Payroll

Last updated May 2021

What legal risks arise in administering payroll?

Administering payroll is an important function of any employer business.

A typical payroll process has nine stages:

1. Employee clocks in and out using a time and attendance (TA) system.
2. Supervisor reviews TA records against work schedules, makes adjustments and exports records to payroll.
3. Payroll officers process the pay run using guidance material to calculate penalties, loadings and allowances.
4. A variance report is run and reviewed to check for inaccuracies.
5. Workers’ compensation payments are added.
6. The payroll manager, HR manager or financial controller (or similar) review the proposed payments, including deductions, pay rate changes and employment termination payments.
7. Bank payments are approved.
8. Pay sequence is closed.
9. Employees are paid.

Two key risks in administering payroll are:

• underpayment of employees; and
• failure to comply with record-keeping requirements.

Underpayment

The primary legal risk arising in administering payroll for an employer is the underpayment of employees.

Common errors that can lead to underpayment include:

• TA records are incomplete or obviously inaccurate because employees have neglected to ‘clock on’ or ‘clock off’ as required;
• supervisors make adjustments that are not explained or otherwise undermine the integrity of TA records (e.g. logging the employee as having worked ordinary hours when it is clear from the records that this is not the case);
• the payroll data collected, entered and modified at various times are incorrect (which might be because an employee has submitted incorrect details or data have been entered into the payroll system incorrectly); and
• ‘pay codes’ and ‘pay rules’ in the payroll system reflect incorrect interpretations of awards or enterprise agreements, such as:
  • incorrect identification of the applicable industrial instrument that specifies minimum remuneration entitlements;
  • incorrect classification of employees under the applicable industrial instrument; and
  • incorrect interpretation of operation of clauses dealing with ordinary hours, overtime, penalties, etc.

Underpayment can lead to legal proceedings being brought by the affected employees or unions on their behalf. The Fair Work Ombudsman can also initiate an investigation and court proceedings for underpayment.

Common misconceptions that may result in underpayment

Misunderstanding entitlements and award coverage can result in payroll errors, including underpayment.

Three common misconceptions are shown in the following table:

5 tips to reduce the risk of underpayment

1. Develop guidance material and provide training to assist the payroll team to properly interpret the applicable award and enterprise agreement provisions dealing with monetary entitlements.
2. Encourage employees to regularly check the details on their pay slips and human resources online portal.
3. Ensure the authority to change key employment conditions is clearly understood and documented.
4. Ensure human resources staff have control of template employment contracts, and that they are the primary point of contact for the external payroll services and salary packaging providers.
5. Ensure any material changes to an employee’s terms and conditions of employment are formally recorded and stored on the employee’s personnel file.

Record-keeping requirements

You have legal requirements to maintain records during the payroll process.

You have legal requirements to keep records of time worked and pay in accordance with the FW Act, and modern awards and enterprise agreements enforceable under the FW Act and Fair Work Regulations. State and Commonwealth privacy legislation may also apply.

The FW Act requires you to:

• make and maintain accurate and complete records; and
• issue pay slips to employees.

Records of an employee’s pay and superannuation contributions must be retained for 7 years.

These records must be:

• properly maintained;
• accurate;
• legible;
• readily accessible to a Fair Work inspector; and
• in English.

For each employee in each pay period, records of pay must show:

• rate of remuneration paid;
• gross and net amounts paid;
• any deductions made from the gross amount paid to the employee;
• if the employee is a casual or irregular part-time employee who is guaranteed a rate of pay set by reference to a period of time worked, the hours worked by the employee in that period; and
• details of any incentive-based payment (e.g. commission), bonus, loading, penalty rate, or another monetary allowance or separately identifiable entitlement to which the employee is entitled.

