Can Switching Payroll Software Reduce the Risk of Underpaying Employees in Australia?

Talk to risk and compliance expert Tom McLeod, and he will tell you employers have two main responsibilities when it comes to their employees.

The first is to keep them safe while at work. The second? To pay them appropriately and accurately.

While health and safety has improved in Australia over the last 30 years, paying employees appropriately has become a big problem. Incidents of employers underpaying employees have been regularly revealed, leading to new laws designed to combat intentional ‘wage theft’.

McLeod, chief risk officer at payroll compliance firm Yellow Canary, said Australia’s awards system can make paying employees complex. However, he said changing payroll systems will not by itself fix the problem and recommended independent payroll validation as a solution.

How big is Australia’s employee underpayment problem?

Australia has been waking up to its underpayment problem for a number of years. Beginning with a case involving 7-Eleven, first revealed in 2015, McLeod said awareness of the problem had been growing in both society and government, leading to the discovery of more cases.

SEE: Best practices for maintaining payroll compliance

The Fair Work Ombudsman, the regulator responsible for recovering unpaid wages, said it recovered AUD $509 million (U.S. $336 million) for 251,475 workers in 2022-23. This was the second consecutive year where more than half a billion dollars had been recovered.

Australia experiencing high profile underpayment incidents

In a recent incident, Australian law firm Slater & Gordon self-reported to Fair Work after discovering an AUD $300,000 (U.S. $198,000) problem with the rate at which leave was accrued for some current and former staff who took leave at half pay between late 2011 and mid-2023.

This is dwarfed by the university underpayment crisis. The National Tertiary Education Union says 30 universities have confirmed AUD $203 million (US $134 million) in underpayments, with another AUD $168 million (U.S. $111 million) set aside by nine universities for suspected underpayments.

The list of historic underpayments includes supermarket giant Woolworths, which underpaid thousands of staff by $300 million (US $198 million), and airline Qantas, which accepted an enforceable undertaking in 2020 to pay employees back AUD $7.1 million. ($4.7 million).

Overpayments also discovered when payroll audits conducted

Employers in Australia also regularly overpay employees. Even if not as costly to businesses in the long run as underpayments, the Australian Payroll Association has said that it has discovered overpayments in 70% of its payroll compliance checks.

McLeod said the payments issue is a question for all Australian organisations, whether they are “large or small, government or private, listed or not listed, or not-for-profit or for profit.” More than half of Fair Work’s 22-23 recoveries came from large corporate and university employers.

Why are underpayments occurring so frequently in Australia?

Wage underpayments in Australia are often a case of employers just getting things wrong. This is because Australia has an “extraordinarily complex” industrial relations system, with payments based on 122 modern awards, thousands of enterprise agreements, and individual contracts.

Though payroll software supports efficiency, it does not guarantee accuracy. When employers do make mistakes in this environment, it can cascade into other Australian employee entitlements such as superannuation or Long Service Leave.

Most companies will have made some errors with their payroll

McCleod explained that some companies are “brave enough” to investigate internal pay inequities, while others are not. And he said that, when a check is conducted from a Yellow Canary perspective, it is “very rare for us to find a completely clean slate.”

Payroll compliance errors are likely to be discovered for a number of reasons:

• The long historical periods being investigated: When a potential issue is discovered, payment investigations often look into employee payments made by employers over many years. This makes it more likely that historical mistakes will be uncovered.
• Manual interventions and assumptions: Manual changes and assumptions can be made by those managing payroll. This can end up corrupting the data in the payroll process, leading to incorrect payment outcomes over long periods of time.
• Reliance on documentation: Payroll in the past relied on paper contracts and documentation, which can at times date back to before data was digitally searchable. This makes the likelihood of errors higher when reviews take place.

Changing payroll software does not guarantee correct payment

Payroll has been digitised over a number of years. This means the payroll process now relies on good technologies, either managed in-house or outsourced. McLeod said, “you cannot do payroll in the current environment with anything other than an automated approach.”

SEE: A step-by-step guide to doing payroll (the right way)

But upgrading payroll software will not fix underpayment problems. McLeod noted that systems are set up to correctly calculate payroll based on the data and rules entered into them, but problems come from the data fed in — especially when the process is not independently checked.

“[Changing systems] is sometimes a bit of a Hail Mary,” McLeod explained.

“People think, ‘this is too hard, let’s just put in a new system, and when we put in the system, all this will go away.’ What they’re mistaking is that the system is just the sausage-making machine, and paying correctly depends on the ingredients — the data, or lack thereof.”

This problem is compounded by the multiple systems involved and no independent checking.

The payroll process can involve multiple integrated systems

Payroll can depend on multiple integrated systems. On a manufacturing floor, for example, automated time and attendance systems, manual employee-break recording, and rostering systems often work together to generate a payment rule based on the relevant award.

Employers and employees have outsourced checking to software

McLeod said the introduction of digital systems has seen companies and employees outsource the manual double-checking of how much they are paid.

“Because the system is doing it for us, employers and employees have both absolved ourselves of our responsibility,” McLeod said.

Should you upgrade your payroll software to mitigate payroll compliance risks?

Before upgrading their payroll software, organisations should ask why they are doing it, McLeod noted.

“If you’re wanting efficiency, then there are a multitude of systems out there, but ultimately, payroll compliance is about accuracy, not about efficiency,” he said.

Seek independent internal or external validation of employee payments

Employers should consider introducing independent payroll compliance checks into the process.

“If accuracy is your mandate, you have to ask, what independence of thought sits within the system that can automate accuracy, or product reporting that shows where you are inaccurate,” McLeod said.

He cautioned that, though he has seen employers validating pay runs against the previous month, this is not sufficient to help identify any systemic underpayment problems.

While some companies validate payments in an Excel spreadsheet, McLeod said this is not “scalable or repeatable,” and may not be defendable if a company is investigated. Independent pre-payment validation services like those offered by Yellow Canary, which sit outside the organisation, are more robust ways to regularly check that employee payments are correct.

Australian payroll crisis likely to catch out more employers

Australia’s payroll crisis could hurt businesses and drive payroll technology innovation for the next 25 years, McLeod predicts.

As a compliance issue, he likens it to Y2K, which required organisations to remediate the computer date changeover in 2000. The only difference? There is no deadline to get payroll compliance right, so it will be a perpetual issue for business.

However, McLeod urged businesses to be brave enough to investigate their payroll compliance, as well as to consider independent pre-validation services.

“Every organisation has to pay their employees appropriately,” he said. “To borrow a phrase, it is an idea whose time has come. Today, you can’t say your business model is to underpay employees in the Australian environment.”