Even with the best of intentions, inadvertent underpayments can happen to any business of any size, or industry, caused by anything from misinterpretations of awards to simple human error. With wage theft now a criminal offence, it is vital for employers to understand the ramifications of inadvertent underpayments, and how to avoid them.

What are inadvertent underpayments?

Inadvertent underpayments refer to situations where an employee is paid less than they are entitled to, not due to deliberate action, but rather because of an honest mistake or oversight. This can be because of errors in payroll setup, misinterpreting award rules, or incorrect data entry, for example. While inadvertent underpayments will not lead to criminal charges, these still carry serious civil penalties, emphasising the need for employers to remain vigilant.

How can employers manage inadvertent underpayment risk?

The first step in managing this risk is to consider the common issues that can result in inadvertent underpayments.

Applying the wrong enterprise agreement or modern award

Employers need to review and check that they are applying the correct industrial instrument. Most often it will be a modern award, but it may be an enterprise agreement. Applying the wrong industrial instrument can have messy flow on effects.

Misclassifying employees

Minimum rates in instruments are determined by the classification. If an employee is misclassified at a lower classification and therefore paid a lower minimum rate than they should be paid, the underpayment can quickly add up. Employers must review and analyse the classifications they apply to each employee and match, not only the position descriptions against classifications, but what the employee does in practice.

Misapplying allowances, overtime, penalty rates, and other ad hoc payments

Instruments often provide complex provisions on entitlements to allowances, penalty rates outside of ordinary hours and overtime. It is important to have clear and accurate pay rules for these various entitlements because incorrect application can lead quickly to significant underpayments.

Misunderstanding minimum engagement periods

Most instruments provide for minimum engagement hours when an employee works overtime or works on a Saturday or Sunday. For example, in many cases, an employee working on a Saturday or Sunday must be paid for a minimum of 4 hours even if they work less than 4 hours. Not applying minimum engagement period can lead to a substantial underpayment.

Misunderstanding annualised salaries

Many businesses pay employees an annualised salary that exceeds the relevant award minimum. The intention is that the annualised salary is paid in full satisfaction of all statutory entitlements. When determining the annualised salary, employers must ensure they pay sufficiently above the award to be able to set-off all award entitlements.

So, when paying an annualised salary, employers still must consider the above factors that can contribute to an underpayment and ensure there is sufficient margin above the minimum rates to cover all award entitlements. Employers must also ensure the employment contract contains an effective set off clause or what is paid as salary may not be able to be set off against allowances, travel allowances, penalty rates or overtime rates, leading to significant underpayment claims by employees.

What do employers need to do?

It is crucial that employers regularly review their payroll systems and payroll rules to satisfy themselves that employees are being paid correctly under and applicable industrial instrument. Employers need to check that:

  • They are applying the correct award or enterprise agreement;
  • Employees are classified correctly;
  • All applicable allowances or penalty rates are being applied and paid correctly; and
  • Accrued entitlements such as annual leave or sick leave are being accrued correctly.

Undertaking a payroll review offers numerous benefits, including ensuring compliance with regulations, improving accuracy and efficiency, enhancing employee satisfaction, and reducing the risk of legal issues and financial penalties. By identifying and addressing potential errors or vulnerabilities proactively, businesses can streamline payroll processes, build trust with employees, and protect their reputation.

Get in touch with our team for an obligation free chat now on how we can support your business to conduct a payroll audit, and stay compliant. Find our articles helpful? Remember to follow us on Facebook, Instagram or LinkedIn to keep up to date with our practical tips and information for business owners and managers.