Why do major companies keep getting caught in employee underpayment scandals?

Every few months sees a major employee underpayment scandal – companies announcing that they have made payroll errors that have impacted thousands of employees – go public. Examples are the $43 million error by Rebel Sport this year, the $2 million error by Lush Cosmetics last year, the $1 million in underpayments by Maurice Blackburn and more than $1 million in underpayments by Rockpool.

These types of errors are often identified and corrected by payroll expert Tracy Angwin at Australian Payroll Association, an industry network that has helped hundreds of organisations over 25 years ensure their payroll meets their legal requirements.

Tracy says underpayments are more common than one might think: “The various clauses across the 122 employee awards in Australia, as well as Federal- and State-based legislation, are extremely complex. At times, even the relevant Government bodies have not been able to answer our questions when we ask for clarification. In addition, legislative changes occur weekly.

“The errors behind the scandals are often a result of inadequate training given to payroll managers. The Australian Payroll Association’s 2019 Benchmarking Report reveals that the average payroll manager has just 2.6 days of training a year. Yet they are responsible for millions of dollars in payments and ensuring those payments meet the law.”

Tracy reveals the most common payroll mistakes and oversights that usually lead to such scandals.

The 7 mistakes that lead to major employee underpayments:

1. Incorrect calculations in overtime provisions. Mistakes are made when organisations do not ensure every ruling on overtime has been considered for employees. Many employee awards have numerous sections on overtime – for instance in the ‘overtime’, ‘breaks’ and ‘part-time work’ sections. One often overlooked ruling is overtime. Employees must receive a minimum of 10-hour breaks between shifts. If their break is fewer than 10 hours, under some awards – such as those governing hospitality, aged care and social service employees – they must be paid overtime rates thereafter, until they receive their full 10-hour break.
2. Underpayment on termination. The most common error here is payroll managers failing to refer to the Fair Work Act, in addition to the relevant employee award. The Act entitles employees over age 45 who have had at least two years of service with the company to receive one additional week of notice upon termination.
3. Failing to pay overtime penalty rates to part-time employees. Many organisations erroneously place the same rules on overtime payments to part-time employees as to full-time employees. However, some common employee awards – such as the retail award and clerks award – require overtime penalty rates to be paid to part timers when they work more than their contracted hours. This is where underpayment mistakes are commonly made.
4. Superannuation underpayments. Many employers fail to pay superannuation on employee payments on top of regular wages or salary. Super should be paid on any employee payment that is regarded as ordinary time earnings – this includes bonuses, leave loading, payment in lieu of notice of termination, and cashed-out annual leave.
5. Only paying the base rate on annual leave payments. This is an error that Australian Payroll Association has identified across multiple organisations in the health support services and manufacturing sectors. The awards governing employees in these sectors require that annual leave payments should include the full payments owed to the employee if they had worked. This includes penalties and allowances, not just the base rate of pay.
6. Excluding commissions and bonuses from long service leave. Many employers do not include commissions, incentives and bonuses when they calculate the value of long service leave. These payments should be included when long service leave is paid.
7. Lack of payroll reviews and outdated systems. A major oversight that contributes to all of the above errors are failing to review the accuracy of payroll systems alongside legislative changes – therefore new regulations that benefit employees are not implemented.