On the front foot with payroll compliance

by HRD04 Nov 2016
For all the horror stories related to payroll errors that have emerged over the past 18 months – 7-Eleven being the obvious case – it was refreshing to see plaudits rather than criticism being handed out by the Fair Work Ombudsman recently. McDonald’s Australia was congratulated for placing workplace compliance high on the priority list since signing the Fair Work Ombudsman’s first Compliance Partnership in 2011.

The first Partnership was deemed a success, with McDonald’s self-auditing approximately 8,500 pay packets to reveal 100% compliance for wages paid in 2009 and 97% for wages paid in 2010.

A second Compliance Partnership was commenced in 2014, with McDonald’s committing to continue to review and evolve its systems and explore ways to further improve the way it manages its workplace relations.

The second Partnership also included an agreement that the Fair Work Ombudsman would refer requests for assistance it received from McDonald’s employees back to the company for resolution internally, to the satisfaction of the Fair Work Ombudsman.

Fair Work Ombudsman Natalie James revealed that from a national workforce of about 100,000 McDonald’s workers, her Agency received just 33 requests for assistance in the two years ending in June 2016.

Only 10 of the requests resulted in a finding that a worker needed to be back-paid.

McDonald’s has also put a range of steps in place – auditing of its franchises, an employee hotline, and state-of-the-art time recording – to ensure that workers get paid for every hour they work.

While not all employers can match the resources of McDonald’s in order to remain payroll compliant, the company’s proactive stance is something all employers can strive for.

Prevention is the key
Eugene LaFontaine, National Operations Manager – FPS at Frontier Software, says preventative action is critical. “Having a preventative mindset allows you to minimise your risk when it comes to any breaches under the employment legislation in Australia.”

How can employers switch their mindset from reactive to proactive? LaFontaine suggests getting to the root causes of payment errors. “The first key cause is software not being configured correctly,” he says. “There is a requirement within our business to ensure that when we’re doing an implementation that data integrity is validated prior to going live.”

This process may encompass parallel testing with legacy systems, ensuring the data coming through is correct, that the rules set up behind how the employee is supposed to be paid are true and correct, and most importantly, that the rules applied by the business – the ‘owners’ of the rules – are clearly stipulated prior to setting up the system. “It’s all about ensuring the system is configured correctly according to the rules of the organisation,” LaFontaine says.

The business processes around the new software platform also need to be examined. Data integrity is critical. For example, when a new employee is onboarded, efforts should be made to ensure that every data aspect of that person’s employment is checked and validated by the payroll team.

Human error will always occur, and sometimes it’s on the side of the employee; for example, when incorrect bank information has been supplied or when leave requests are made. In the latter case, LaFontaine says it’s not unusual to find that there might be an agreement in place between the manager and the individual whereby the manager has approved the employee going into negative leave, but that communication has not been fed through to the payroll team, meaning the individual is underpaid. “Sometimes it’s simply out of the hands of the payroll team,” LaFontaine says.
Eugene LaFontaine, who has worked as part of and with payroll teams for many years, says the importance of the function is too often underestimated.

“It’s not just about processing pay,” he says. “Payroll professionals must have a good understanding of finance in relation to posting the payroll results to the appropriate General Ledger accounts. They also need some experience around what we call Award interpretation. With EAs, or Awards, many payroll professionals are given the task of interpreting what should be paid as overtime, what allowances attract overtime and what allowances attract penalties. Most importantly, they have to be exceptional customer service people. They need to be able to explain why someone missed out on overtime pay. Diffusing conflict is a key aspect of their role.”

The critical role of technology
Technology can help mitigate the costs of human error. For example, variance reports can be used to ensure an employee is being paid correctly. This involves checking what an individual was paid on the last pay day, compared to what they’re being paid today. The variance may come down to a threshold – for example, it might be a variance of $1 or $2 – and anything above or below that needs to be investigated.

