Why is compliance important?
I’m sure you’ve seen it, staff underpayment is at the forefront of Australian media with a long list of wage underpayment cases rearing their heads. This year, legislation was passed to make wage theft a criminal offence in VIC and QLD. This legislation sets a new standard to make sure businesses are doing more to avoid underpaying their workers.
An estimated 13% of the Australian workforce is being underpaid $1.3 billion dollars every year.
Something as simple as a slightly off system configuration could lead to a serious breach. A small issue like this, if unnoticed for many years, could make or break a business. With fair pay legislation tightening and public tolerance wearing thin, no org size or industry is safe from the payroll compliance crack down.
Before we jump in, let’s start with some basic definitions.
Wage: A fixed regular payment for work or services. Wage & entitlements can depend on age, industry, qualifications, work duties & responsibilities. Australian full-time minimum wage is for a 38 hour week, with a 2.5% increase of minimum wage being rolled out in 2021. The minimum wage provides a starting point to calculate employee wages, however most employees are covered by an award.
Awards: Industry or occupation based minimum employment standards & wages which apply in addition to the National Employee Standards. Look up the awards relevant to your business on the Fair Work Ombudsman (FWO) website, keep in mind – there will be changes to awards announced this year as part of a scheduled review process.
Enterprise agreements: Conditions of employment for a group of employees at one or more workplaces. You can draft your own so that it reflects your particular business. If you use an agreement, it will apply instead of a modern award – however, the pay rate for an agreement can’t be less than the pay rate in the relevant modern award.
Source: Australian Government, Fair Work Ombudsman
Common culprits for non-compliance
Payroll compliance isn’t just about making sure your employees get paid on time. Few businesses escape the complexities defined by your industry and the state and federal legislation. Below are some the most common causes of non-compliance in Australia:
Misinterpretation or failure to review
Employers not fully understanding which awards or agreements are relevant or they apply the correct rules, but fail to keep them up to date. It’s clear that this is a much more complex task than most anticipate, many institutions across Australia have requested for awards to be written in a less confusing language.
Incorrect hours or bad configuration
Employers failing to accurately record hours (including breaks), making it difficult to calculate minimum entitlements or the payroll system is incorrectly configured for overtime, penalties, loadings, allowances & super. Lots of organisations assume that payroll system vendors will pick up on errors or take on the responsibility of checking, unfortunately this is not the case.
Leave accruement issues
Failure to accurately track & calculate leave, particularly for long service leave (LSL), annual leave or leave without pay (LWOP). This can become very difficult to track under more complex circumstances, for example reporting on LSL over multiple employers that remain in the same industry or calculating the length of service when employees have taken LWOP.
Failure to register for payroll tax
By making mistakes around employee classification, awards or recording breaks, employers could be inadvertently falling under the state payroll tax threshold. This will result in a breach of compliance against the State Revenue Office by failing to register & pay your obligated payroll tax. More information on this below.
Five pillars of payroll compliance
1. Meet the National Employment Standards (NES)
Minimum employment entitlement requirements, with a brief description:
- Maximum weekly hours – 38 hours FT + reasonable additional hours
- Flexible working arrangements – entitled to request after working for the same employer for 1 year
- Parental leave – employees with a new-born or adopted child are entitled to up to 12 months unpaid leave & have the right to request an additional 12 months
- Annual leave – all employees, except casual, receive 4 weeks of annual leave (with some shift workers receiving 5)
- Personal/carer’s leave & compassionate leave – 10 days paid leave, 2 days unpaid carer’s leave as required & 2 days compassionate leave (unpaid for casuals)
- Community service leave – leave for jury service with 10 paid days & unpaid leave for voluntary emergency activities
- Long service leave – an entitlement for employees after working for the same employer for a long period. The entitlement comes from an applicable pre-modernised award
- Public holidays – a paid day off on the relevant state public holiday, employees are entitled to the public holidays of where they are based – not where they are working on the day
- Notice of termination & redundancy pay – up to 5 weeks notice of termination & up to 16 weeks pay on redundancy, calculated based on length of service
- Fair Work Information Statement – must be provided to all new employees, containing information about the NES, flexibility requests & arrangements, modern awards, agreements, freedom of association, workplace rights, termination of employment, rights of entry & the role of the Fair Work Commission & the Fair Work Ombudsman
For more specifics, see our source: Australian Government, Fair Work Ombudsman
2. Keeping records & providing pay slips
All businesses, large or small are obligated to maintain records and provide pay slips. This is so your organisation can prove that employees receive correct wages and entitlements during audit. Tracked time and records can’t be false or misleading, no changes can be made unless they are made to correct an error. Time and wages records need to be:
- Kept for up to 7 years
- Readily available
- Legible & in english
What you need to track for all employees:
- Employer’s & employee’s name
- Employer’s ABN
- Employee’s start date
- Employee type: FTE, PTE or casual
- Employee status: permanent or temporary
- Pay rate
- Gross & net amounts paid
- Deductions from the gross amount
- Incentive-based payment, bonus, loading, penalty rate or other allowance or entitlement
Hours of work
- Penalty rates or loadings paid, including:
- Overtime hours
- Start & finish time of overtime hours
- Hours worked (for casual or irregular part-time)
- Amount paid
- Pay period
- Date(s) paid
- Super fund name
- Reason paid into the fund
- Leave taken
- Accrued leave
- Under an award, if an employer agrees for an employee to take annual leave in advance, the employer has to keep a copy of the agreement
Individual flexibility agreements
- If an employer & employee agree to an individual flexibility agreement under an award or registered agreement, a copy of the agreement or notice of termination must be kept.
