Underpayments: How can I make sure it doesn’t happen to us?

Another day, another sad tale of inaccurate interpretation of employee entitlements costing millions of dollars (this time one that’s forced the early departure of their CEO).

Very few people set out to deliberately underpay people (although there are some notable examples). However, in the quest to optimise labour costs and drive business efficiency and competitiveness, mistakes can be made. A misreading of an award condition here, the selection of an incorrect penalty rate there – and hey presto, a million-dollar backpay bill.

And they’re becoming ever more frequent – from casual interpretation issues at the ABC and individual contract bungles at Thales, to outright mistakes at Qantas, it may seem like it’s impossible to avoid small indiscretions that end up costing a lot.

You can’t get away with it anymore

It’s never been harder to get away with not doing the right thing. It’s easier than ever for employees to research their own rights, or to seek assistance from the Fair Work Ombudsman.

Additionally, with new ‘Reverse Onus of Proof’ laws added to the Fair Work Act to protect vulnerable workers in 2017, employers who don’t do the right thing, can’t meet record-keeping or pay slip obligations and can’t give a reasonable excuse will need to disprove allegations in wage claims made in a court, i.e. it’s not up to Fair Work to prove you did the wrong thing, it’s up to you to prove you didn’t.

The perils of “flat rate”

Head to your nearest Google Search bar (or Google Home, or Alexa, or Assistant – whatever takes your fancy) and search the phrase ‘flat rate underpayments’.

What you’ll get in return is a laundry list of employers who have been named-and-shamed for underpayment by the use of flat rates that have not been set properly, or have not increased as much as they should have over time.

Flat hourly rates are generally used for ease of administration and accounting – a flat hourly rate makes it easier to calculate the pay of your employees during each pay period. A flat hourly rate of pay is used when employees are paid the same rate for all hours worked, regardless of when they are worked. It does not increase for overtime hours worked or hours that attract penalty payments.

The flat rate must pass the Better Off Overall Test (BOOT) which determines if the employee is better off by being paid the flat hourly rate than being paid as per the clauses of the relevant modern award. A flat hourly rate must also be agreed between the employee and the employer by using an Individual Flexibility Arrangement (IFA) or a set-off clause in the employment contract.

Just because your employee signed a contract at a specific rate, it doesn’t mean that they can be paid that rate forever. If the modern award conditions change, you will need to do another BOOT for every employee. You’ll also need to consider other ‘non-monetary’ conditions that may have been available in the modern award, such as allowances, meals and laundry, and ensure you comply with these or make alternative arrangements to match the approximate ‘value’ of those conditions for every employee (a truly difficult thing for the uninitiated to do).

So what can I do to make sure I’m paying right?

For a start, you need to have the right tools, processes and experts to assist you.

At a minimum, if you’re running a business that pays employees you need to have a ‘payroll system’. By ‘payroll system’ we don’t necessarily mean software – you’ll just need some sort of system that ensures you do what you’re supposed to do, when you’re supposed to do it.

Remember – it’s not just about underpayments. You can be fined for not providing (or inconsistently providing) payslips and record keeping issues, too.

Most finance software packages will include basic payroll functionality. Alternatively, some accountants offer to do payroll processing on behalf of their clients. As your business grows you will need to invest in specialised payroll and award interpretation tools to ensure that you are accurately calculating for every possible scenario. Alternatively, you can outsource your payroll to an external provider to manage for you, which will reduce your risk, and in most cases your payroll processing costs too.

You should also seek expert advice if you’re ever in doubt. You can ask your lawyer or accountant (assuming they have a solid knowledge of industrial relations), your payroll service provider or go straight to the source – the Fair Work Ombudsman offers a range of services for you to check if you’re meeting your obligations. Employers who are concerned that they are not meeting their workplace obligations can visit www.fairwork.gov.au or phone the Fair Work Infoline on 13 13 94.

Fair Work offers an interpreter service by calling 13 14 50. Small businesses calling the Infoline also get priority service to assist with their inquiries.