Software solutions can also include an inbuilt ‘Award interpreter’, and LaFontaine suggests the accuracy of this interpretation engine will largely depend on the sophistication of the system being used.

“With every product on the marketplace, and I’ve dealt with plenty of them, you’ll find there are always certain aspects of interpreting Awards where there are gaps,” he says. “If you can get 98% of the interpretation into a solution, the remaining 2% workaround is less significant – but it can still cause an error. The goal is to get 100% of the Award interpretation accurate.”

Similar to the variance reports, there will be exceptions to what an Award interpreter can handle. To cite a typical example, if the requirement from the organisation is that each employee must clock on and off, those times will be downloaded to the Award interpreter. That interpreter will look at a range of factors, including the individual’s start and finish times on their roster and whether the person has started and stopped within the threshold of their start and finish times. The system will then interpret the rules that sit behind that employee’s employment with the company. Anything outside of normal roster patterns will be identified and brought to the attention of managers.

“The Frontier system, for example, will generate exception reports, which identify anyone who has worked in excess of their hours or if somebody has clocked off before they are supposed to. It will cover those people who don’t fall into the roster pattern that has been set up for each individual – these are essentially the rules of engagement that each employee has with the organisation.”

Further tips
While the ‘set and forget’ mentality that business leaders may have had of payroll systems is  thankfully largely gone, LaFontaine urges vigilance. “Australia has tax changes every year, so realistically we all know that on 1 July every year there will be changes to implement. Every software vendor should be offering automated updates or, depending on the software being used, it may require rekeying that information into some parts of the system.”

Larger organisations should consider system health audits, whereby the software vendor will target specific areas that patrol payments to employees. For example, are the leave rules accruing leave correctly and do these rules reflect changes that may have occurred via an EA or common law requirement? Have any changes been made to the internal HR policy around parental leave and are these reflected in the system?

“It’s making sure every two years that what you have in place within the organisation in terms of policies and procedures are set up correctly in the system as well,” LaFontaine says. He adds that such an audit is less expensive than engaging in a tax audit or, worse still from a brand perspective, being hit with a Fair Work audit.

LaFontaine further recommends doing a once-a-year internal audit. Again, most software providers should offer audit reports within the system, which can provide information in a summarised form that can easily be checked against employees’ personnel records.

“The primary component of an audit is checking an employee is engaged on a particular base salary and they are receiving their standard super guarantee percentage. Secondly, are they accruing the right sick leave, annual leave and long-service leave? Further elements, like bonuses and commissions, will be articulated in the engagement letter or the EA. That’s about making sure the rules you have set up, whether it’s a system-driven rule or a manual rule, are being correctly applied to those individuals.”
At the end of the 2015/16 financial year, the Fair Work Ombudsman released the findings of its checks on the record-keeping practices of businesses throughout Australia.

Spot checks of 1,376 businesses in every state and territory found that 988, or 72%, were compliant with their record-keeping and payslip obligations.

However, 46 employers were asked to back-pay a total of $620,023 to 336 of their workers who had been shortchanged.

Two businesses received a Letter of Caution, putting them on notice that future breaches of workplace laws could result in enforcement action.

“It’s important that we check that workers are being paid correctly, but we also want to be proactive about ensuring employers understand their obligations,” said Fair Work Ombudsman Natalie James. “Businesses are required to keep a range of records, and if issues arise, it is usually these records which can show that employees have received their correct entitlements, so we place great importance on correct record-keeping.”

Payroll tools and information can be found at fairwork.gov.au.

Founded in Melbourne, Australia, in 1983, Frontier Software is a global leader in Human Resource, Talent Management and Payroll solutions. Their solution ichris sets the global benchmark for functionality and improved employee experience. With support offices in Melbourne, Brisbane, Sydney, Canberra, Adelaide and Perth and key global locations, Frontier Software are well placed to service their 1,700 clients.

For further information on Frontier Software, click here


Most Read