Industrial relations laws have undergone a substantial shift, moving from a reactive approach, where employers respond to issues and incidents, to a proactive stance, requiring directors to prevent breaches from occurring in the first place.
This requirement to operate proactively includes preventing inadvertent underpayments to workers. If adequate mechanisms and risk mitigation protocols are not in place, directors can be held personally liable, and companies face substantially increased fines of up to the higher of $4,696,000 or three times the underpayment amount.
It's clear, through these reforms, that the responsibility of overseeing and ensuring payroll compliance sits squarely within the board’s remit. The five questions below serve as an initial action for board members to assess their company’s compliance risk.
1. Who has ultimate accountability for payroll compliance?
Determining ultimate accountability for payroll compliance is a common challenge for many companies, often leading to a lack of clarity as responsibilities are dispersed across payroll, workforce planning, legal, and technology teams.
In reality, the responsibility for ensuring payroll compliance rests firmly with the board, particularly within its risk or audit function. As directors can be held personally liable for any payroll compliance issues, it is crucial for the board to actively oversee and stay informed about the organisation's compliance status. While the board should delegate the day-to-day management of payroll compliance, it must not disengage entirely. High-level updates and reporting should be provided regularly to ensure ongoing oversight (similar to WHS issues).
The delegated operational responsibility of payroll compliance and processes depends on the size and structure of the company. Typically, we find that the responsibility will fall to the:
- Chief Executive Officer in smaller organisations with fewer than 750 employees;
- Chief Financial Officer if payroll and HR compliance functions report to them; or
- Chief People Officer if HR compliance functions are under their purview.
This clear delineation of responsibility and a defined point of accountability facilitates better compliance management and reduces the risk of non-compliance.
2. How confident is the board and the management team that payroll compliance at the organisation is 100% right?
Directors and management teams should be 100% confident that they have the right processes and procedures in place to substantially mitigate payroll compliance risks. Similar to WHS issues, boards should have a zero-risk appetite or tolerance for payroll compliance issues.
Despite the best efforts of employers, we consistently discover underpayments in payroll, typically ranging between 1% and 3% of total labour costs. This seemingly small percentage can translate into significant financial implications. For example, an organisation with $10 million in labour costs might face an average underpayment of $200,000 annually, accumulating to $1.2 million over a six-year period.
It is a stark reminder that achieving 99% accuracy is not sufficient. The remaining 1% of inaccuracies are where the problems occur. These 1% of inaccuracies can lead to underpayments that damage a company’s reputation, attract legal action from the Fair Work Ombudsman, and result in substantial remediation payments to workers. This underscores the critical importance of striving for absolute accuracy in payroll compliance to safeguard the organisation's reputation and financial stability.
3. What systems and processes does the company have in place to ensure payments made to employees are legally compliant?
When interrogating the systems and processes the management team has put in place to facilitate legally compliant payments to employees, directors should pay attention to key risk indicators.
Answers that indicate a high level of risk within current processes include:
- reliance on the payroll system alone for compliance;
- manual processes, which are prone to human error;
- payroll teams working in isolation with minimal input from legal or workforce planning teams; and
- the use of sample testing to complete compliance reviews.
Answers that indicate a low level of risk within current processes include:
- clearly documented and defined process, roles, and responsibilities in payroll compliance reviews;
- processes that have been developed based on legal advice;
- the integration of automation and technology in the review process;
- providing comprehensive reporting delivering insight into the current compliance status to the board; and
- regular reviews and prompt rectification of payroll issues.
4. What reporting and information can be provided to the board to provide them comfort of the organisation’s compliance status?
As director obligations continue to increase in both complexity and scope, the risk of personal liability for non-compliance has become a significant concern. Directors are tasked with overseeing a myriad of issues, making it challenging to stay informed without delving into operational details.
Leveraging technology has become a necessity to bridge this gap and provide the board with the necessary visibility to monitor compliance effectively. Advanced technological solutions offer concise and insightful reporting, enabling directors to maintain a comprehensive understanding of the organisation's compliance status without being overwhelmed by operational intricacies. For instance, Yellow Canary’s platform provides boards with a comprehensive overview of high-level information that is easy to navigate. This feature streamlines the monitoring process and provides the flexibility to explore specific details as necessary, ensuring informed decision-making and effective governance.