Guarantee of annual earnings
- Date cancelled
- How the employment was terminated e.g. agreement, summarily, etc
- Notice provided & how much
- Name of terminated employee
Transfer of business
- Where there has been a transfer of business, the old employer has to give the new employer records of any transferring employee
3. Effective management of modern awards & agreements
Organisations are responsible for interpreting and keeping up-to-date with relevant modern awards. Modern awards are based on industry or occupation and generally have conditions relating to:
- Minimum wages
- Wage or salary annual arrangements
- Employment types (FTE, PTE or casual)
- Work arrangements (rostering or variations to hours)
- Overtime & penalty rates
- Leave, leave loading & taking leave arrangements
- Consultation, representation & dispute settlement procedures
Maintaining compliance to awards can be a key challenge for payroll considering the rules are difficult to interpret. The main components include:
- Understanding the industrial relations framework (IFA) in Australia
- Learning which modern award/s will apply to their employees
- Staying informed about what can be done within the national workplace relations system and the bodies associated with it
- Research the award clauses that affect pay including ordinary hours, overtime, penalty rates & allowances
- Determining if you have additional super obligations
- Identifying when an award has been varied & how to find a past variation
- Taking advantage of the tools provided by the Fair Work Ombudsman
Enterprise agreements set out minimum employment conditions and can apply to one business, a group of businesses or an individual employee (though these types of agreements can’t be made anymore). When a workplace has a registered agreement, the award doesn’t apply. However, the base pay rate in the registered agreement can’t be less than the base pay rate in the award, the NES and any terms about outworkers in the award still apply.
4. Payroll Tax Compliance
Payroll tax is different across all states and territories. If your business has employees across multiple states, this becomes quite challenging to calculate. You’ll need to check if your total wages exceed a monthly threshold according to the state’s payroll tax laws, if it does, you’re required to register for payroll tax. A couple of examples include:
- The annual threshold in NSW is $1.2m for FY22, with the payroll tax rate currently 4.85%
- The annual threshold in VIC has increased to $700,000 for FY22, with a payroll tax of 4.85% except for regional employers
We’ve worked with many businesses that find this process particularly painful, most finding themselves under reporting when they were actually over the threshold. If you’re feeling unsure if you’re meeting your payroll tax obligations, we’ve put together a quick guide that will help you to understand all the ins and outs. We’ve also designed a DIY payroll tax calculator in Excel that will help automate payroll tax calculations for employees across multiple states & territories.
5. Improving audit practices
There are two levels of payroll compliance to tackle, internal and external. Internal compliance relates to rules put in place by your business to improve efficiency and reduce liability, e.g. locking your computer or auto accepting employee allowance variances under $200 during reconciliation. External compliance relates to regulations put in place by the government or a board in your operating industry.
Below are some basic best practices for meeting compliance obligations:
- Review data security practices – are you meeting privacy laws & protecting employee & payroll data? This is crucial, one breach & you could permanently damage the trust of your employees & customers.
- Consolidate personnel & payroll data – can your payroll team see a complete picture of your data? Pull everything together into as few locations as possible or into a tool that allows you to see all your data in one place.
- Tighten internal rules & standards – create an ongoing process that will improve compliance & data management practices. For best results, use a tool that enforces compliant practices rather than relying on memory.
- Document your processes – this reduces the risks associated with critical knowledge being held by only a few core staff. It will also speed up the onboarding process for new staff by improving autonomy.
