on 122 modern awards, thousands of enterprise agreements and individual contracts.
While payroll software can improve efficiency, it does not guarantee accuracy. If employers make mistakes in this environment, it could affect other benefits for Australian employees, such as superannuation or long service leave.
Most companies make some mistakes on payroll
MacLeod explained that some companies are “brave enough” to investigate internal pay inequality issues, while others are not. When examined from the perspective of the Golden Canary, he said, “rarely do we find a completely clean record.”
Payroll compliance errors may be discovered for a number of reasons:
- Long historical periods being studied: When potential problems are discovered, payment investigations typically look into payments an employer has made to employees over the years. This makes it more likely that historical errors will be uncovered.
- Artificial Intervention and Assumptions: Payroll administrators may make manual changes and assumptions. This can corrupt data in the payroll process, resulting in incorrect pay results in the long term.
- Dependency documents: Payroll in the past relied on paper contracts and documents that sometimes dated back to before data was digitally searchable. This made errors more likely when audited.
Changing payroll software does not guarantee correct payments
Payroll has been digitized for many years. This means that the payroll process now relies on good technology, Internal management or outsourcing“In the current environment, there is no other way to deliver payroll other than an automated approach,” McLeod said.
look: A step-by-step guide to getting payroll right
But upgrading payroll software won’t solve the problem of underpayments. McLeod noted that the system is calculating payroll correctly based on the data and rules that are entered, but the problem comes from the data that is entered – especially when there is no independent review of the process.
“(Changing the system) is a bit of a Hail Mary sometimes,” McLeod explained.
“People think, ‘This is too hard, we’ll just install a new system and when we install it all of this will go away.’ They mistakenly think the system is just a sausage-making machine and that getting the payment right depends on the raw material – the data, or the lack thereof.”
This problem is exacerbated by the fact that multiple systems are involved and there is no independent review.
The payroll process may involve multiple integrated systems
Payroll can rely on multiple integrated systems. For example, on a manufacturing floor, automated attendance systems, manual employee break records, and shift scheduling systems often work together to generate payment rules based on relevant incentives.
Employers and employees have outsourced inspections to software
The introduction of digital systems has allowed companies and employees to outsource the manual work of checking payroll, McLeod said.
“Because the system does it for us, both the employer and the employee are relieved of their own responsibility,” McLeod said.
Should you upgrade your payroll software to reduce payroll compliance risks?
McLeod noted that before upgrading payroll software, organizations should ask themselves why they are doing it.
“If you’re looking for efficiency, Then there are many systemsBut ultimately, payroll compliance is about accuracy, not efficiency,” he said.
Seek independent internal or external verification of employee compensation
Employers should consider introducing independent payroll compliance checks into the process.
“If accuracy is your mission, then you have to ask what independent minds within the system are automatically achieving accuracy, or what product reports are showing you where you are inaccurate,” McLeod said.
He warned that while he had seen employers verifying payroll based on the previous month, that was not enough to help detect any systemic underpayment issues.
While some companies verify payments in Excel spreadsheets, McLeod said this approach is “not scalable or repeatable” and may not be defensible if the company is investigated. Independent pre-payment verification services like those offered by Yellow Canary (located outside the organization) are a more reliable way to regularly check that employee payments are correct.
Australia’s wage crisis could put more employers in trouble
MacLeod predicts Australia’s payroll crisis could hurt businesses and drive innovation in payroll technology over the next 25 years.
As a compliance issue, he likened it to the Y2K problem, which required organizations to correct computer date conversions in the year 2000. The only difference? Payroll compliance has no deadline, so it will be a permanent issue for the business.
However, McLeod urged businesses to be brave enough to investigate their payroll compliance and consider independent pre-verification services.
“Every organisation has to pay its employees an appropriate wage,” he said. “To borrow a phrase, the idea has arrived. Today, in the Australian context, you can’t say your business model is to underpay your employees.”
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