Invest in getting payroll right, or risk catastrophe

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It’s never been a particularly attractive profession and business constraints, tighter budgets and a lack of new blood coming into the area have all contributed to the scaling back of payroll as both a business focus and occupational speciality. All too often HR has had to scale back payroll departments and add new jobs to the already long list of departmental duties. But as a recent spate of payroll debacles has demonstrated, getting the fundamental issue of pay wrong can have catastrophic effects on reputation, trust and morale.

Typically it’s human error that causes the majority of payroll mishaps, but the added pressure created by scaling down payroll departments may be increasing the scope for error. “We’re finding that people [in payroll] are being asked on a regular basis to pick up other roles,” said Craig Osborne of Sage MicrOpay. But if people in the payroll area aren’t sufficiently focused or skilled, the situation is ripe for costly mistakes to occur.

 Most payroll mistakes generally occur as a result of:
 

  • a lack of understanding of the correct awards, allowances and employment conditions

  • too many tasks being added to payroll responsibilities

  • administrative errors – both entering information incorrectly and/or being given incorrect information

Payroll often falls into the ‘if it aint broke’ category within organisations. “At the moment many businesses may have more pressing priorities, and it becomes more that they react [to problems], rather than they plan to avoid them,” Osborne commented.

While there are a range of factors that can create problems, payroll software cannot be completely ‘idiot proof’, and payroll teams must be given the right tools to do their job, including adequate training and support.

Financial cost of mistakes

If mistakes are not promptly remedied, the impacts for business can become not only administrative but financial as well. The cost of fixing errors is dependent on a range of variables – how many employees have been affected, how complex the error was, how time-consuming it will be to fix, if it went on for a long period of time, and if a lot of recalculating is needed.

Osborne noted that it is not typical for employers to pay compensation alongside back-pay, but it really does come down to the relationship between the employer and the employee.

Penalties under the Fair Work Act

It is at the discretion of the Federal Magistrates Court to impose penalties for underpayment of wages, and the Fair Work Act is the relevant body of law. The Fair Work Ombudsman (FWO) will prosecute the case, and a wide range of factors will be taken into consideration by the courts.

FWO is very active in investigating complaints brought by employees, and regularly conduct inspection campaigns and initiate prosecutions in relation to any underpayments that it discovers. Currently, for each individual breach of the act companies may be fined up to $33,000, and fines of $6,000 for individuals per offence can apply. Additionally, in cases where a business might be dissolved or become insolvent, the FWO will prosecute directors.

Recent judgements handed down by the Magistrates Court illustrate the seriousness with which the courts view non-compliance with minimum wages and entitlements:
 

  • A Melbourne cafe operator who underpaid two casual employees $7,061 in one case and $1575 in the other, the Court imposed a total of $120,800 in penalties - $99,000 against the business, $19,800 against the owner and $2,000 against the former manager of the cafe. Some 14 times the actual amount of the underpayment.

  • A Bendigo transport company (Stewarts Transport & Logistics Pty Ltd) underpaid a casual truck driver an amount of $3,228, and the Court subsequently imposed $60,200 in penalties - $43,500 against the business and $8,700 and $8,000 respectively for each of the company's owners – roughly 19 times the actual amount of the underpayment.

In the example of an underpayment of an entire body of workers, eg. 600 employees, the fines are not necessarily capped at a certain amount. The courts will generally look at all of the circumstances, and it’s possible that each individual breach (or offence) could be considered separately. However there have been cases which showed that if the breaches arose all out of a single course of conduct, the courts may view it as one breach only.

Notably, in most cases where an employer agrees to back pay immediately, the matter would generally not be taken any further. While technically unions or employees could seek that a penalty be imposed even after back payments have been made, the court is likely to take into account that the employer ‘made good’ on the underpayments as soon as the employee raised it with them, and although there’s no guarantee that there wouldn’t be any formal penalties, if any, they would be on the lower end of the scale.

Reputational risks

As was the case with the Queensland Health pay debacle, getting payroll wrong can be very damaging to an organisation’s reputation, particularly if it is a repeat offender. Getting payroll right is an absolutely fundamental aspect of maintaining the employee-employer relationship, so when things start to go wrong, trust will break down quickly and myriad flow-on effects follow. If the organisation can’t be trusted to pay its staff, how can it be trusted to pay its suppliers or fulfil its obligations to customers and the wider community?

HR’s role in minimising the risk

HR needs to keep right on top of the payroll software used, assess whether its reliable, up-to-date and efficient, and whether newer products that can remove more human error risk factors is available.

Additionally HR should:
 

  • provide adequate training and administrative support wherever possible

  • focus on the talent pipeline: payroll requires specialist knowledge, and succession planning is vital

  • promote awareness of departmental workloads

 

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  • Nav Dhillon (D-BIT Australia) on 9/03/2012 11:51:35 AM

    D-BIT Australia has been providing Payroll software to Australian Businesses of all sizes for close to 20 years now and we understand all too well the points raised in this article. Over the years we have been able to help companies scale back their payroll departments without affecting the payroll process and in most cases even improving the internal payroll process. Being able to customise our software to fit in with existing business processes and integrate to other internal systems we have found are key aspects in saving companies a great deal of time and money. Flexibility is also key and we give the user the power to make changes at several stages of processing to ensure mistakes are minimized. We understand any errors in Payroll would reflect badly on our clients and in turn us therefore we provide plenty of training and support to our clients Payroll departments. The bottom line is companies can scale down their Payroll departments and still make sure the Payroll is running smoothly with the right system. The key things to look for in a system are that it will streamline processes which can lead to reduced man power required and a return on investment, flexibility for existing users to pick up and fix mistakes at several points in the process and a company that will provide sufficient support to your Payroll team whenever required.

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