Payroll: Over, under or just right?

As countless high-profile cases have proven, there is no such thing as ‘near enough is good enough’ with payroll. Here’s what your organisation can do to avoid costly errors.


In September 2014, Canberra’s Prime Minister and Cabinet was left red-faced when it was revealed that underinvestment in training for payroll professionals had resulted in significant underpayment of employees who had been made redundant. The department was forced to repay former staff members whose redundancies were underpaid – in one case by $17,000, because the employee's agreement to waive his right to a deployment period was overlooked.
 
Although this was a high-profile and complicated case, there are countless other incidents of underpayment or overpayment of pay each and every week. A recent review rated Australia’s payroll as one of the top five most complicated globally.

When asked if he agreed with that report, Nick Southcombe, general manager of Frontier Software – a global provider of HRIS software and payroll services – replied: “Absolutely. Complexities surrounding taxation of various pay elements, different leave entitlements, and payroll tax in different states, a complex and ever-changing superannuation regime, combined with grey areas in awards and EBAs, are what result in Australia having one of the most complex payroll environments in the world.

“Payroll staff are expected to have an in-depth knowledge of all these complex variables; a very difficult ask. It is understandable that lack of knowledge and interpretation anomalies result in over or underpayments to staff.”

Can technology help?
Fortunately, HRIS and payroll systems are programmed to address many of the complexities in payroll, albeit to varying degrees. This can include time collection, award interpretation, leave liability calculation, calculation of superannuation contributions, and of course the taxation related to all of these elements. Not all payroll software vendors have programmed their software products for all payroll factors, and often additional manual entry or overrides may be required, which means human error can still be a factor. 

As technology continues to evolve, software vendors are working to close the gaps. Today, a best practice payroll system that will reduce the risk of future unfunded liabilities will include:

• automation of time collection
• interpretation of hours worked against awards and enterprise bargaining agreements
• online Employee and Manager Self-service, which reduces error-prone manual tasks for staff, managers and the payroll team
• workflow to automate processes
• expense management
• access to the payroll system from mobile devices
• strong reporting and auditing tools, including dashboards, which provide management with an additional level of review and control

 
“Clearly, the more automation the better,” says Southcombe. “However, there is always at least one person behind each and every payroll system who must also be managed and trained to use the system accurately and efficiently.”

The process behind the scenes
There are further steps employers can take that don’t revolve around technology. The key differentiator is often the depth and quality of training and business support provided to the payroll practitioners. “Training is a key enabler for all employee performance and certainly essential in the complex Australian payroll environment,” confirms Southcombe.

Payroll staff will always benefit from regular updates and training on all appropriate legislation. Organisations such as The Association for Payroll Specialists (TAPS) and the Australian Payroll Association (APA) offer such updates and training. The APA now offers a Certificate IV in Payroll Administration and a Diploma in Payroll Management. Additionally, all payroll professionals should belong to TAPS and/or the APA.

“Updates and training do not just apply to payroll legislation and practices,” says Southcombe. “Appropriate training in the use of payroll software, and keeping up to date with the changes and enhancements the payroll software vendor offers as part of system updates, is also essential for efficient and accurate payroll processing.”

Very importantly, Southcombe adds, there must be appropriate internal controls in place, including segregation of duties, supported by appropriate audit practices.

Organisations should also recruit smartly by seeking both experienced and qualified payroll professionals. Detailed reference checking of preferred candidates is essential.

Finally, management needs to make sure that payroll teams are adequately resourced so they can make clear and unrushed decisions and calculations, ensure appropriate segregation of duties, and have time to attend training and update sessions. 

Making payroll audits standard practice
Following a precedent set by a number of fast-food retailers in recent years, some companies are now opting to conduct voluntary wage audits in association with the Fair Work Ombudsman (FWO) to ensure they are paying workers correctly.  

Typically, an organisation will enter into a voluntary agreement with the FWO to audit the pay of a cross section of its workforce, known as a Proactive Compliance Deed. In independent internal pay audits, firstly a review of the current industrial instrument that applies to the individual workforce – such as an award enterprise agreement or employment contract – is carried out. Then, typically, the award classification is reviewed to ensure employees are classified at the correct level and receiving the correct pay rate, penalties and allowances, including the transitional items where appropriate.
 
Southcombe notes that investigations should be conducted immediately if there are suspicions of inaccurate pay. However, he stresses that audits should also be a matter of business as usual, as they are in other parts of the business.
 
In addition to checking the accuracy of the payroll itself, pay audits should also:
 

• ensure payroll staff are following established processes and policies
• ensure only approved authorised signatories are reviewing and signing off on all payments
• ensure there is appropriate segregation of duties in place
• assess whether processes in place are best practice and provide suggestions as to how processes could be improved
• review previous audit findings to ensure all recommendations have been implemented
• ensure disaster recovery and business continuity plans are in place and up to date

 
“Engaging your payroll software vendor to conduct a system health check on a regular basis is also beneficial,” says Southcombe. “They can often assist to assess if your system is set up correctly; if there is unused functionality you can implement and provide guidance on a best practice configuration.”

Prevention better than a cure
Here are the Australian Payroll Association’s (APA’s) top three tips for avoiding payroll mistakes:

1. Ensure you have the right people

As highlighted by issues in the public sector, the key to payroll compliance is having qualified payroll professionals. This has been difficult as nationally accredited training in payroll has only been available since January 2013 (when APA established Australia’s first official payroll certification). If you can't find staff with a competency-based qualification such as the Certificate IV in Payroll Administration or the Diploma of Payroll Management, you should ensure that the candidates you assess go through a thorough payroll knowledge assessment to identify any knowledge gaps. You typically won’t find the best payroll professionals on SEEK as they are being actively retained by their employers because they are rare.

2. Keep your payroll team knowledge up to date

Payroll experience does not necessarily mean payroll knowledge. Because legislation affecting payroll changes every year it is important to keep your team up to date through regular training and assessment to ensure their knowledge is always current.

3. Measure your payroll operation

To ensure you are running the most efficient and compliant payroll operation possible, you must benchmark your operational payroll costs. Once you have these measurements, you will be able to identify where to make improvements in both cost and governance.

Frontier Software was founded in Melbourne in 1983 and is a global leader in payroll, HR and talent management solutions.