5. Do we have a culture of compliance that trickles down through the organisation?
In the ever-evolving landscape of compliance obligations, relying solely on processes can quickly lead to outdated solutions. The cornerstone of sustained compliance lies in fostering a compliance culture. This cultural shift must originate at the board level, permeating through the organisation to create an environment where compliance is embedded in every action and decision.
Boards that actively engage with compliance information and prioritise it in their decision-making processes effectively set the tone for a compliance-centric culture. Top management should visibly support and actively promote compliance, setting a clear example for the rest of the organisation. Leveraging technology to simplify compliance tasks and integrating compliance objectives into the company’s Environmental, Social, and Governance (ESG) program can also reinforce this culture, ensuring that compliance becomes a natural and integral part of the company ethos.
By instilling a culture of compliance that creates a supportive environment that resonates from the boardroom to every corner of the organisation, companies can navigate the complexities of regulatory requirements with confidence, safeguard their reputation, and ensure long-term success.
With Australia’s complex and constantly evolving industrial relations landscape, it’s no surprise that The Fair Work Ombudsman recovered $509 million of underpayments in FY2023. Payroll underpayments can be driven by outdated processes and systems which are manually led, labour-intensive and time consuming. Ironically, the proposed solution to underpayments is often the very cause of the problem in the first place: more manual processes, calculations and interpretations carried out by people, in Excel spreadsheets (insert face-palm emoji).
If you’re considering utilising automation in your wage compliance processes, here’s a major spoiler alert for the following blog post: it’s the only way! We're here to explain why, and how.
Why traditional compliance frameworks are failing
Reliance on payroll systems for compliance
The majority of payroll systems in Australia are not designed specifically for the nuances of the Australian market. Depending solely on a payroll system for compliance assumes flawless configuration to your specific compliance requirements, the capability to navigate complexities arising from legislation, awards, and EAs, and assumes that awards, EAs, and regulations are static.
We know that even the most sophisticated payroll systems require manual workarounds. Relying on these alone for compliance gives rise to underpayment risk.
Payroll is focused on getting wages out the door
Payroll isn’t a one-way street, but commonly the function is designed only to get payments out to employees. Organisations too often focus only on compliance during payroll processing and don’t check payroll outputs after the fact.
Issues with traditional payroll compliance risk detection methods
Sampling methods
Professional service firms commonly use sampling of employee data to assess wage compliance. Sampling in payroll auditing involves selecting a subset of employees and comparing their actual payments with what they should have been paid, using their time and attendance data. The idea is to assume that the sample represents the entire population accurately. But when we carefully examine the complexities of payroll compliance, it’s evident that sampling just doesn’t cut it.
Each employee's situation can differ significantly. For instance, one employee may be on holiday, while another might forget to log their clock-out time. Some employees may work additional shifts or agree to unique working conditions, which aren't captured in the sample. These variations make it challenging to draw reliable conclusions from the selected subset.
Certain roles might have specific minimum shift durations, but these requirements might not be adequately represented in the sample. For example, an employee called in for a 2-hour training session when a 3-hour minimum shift is required wouldn't be accounted for in the sampling process.
Internal wage audits
There are typically two types of internal wage compliance audits. The first is an internal review conducted by the payroll team itself, and the second is a review conducted by the internal audit team.
Reviews by payroll teams
While businesses may have competent internal payroll teams, the inherent human factor introduces risks. Conducting internal audits without external oversight lacks the fresh eyes and segregation of duties necessary to catch potential compliance breaches.
Reviews by internal audit teams
The problem we have seen with reviews conducted by internal audit teams is that they don't typically have a grasp of the nuances of payroll compliance issues and this can lead to the company having a false sense of security in relation to payroll compliance risk. In other cases, we have seen a limited scope for the internal audit team which can lead to the same problem, particularly if a sampling approach is used.
