It has been a tumultuous 18 months and COVID has had an unequal impact on many sectors with some coming to a near standstill, while others boomed. There are certain sectors that are “cashed up”, where liquidity is strong, borrowing costs are low and the environment is ripe for an M&A led recovery.

While there are many factors to assess in determining the right price for a business, it is important that buyers do not unintentionally take on additional liabilities for employee entitlements. Historical liabilities for employee entitlements often only emerge after completion and it is possible that the new owner can be liable for the oversight of the previous owner. Given the risk, it is wise to properly assess the target companies HR/Payroll environment to determine the likelihood of unreported underpayments.

The following is by no means an exhaustive list, but serves as a “starting point” of issues for consideration:

• The complexity of the target’s Award or Enterprise Agreement (e.g. “industrial instruments”) structure. How many are relevant to the population of employees and are different employees covered by different industrial instruments?
• The wording of the relevant industrial instruments. Are there any clauses open to interpretation or any undertakings requiring periodic review (e.g. periodic reconciliations to underlying award)?
• Employee classifications and roles. When was the last review conducted to ensure that employee coverage and classification under the relevant industrial instrument is correct?
• Qualitative information can also provide useful context, such as any proceedings in Court with the Fair Work Ombudsman? It is also pertinent to review any relevant audit findings that may exist.
• Availability and completeness of data. Do you have access to payroll and time and attendance data that would enable to you to test the accuracy of employee entitlements paid, even if just on a risk based or sample approach?

The data doesn’t lie

Attempting to recalculate wage entitlements can be a challenge when trying to extract data and information from systems and platforms that are disparate. The frustration is heightened when the underlying data is unavailable due to the improper maintenance of records.

Whilst legacy payroll systems may not have been constructed to deal with current questions from the Fair Work Ombudsman, accurate record keeping of wages and entitlements is not just good for business, it is a legal obligation that rests squarely with the employer. In the event of a claim made by an employee for underpayment, the onus turns on the employer to disprove the claim.

When wage and entitlement information has not been recorded, employers have the limited option of applying reasonable assumptions that benefit the employee. For instance, if an employee claims to have worked overtime and the records have not been maintained, the employer will have to assume they worked the overtime.

It is clear that the ever-increasing spotlight on remuneration entitlements is unprecedented. Therefore, when you are acquiring a business, assessing the risk of employee underpayment under the surface is critical. Understanding the target company’s data as soon as possible will assist you in being able to test compliance. It will also help you to understand the company’s historical attitude to wage compliance, record keeping and the maintenance of critical wage data, which may be an indicator for employee liabilities lurking under the surface.