How to spot the Underpayment Early Warning Signs
02 September 2021
A number of recent, high-profile cases of employers underpaying staff in Australia have demonstrated the significant financial, reputational and compliance risks associated with underpayments.
Employers need to be addressing red flags as early as possible, reducing the chance of risks materialising. They can do this by adequately identifying and assessing underpayments as a risk in their company’s risk register, and then monitoring it at a board level.
There are three lines of defence that should be responsible for preventing underpayments occurring:
The core business units such as HR, Payroll and IT
The compliance and oversight functions established by management, such as controls, exception management and reporting
In order to identify, assess and manage this risk, employers should be monitoring for early warning signs to ensure employees are paid correctly in line with their entitlements, as well as successfully prevent unnecessary repayment work, costs and potential legal implications.
Based on our experience of helping clients at the third line of defence, here are just a few of the early warning signs that, occur most frequently:
Inadequate time recording mechanisms – often a root cause for employees missing out on their minimum entitlements because using manual timesheets increases the chance of misplacement or non-completion, as well as inadequate recording of breaks. This is often magnified in industries with high levels of shift work that heavily depend on timesheet submission to pay their staff. Organisations should be mindful that if their staff work shifts, there is a higher probability of them working periods typically subject to higher rates of pay, for example overtime, out-of-hours call outs, weekends and public holidays.
High numbers of casual staff – who can be entitled to various minimum rates of pay and leave loading, can create confusion about how to classify staff. The complexity of whether an employee is classed as a casual member of staff was recently demonstrated in a ruling by the High Court of Australia in WorkPac Pty Ltd v Rossato, where the Court held that a casual employee is an employee with “no firm advance commitment as to the duration of the employee’s employment or the days (or hours) the employee will work”.
Enterprise Agreements that are highly complex, outdated and vague – coupled with under-resourced payroll teams that lack the knowledge to interpret them, can create the perfect cocktail for employee underpayments to occur. It is vital that organisations seek appropriate professional advice on the interpretation of any Enterprise Agreement applicable to its workforce, and recruit and train payroll teams with the knowledge and skills to apply them in practice. Failure to do so can often result in large and unwanted issues, and potential reputational damage that will last long after underpayments have been repaid.