In 2019 several large businesses found themselves in payroll scandals they had the resources to avoid. So what happened?

There is a phrase that goes something like: “Once is happenstance. Twice is coincidence. The third time it’s a pattern.” It would be interesting to know what the phrasemaker behind this memorable aphorism would say about the number of notable Australian organisations reported to have underpaid staff by millions of dollars. 

Some of the biggest include Woolworths, Wesfarmers, MAdE Establishment, Commonwealth Bank, Super Retail Group, and the ABC. And just two days before this magazine went to press, Coles admitted to staff underpayments and set aside $20 million to pay for them. If three is a pattern, what do you call it when the same thing happens over a dozen times?

The argument made by some, that the complexity of Australia’s industrial relations system is to blame, has become weaker as the headlines have piled up. These are well-resourced organisations with sophisticated HR and payroll functions that can’t get it right. So what’s really going on?

State of pay

Underpayments are not a new development. The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 significantly increased fines and liability for such breaches. 

However, regulators have been seeing a shift in underpayments from small-to-medium businesses to major companies, with multimillion-dollar unpaid wage bills. The recent spate of high-profile cases has led to a vigorous debate on the possibility of criminalising wage theft – a move the federal government has flagged for early this year. 

“It is important to distinguish between mistakes and misconduct in relation to underpayments,” says associate professor Eva Tsahuridu, industry fellow in the School of Accounting at RMIT University.

“We also need to differentiate between systemic and single mistakes.  In some cases, underpayments of wages amount to wage theft – intentional and motivated by greed rather than a mistake. But even if it is due to recklessness and lack of attention, I think that could still be considered wage theft.” 

“I have yet to come across a case where thousands of employees have been overpaid hundreds of thousands of dollars over a number of years.” – Eva Tsahuridu, RMIT University.

Natalie James, a partner within Deloitte’s assurance and advisory practice group and Fair Work Ombudsman from 2013-2018, says the nature of underpayments is changing.

“When I was Fair Work Ombudsman, the focus was rightly on helping employees and small businesses navigate the system, as these were the cohorts who were least likely to have access to paid advice and may have lacked the resources to work through those issues themselves,” she says.

“What we’re seeing now is something quite different. We’re seeing long-standing legacy underpayments that had been embedded in large and established businesses for many, many years.”

Complexity is regularly cited as a leading factor in underpayments. James acknowledges that it plays a role, but she stresses that the system has become less complex in recent years. 

“We’ve gone from more than a thousand state and federal awards to 122,” she says. “We’ve had an award modernisation process and that’s been overseen by the Fair Work Commission. Complexity is an issue, but it’s not an excuse.”

Ciaran Strachan, co-founder and partner of HR-Employment Relations & People Analytics, says awards underpin less than 15 per cent of paid employees.

“The remainder are on EBAs, and there’s a BOOT test there, which is actually very simple,” he says. “Where are the internal governance checks and framework post BOOT tests?”

Strachan questions whether many companies are simply doing the minimum to scrape through the labour laws and the BOOT tests. When they don’t get it right, they fall into the underpayment camp. 

“It’s not so much a question of complexity. It is the governance values of these big companies,” he says. 

Strachan cites the example of flexible working as a signal of whether “a company is committed to doing the right thing or whether it’s doing more than the bare minimum”.

“There was a legislative change around flexible working arrangements last year, and it was an alarm bell for anyone who knows the connection between HR and industrial relations,” he says.

“The Fair Work Ombudsman was getting a huge amount of complaints from employees asking for [flexible work], but it not being approved. And when they did a review, they found over 50 per cent of cases should have been approved. It’s another example of employers thinking they can do the minimum and get through.”

“If I was an HR professional and I had payroll professionals working for me that weren’t qualified, I would be nervous.” – Tracy Angwin, CEO of the Australian Payroll Association

Tracy Angwin, CEO of the Australian Payroll Association, acknowledges the complexity of Australia’s industrial relations system. However, she says it’s not the root cause of underpayments.

“If it came down to complexity, why are many hundreds of thousands of employers in Australia getting it right?”

Angwin says a reliance on automated payroll systems plays a greater role.

“When underpayments occur, the excuse tends to be ‘the system got it wrong, but we are upgrading and everything will be fine’,” she says. “Systems never get it wrong. Humans get things wrong when they use systems and don’t check the outputs. It’s like me using Excel and blaming it when my formulas don’t work. I can’t call Bill Gates and get him to take responsibility for my incorrect calculations.”

The cause of underpayments is unqualified payroll managers, she says.

“It is the Australian Payroll Association’s opinion that the minimum requirement that anyone who touches your payroll should have is a certificate in payroll administration.

“We know from our 2019 payroll benchmarking report that 90 per cent of people working in payroll in Australia don’t have that. They wouldn’t recognise the problems because they don’t have the knowledge to recognise them. To my knowledge, no-one at any of the companies that have been in the media for underpayments had anyone in their payroll teams with a qualification in payroll administration or a certificate in payroll management,” she says.

Strachan says this issue of qualifications is not limited to payroll managers. “There are also senior HR people sitting at the table of some of these companies with no [HR] qualifications.  When they’re talking about governance and due diligence, they’re learning on the fly. ”

“HR needs to continue towards certification – that’s what AHRI has started, but it’s got a long way to go.”

Angwin also points to a historical underinvestment in the payroll function by Australian employers.

Getting it right

From 1 March this year, new rules require companies to conduct regular pay reconciliations for annualised salaried employees under a range of industry awards. This will affect workers in industries such as manufacturing, health, hospitality and telecommunications.

However, James says all organisations must take steps to ensure employees take home the wage they rightfully earn. She says a “back to basics review” is the first step.

“This requires investing in workplace relations advice and ensuring that this advice is then linked in across all of the components of the system that determine how people are paid,” she says. “It also includes ensuring payroll staff are appropriately qualified and supported. 

“Businesses also need to have continued monitoring in place to ensure they stay on the right side of the law.”

Angwin suggests investing in payroll qualifications. “If I was an HR professional and I had payroll professionals working for me that weren’t qualified, I would be nervous. We make sure our account people are trained. We make sure our first aid and safety officers are trained. So why don’t we do the same with payroll officers? They are managing what is likely to be the largest expense in your organisation.”

In Unit 2 of the AHRI Practising Certification Program, you will learn the legal requirements with which businesses must comply.

Tsahuridu believes a review of governance practices may also be in order.

“These companies ought to have in place the systems, policies and practices to comply with the law,” she says. “When that is not the case, and the reason provided is that complexity is the cause, then it is not surprising that many doubt that is in fact the real cause of the underpayments.”  

This doubt is also reinforced by the prominence and frequency of cases related to underpayment and not overpayment, adds Tsahuridu. 

“That is not to say that overpayments do not happen, but I have yet to come across a case where thousands of employees have been overpaid hundreds of thousands of dollars over a number of years.” 

This article first appeared in the March 2020 edition of HRM magazine.