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How to avoid costly underpayments and payroll issues

01 August 2023

3 min read

#Workplace Relations & Safety

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How to avoid costly underpayments and payroll issues

As an employer, you have an obligation under the Fair Work Act 2009 to correctly pay staff according to contract agreements for their hours worked. Employers must also understand that correctly paying staff is not just about correctly paying wages, but also entitlements such as superannuation guarantee, annual leave, time in lieu or overtime, ensuring adequate breaks between shifts, and more. Having a payroll system that generates accurate time and wage records is critical.

What are the consequences of underpaying staff?

Underpaying staff can have severe consequences for businesses and can result in financial penalties, cash flow pressure, high staff turnover and reputational damage. For staff, it can lead to decreased workplace motivation, absenteeism and high stress. In Victoria, where wage theft is a crime, employers can face $1.1 million in fines and ten years prison time.

Why do underpayments occur?

It is rare that businesses underpay their staff intentionally. Usually, underpayments occur when employers do not understand their payroll obligations or do not have administrative procedures in place to ensure compliance. The most common forms of underpayments and payroll errors we see are:

  • ‘set and forget’ use of annualised salaries and loaded up pay rates
  • outdated payroll and timesheet systems
  • staff working overtime or using penalty rates that are not recorded
  • superannuation guarantee not being correctly paid
  • employees not being paid their minimum shift requirement
  • staff taking breaks too late or too early in their shift, causing issues with split shifts
  • incorrectly classifying an employee or using the wrong award rate.

“Reasonable” overtime

Underpayments often occur due to the expectation that workers receiving an annualised salary should work reasonable additional hours without overtime pay. While this is accepted and common practice, it is only permitted when workers are paid well enough or above their respective award hourly rate, so their additional pay compensates for the overtime hours. In 2018, the Vue Group came under fire for this when their pay rates of 25 per cent above the Award was deemed insufficient to cover the large amount of overtime they expected from workers.

How can employers prevent underpayments?

To protect your business from costly losses, employers can avoid underpayments by:

  • conducting regular audits to catch and resolve payroll issues early
  • ensuring staff are classified under the right Award, and regularly reviewing this classification as it can change with staff picking up additional responsibilities
  • keeping detailed timesheets and pay records to make sure employees are properly paid and have the proof to support it
  • ensuring staff are taking appropriate breaks and using their time off as required
  • ensuring you are up to date with wage increases, employee benefits and any other changes that could affect payments
  • establishing accounting practices that correctly pay the employees’ superannuation guarantee.

Changes to Awards, vague terminology and a myriad of other factors can make the process of keeping compliant and properly paying employees confusing. Reaching out for legal counsel is the best way to prevent any misunderstandings and protect your business from the large penalties, bad publicity and increased turnover rate that can follow underpayment claims.

If you have any questions regarding your payroll operations, please get in touch with a member of our Workplace Relations & Safety team below.

The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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