- Handle payments more securely – consider upgrading to online statements if your business is still using printed statements that are left on desks (red flag).
- Self-service portal – give employees access to their personnel data. This would naturally improve data accuracy as employees can track & edit their personal info, work hours, sick leave, etc.
- Keep variance reports – run an independent audit each pay cycle (even better if you can automate this – hint Paytools can do it for you). Important reports to keep include:
- Current vs comparison pay cycle
- Business rules used to reconcile the pay cycle
- Variances identified between the current vs comparison pay cycle
- All acknowledged & unacknowledged variances with details
- All remediation actions taken
- Use a dedicated tool to reconcile payroll – basic payroll reports can leave you open to errors that occur at the line item level. E.g. if you assume ‘if totals are equal, payroll is correct’, one line item could be up, exactly the amount another is down. Line item comparison ensures that each record is checked individually, leaving no stone unturned.
- Stay informed with changing rules – have you subscribed to updates from the Australian Payroll Association or The Association for Payroll Specialists? How often do you check the FWO & ATO website? Missing one announcement could leave you owing thousands of dollars, let alone the potential fines & rep damage. Assign the most qualified person in your team to own this task, or if no one has the expertise, engage an expert to set up business rules that will automatically maintain this.
How do I get compliant?
In order to adopt an effective compliance strategy, step one should always be analysing your business for compliance problem areas. Once you have determined what areas have non-compliance issues, you then need to identify the root causes. Ask yourself:
- Where are the major risks?
- Where are the issues stemming from?
- What processes are not documented & rely heavily on memory?
- Where do we need a new solution to reduce risk the most?
Once you have solved the systemic issues of non-compliance, next it’s time to explore what resources are available to you. If you’re looking to manage an internal payroll compliance audit, you will need someone who understands all relevant modern awards and agreements and is a wizard in Excel. This is still an extremely manual and laborious project regardless of experience, the results are always heavily dependent on the skills and accuracy of the individual.
If you’re thinking about using technology to improve compliance, make sure your prospective vendors can walk the talk. Most payroll software providers claim to have all the answers when it comes to compliance, but tend to over-promise and under-deliver. Make each vendor put together a proof of concept that proves that the solution works and that it’s right for your business.
A dedicated payroll compliance tool can help to reduce stress and liability for payroll, finance and the c-suite, by offering a safety net of assurance that workers are being paid correctly. By incorporating compliance checking and variance reporting as part of your ongoing reconciliation process, you can improve the speed and accuracy of each verification, checking for any discrepancies as you go.
Best Australian compliance solutions
You might be pleasantly surprised with how easy it can be to meet payroll obligations using dedicated tools. Here’s our top 6 resources/tools for easy and affordable payroll compliance:
1. Brought to you by the well-loved Navigo brand, Paytools consists of a Melbourne-based team passionate about HR tech & payroll. Features of our Xero payroll tax assistant include:
- Automated leave, super, tax & wage compliance checks
- Complete review of configuration & employee setup
- Flag all issues and access resolution actions
- Keep up-to-date with changes in legislation & due dates
- RosterRight is an Australian based company that offers consulting services & smart technology to ensure that companies are meeting the legal requirements of rostering. Their team of consultants can also work with you to identify where improvements can be made.
- Australian Payroll Association (APA) has been working with payroll teams throughout Australia to design best payroll practices. This entity now offers extensive training & advice to organisations to help get things right in the payroll industry.
- The Association for Payroll Specialists (TAPS) is a member-based community that has been operating in Australasia for 30 years. TAPS specialises in advice, training, recruitment & payroll health checks.
- Outflank Paytracker is simple to use & allows employees to accurately track their own work hours & calculate their entitled pay.
- SuperStream is an ATO initiative that allows employers to transfer super money & information across a system between employers, super funds & the ATO. It allows payroll to deliver super contributions in a single transaction. Process rollovers & contributions faster & more accurately, significantly reducing the chance of lost accounts & unclaimed super money.
Don’t forget to download our free payroll compliance checklist [PDF] as a quick reference guide you can keep!
Get the right advice
If you’re looking to create an effective compliance strategy, you first need to assess your payroll configuration, what works for your industry and what tools will meet your requirements.
Our team is always up for a chat if you’re hoping for some independent and honest advice. Get in touch with our Melbourne-based team and we’d be happy to help you to find which solutions might be a good fit.
About the author
Lee, Paytool’s Marketing Manager, is passionate about all things HR tech. She is actively exploring the most effective ways for Australian organisations to solve payroll compliance issues.