Your time and pay records must include records for the following:

• Compulsory superannuation contributions payable to an employee, including:
  • the amount of the contributions made;
  • the period over which the contributions were made;
  • the date on which each contribution was made;
  • the name of any fund to which a contribution was made; and
  • the basis on which you became liable to make the contribution, including a record of any election made by the employee of the fund to which contributions are to be made, and the date of any relevant election.
• Overtime, if a penalty rate or loading (however described) must be paid for overtime hours actually worked by an employee. The record must specify the number of overtime hours worked by the employee during each day, or when the employee started and ceased working overtime hours.
• Cashing out of leave. If you agree with an employee to cash out an accrued amount of leave, you must put the agreement in writing and keep a copy of the agreement. The agreement must show the rate of payment for leave that was cashed out and when the payment was made.
• Guarantee of annual earnings. Similarly, if you revoke a guarantee, you must make and keep a record of this.

Granting access to employee records

If you are asked by an employee or former employee to make a copy of their employee record available for inspection, you must tell them where the records are kept.

You must make a legible copy of an employee record available upon request to the employee or former employee to whom the record relates.

If the employee record is kept at the premises at which the employee works or the former employee worked, you must make the copy available at the premises within 3 business days after receiving the request, or post a copy of the employee record within 14 days after receiving the request.

If the employee record is not kept at the work premises, you must, as soon as practicable after receiving the request, make the copy available, or post a copy to the employee or former employee.

The employee or former employee may interview you or your representative, at any time during ordinary working hours, about an employee record you have made or will make.

Checklist: What to include on a pay slip

You must give a pay slip to each employee within 1 working day of payment for the performance of work.

A pay slip must be in electronic or hard-copy form, and specify:

• Employer’s name.
• Employee’s name.
• Pay period.
• Payment date.
• Gross and net amounts of the payment.
• Any amount paid to the employee that is a bonus, loading, allowance, penalty rate, incentive-based payment or other separately identifiable entitlement.
• Your Australian Business Number.
• Name, or the name and number, of the fund or account into which any deduction was paid.
• Hourly rate of pay and the total ordinary hours the employee is employed to work in the pay period (in the case of salaried employees, the pay slip just needs to show the annual salary).
• Amount of each superannuation contribution made in the pay period, the name, or the name and number of the fund.

Click here to download the document: What to include on a pay slip.

How inadequate record-keeping can affect you in underpayment claims

Inadequate record-keeping will make it harder for you to respond to claims of underpayment, which often arises after an employee leaves employment in disputed or contentious circumstances. If, for example, a salaried employee asserts they were required or requested to work hours in excess of ordinary hours or at times that would attract a penalty loading under the applicable award, the employer cannot refute these claims if TA records are not kept or unreliable.

Compliance with modern award annualised wage requirements

Since 1 March 2020, the following requirements have applied for those full-time employees covered by an award who are paid a fixed monthly or annual salary to satisfy award entitlements (including base rates, overtime, penalties, loadings and allowances):

• Employment contracts must specify the outer limit number of ordinary hours that would attract the payment of a penalty rate under the award, and the outer limit number of overtime hours that the employee may be required to work in a pay period or roster cycle without being entitled to an amount in excess of the annualised wage.
• You must keep a record of the starting and finishing times of work, and any unpaid breaks taken, for each pay period or roster cycle. This must be signed or acknowledged as correct in writing (including by electronic means) by the employee.
• If in a fortnightly pay period, a full-time salaried employee works any hours in excess of either of the outer limit amounts specified in their employment agreement, you must ensure an additional payment is paid.
• Annual reconciliations must be conducted each 12 months from the commencement of the annualised wage arrangement, or within any 12-month period upon the termination of employment of the employee or termination of the agreement, and shortfalls paid.

How to do a payroll audit

It’s important to take time to inspect your payroll process to ensure it is operating correctly. Regular audits will allow you to catch any problems, and rectify them, early.

In your audit, you should check:

• payroll items are set up correctly for:
  • taxable/non-taxable; and
  • superable or non-superable;
• correct allocation for Single Touch Payroll (STP) reporting;
• calculations of tax deducted from a sample bonus payment;
• calculations of tax deducted from a sample back payment;
• calculations of gross amounts and tax deducted from a sample termination payment, including notice, redundancy, unused leave and superannuation;
• payroll tax administration including whether pay items correctly allocated to taxable/non-taxable (per state guidelines); and
• sample of monthly payroll tax calculation.