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How to avoid the costly pitfall of payroll errors

Regulation

With myriad awards and entitlements, calculating wages is complex and mistakes can add up to millions in backpay and fines.

By Phil Bernie 12 minute read

As the Fair Work Ombudsman (FWO) cracks down on businesses underpaying staff, accidentally or otherwise, it’s essential that employers update their payroll systems this year rather than risk millions in fines and back pay.

Several businesses have made headlines over the past few years for failing to pay staff what they were owed. In response, several states have updated their laws to officially recognise wage theft, targeting employers which deliberately withhold wages and other worker entitlements.

In Victoria, for example, wage theft is punishable by fines of up to $218,088 or up to 10 years’ jail time for individuals, as well as fines of up to $1,090,440 for companies.

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Mistakes add up

While some instances of wage theft are deliberate attempts to steal from employees, it’s also easy for honest businesses to fall foul of the law because calculating payroll and leave entitlements can quickly become complicated.

When paying an employee on or above the award, frequent rule changes can make this a difficult and time-consuming process — especially when calculating overtime rates. This becomes even more complicated if you manually pay your employees individually each pay run, rather than managing them in bulk.

Sometimes it’s not until a business completely overhauls its payroll system that the magnitude of the problem is fully realised.

Aged and veteran services organisation RSL LifeCare was recently forced to back pay staff in NSW and the ACT more than $5 million while entering into an enforceable undertaking with the FWO.

The not-for-profit organisation, affiliated with RSL NSW, came forth willingly. During a review in 2021 when transitioning to new human resources and payroll system, RSL LifeCare became aware of underpayments and subsequently reported its non-compliance.

The underpaid employees — a mix of full-time, part-time and casuals — were engaged in nursing and management roles at aged care facilities and in-home care programs. The underpayments were due to fundamental payroll and rostering system errors, including setting up the system incorrectly and entering incorrect pay rules.

The majority of the underpayments involved failing to pay overtime rates and weekend penalty rates, along with incorrectly calculating annual leave for shift workers.

RSL LifeCare avoided significant fines only because of its cooperation with the FWO. It demonstrated a strong commitment to rectifying underpayments, including devoting significant resources to engaging independent experts to oversee its rectification.

Automation is key

RSL LifeCare’s experience is a timely reminder that every business must diligently check its payroll systems and processes. Adopting a modern payroll system that automates and streamlines processes and manual tasks can go a long way to reducing errors and improving compliance to avoid non-compliance.

Each financial year, the Fair Work Commission conducts an annual wage review to reassess modern award minimum wages. Adopting a payroll platform that automatically makes these adjustments — along with other relevant changes to legislation — can go a long way to ensuring that employees receive accurate entitlements.

Features such as pre-validation warnings in payroll can alert the user to potential underpayments before they even occur. This ensures both compliance and employee satisfaction, meaning no costly litigation and an increase in staff retention.

When it comes to adding employees and businesses to payroll systems, using strong cloud payroll software helps to improve efficiency via automation. By syncing with the ATO and superannuation providers, as well as allowing self-service for employees, payroll software can dramatically decrease the time it takes for payroll professionals to onboard staff and process pay, all while minimising errors.

Processing payroll has become increasingly complex and the penalties for getting it wrong are harsher than ever. There’s never been a better time for businesses to revisit their payroll system to ensure it all adds up.

Phil Bernie is a co-founder of KeyPay.

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