Employee underpayments often occur simply due to mistakes. Your business must have processes in place to identify and rectify mistakes if they do happen. As many recent large-scale wage scandals have shown, underpayment can affect any business. This article will discuss how your business can take steps to identify if you may be underpaying your employees. It will also discuss what you can do to ensure that you maintain your legal compliance moving forward.

Auditing

If your business is investigating whether employees may have been underpaid, the first step is to review your records.

This review should identify all employees in your business and includes looking at:

  • the legal instrument that applies (modern award or enterprise agreement);
  • the employee’s classification;
  • current rates of pay (including superannuation and allowances);
  • employment status (full time, part-time, casual);
  • the employee’s duties; and
  • hours of work (rostering, shift work).

Identifying the above details will assist your business to accurately classify employees under the applicable industrial instrument. It will also help you confirm whether you are paying your employees in line with their classification.

If your employees are covered by a modern award, as many employees in Australia are, each modern award contains clear guidance on how employees are classified, relative to their:

  • duties;
  • experience; and 
  • qualifications.

For example, a junior administrative employee who does not hold any qualifications, and has only been employed for a short time, would be classified at a lower level under the relevant modern award than a more experienced administrative employee with relevant qualifications. These classifications are important to get right as they will determine the relevant employee’s rate of pay. Misclassifying may lead to underpaying employees.

Some of the most common reasons for underpaying employees (and what your business needs to monitor) are:

  • payroll errors (human or computer errors, miscalculated pay rates);
  • changes in classification (duty changes, qualification completion, apprenticeship movements);
  • missed increases to modern award minimum wages; and
  • penalty rates are not applied (weekend rates, overtime rates, allowances, loadings)

Record Keeping

Accurate and clear record-keeping is not only important in the event you need to commence audits of your business, but it is also a requirement under the Fair Work Act 2009 (Cth) (Act) and the Fair Work Regulations 2009 (Cth) (Regulations). Both the Act and Regulations require businesses to keep accurate and full employment records for seven years.

Once you have reviewed your records and confirmed the correct classification of your employees, you can commence either internal or external audits of your payroll and records.

Internal Audit

Internal audits are a more cost-effective approach to identifying potential underpayments. This process will involve a review of things like your:

  • payroll;
  • employee classifications; and 
  • records, including rosters and timesheets.

Internal audits should look at both current and historical records. It is important to identify historical compliance with workplace laws, as well as current compliance. You also need to include a review of records for both current and former employees.

Auditing will need to include comparisons between when those hours were worked and payroll, payslips and timesheets. Often, underpaying employees will come from the underpayment or non-payment of overtime or penalty rates. This can occur if your business has not kept accurate records or does not have suitable record-keeping practices.

External Audit

External audits are more comprehensive investigations into potential employee underpayments. There are options available for specialised audits performed by accountants or specialised legal teams. External audits are likely to be more expensive than internal audits and will involve providing auditors with access to many of your historical and current records.

The benefits of external audits are that these audits are unbiased and reliable examinations into potential non-compliance. External auditing also provides your business with a tangible output, including:

  • the extent of any underpayment identified; and
  • calculations to provide back payments to affected employees.

Regardless of how you audit your business, identifying underpayments is only one step in the process. You will also need to develop action plans for managing non-compliance and put processes in place to ensure your business is compliant moving forward.

Planning

If your audits reveal non-compliance and employee underpayment, your business should develop an action plan to manage this.

The first step in the action plan is to set out how your business will deal with the underpayments. It would be advisable to approach the affected employees and let them know that you have identified a potential issue and that you are working to rectify any underpayments which may owe them. 

The business should also decide whether you will provide any interest or additional apology payments to affected employees.

Depending on the extent of the underpayment and breaches of laws, your business may decide to self-report to the Fair Work Ombudsman (FWO). There is no requirement for your business to self-report. However, self-reporting can be an important step to rectify non-compliance and advise the FWO that although you have breached laws, you are taking steps to correct your mistakes.

You will also need to make all the appropriate back payments to affected employees. This can be in the normal pay cycle, or an out of cycle payment. Keep in mind that all records of underpayments and back payments need to be maintained in line with the Act and Regulations. It is also vital that all back payments are made, taking into account the relevant PAYG taxes and superannuation entitlements.

Ongoing Compliance

Once you have identified and rectified the underpayments, your business needs to ensure that it is compliant with workplace laws moving forward. Your business needs to stay updated for all wage changes that will affect your employees. The FWO website provides a subscription for email updates. However, your payroll team should be regularly checking for these updates.

You need to maintain accurate employment records to ensure that as employees change duties, or celebrate a birthday, their classifications are appropriately updated. Simple tools such as calendar reminders in your payroll system will assist you with updating classifications.

If your business relies on a pre-populated software program, you need to actively self-review this software to ensure it is accurate. Sometimes software can make mistakes, whether due to:

  • human error in programming; or 
  • insufficient updates.

 This creates the necessity that you regularly review the output.

Compliance is everyone’s responsibility. Making your management team accountable may assist your business in developing better compliance strategies and guidelines. Putting processes in place to catch potential underpayments before they arise is best practice. You should also have checks in place for payroll teams to self-identify errors, especially if using software, and tools in place to rectify errors.

Key Takeaways

You should take proactive steps to audit your employment records to ensure ongoing compliance with workplace laws. Underpaying employees can be unintentional, and ongoing checks are important for all businesses, regardless of their size. Discovering non-compliance can have far more wide-reaching effects than simply a financial liability, as the reputational damage can be sometimes more severe. If you have any questions about auditing your business’ records to ensure you are complying with employment laws, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

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