Reliance on spreadsheets with payroll audits
Traditionally, payroll audits are carried out manually by people and spreadsheets. Excel spreadsheets, though powerful tools, are still operated by individuals who can make typos and errors, impacting the accuracy of formulas. This, ironically, gives rise to future underpayment risk and can often fuel the core issue.
Changing expectations: embracing technology for compliance
In a new era of wage compliance enforcement, businesses are redefining their approach to compliance. Technology is now more trusted than ever, and the expectations of businesses are changing accordingly. Law firms, historically reliant on Excel sheets for wage reviews, are recognising the limitations of manual methods and turning to automation for a more efficient and accurate solution.
Organisations, who may engage law firms of professional services firms to support wage reviews, are expecting more efficient solutions and no longer want to pay for the hours logged by individuals spending unnecessary time on manual tasks.
Why automation and technology are vital for detecting compliance risks
Enter automation—the game-changer in the realm of compliance. By automating the wage compliance review process, businesses can seamlessly integrate checks into their normal operations, reducing the risk of human error.
- Speed and efficiency: Automation allows for a speedy and repeatable process, identifying compliance risks early in the game.
- External oversight: Having a non-human entity conduct the review eliminates the biases, habits, and rituals that humans may bring into the process. This fresh perspective provides a crucial layer of objectivity.
- Elimination of manual tasks: Automation eliminates the need for labour-intensive manual tasks, freeing up valuable time and resources that can be redirected towards value-adding work and business as usual.
- Segregation of duties: Unlike internal audits prone to human error, third-party automated technology ensures a clear segregation of duties, reducing the chances of repeat compliance breaches.
- Complete reviews: Utilising technology in the review process enables organisations to review an entire payroll data set rather than merely a sample.
The automated solution to compliance
How does an organisation implement automation and technology into their compliance framework? Contrary to popular belief, organisations don’t need to completely overhaul their payroll systems to ensure compliance.
Yellow Canary enables large Australian employers to streamline compliance across employee payments, entitlements and Long Service Leave.
Our Always On Compliance (AOC) platform automates monthly reviews, comparing what was paid, to what should have been paid, according to the employee’s modern award, enterprise agreements or industrial instrument. Unlike traditional approaches, Yellow Canary covers every employee in your business, rather than just relying on a sample review.
The AOC platform generates variance and driver reports which enable our clients to rapidly address any issues, avoid protracted remediation projects, and demonstrate to stakeholders and regulators that payroll compliance issues are being addressed.
In a new era of workforce compliance, Yellow Canary is helping employers do right by their employees, whilst avoiding hefty penalties incurred by unintentional underpayments. We’d be happy to support with any inquiries you have about ongoing compliance – just get in touch.
In recent years, industrial relations laws have shifted significantly, placing increased responsibility on board members and executives to proactively manage workforce compliance. Avoiding financial penalties, remediation costs, and reputational damage remains a strong motivator for compliance. However, there is a deeper perspective that can guide compliance in a way that benefits both employees and businesses: prioritising employee well-being is essential for business success.
Changes in the expectations of employers
Compliance responsibilities have increasingly shifted from the corporate level to individuals, especially in areas such as Workplace Health and Safety (WHS) and Respect@Work regulations. This shift is also reflected in the criminalisation of wage theft and the imposition of individual penalties under The Closing Loopholes Acts. Overall, there has been a heightened focus on the employer’s responsibility to support accurate employee compensation and comprehensive workplace safety, including psychosocial aspects.
Employers are realising the importance of embedding compliance into their organisational culture as a proactive strategy rather than an afterthought. With the entry of Gen Z into the workforce, bringing a heightened awareness and confidence to address issues, leadership must be open, aware, and visibly proactive. Embracing this evolving mindset not only can embed compliance into their culture, but also fosters a more effective and engaged work environment.
Focusing on the human
Inadequate compliance frameworks can lead to increased burnout for employees, a condition that has surged since COVID-19. Defined by the World Health Organisation (WHO) as chronic stress that is not successfully managed, burnout results from high job demands, low job control, ambiguity, poor support, and isolation. Manifesting as constant fatigue, negativity, withdrawal, and ineffectiveness, burnout can lead to serious health issues like hypertension, insomnia, substance abuse, and depression. Recent McKinsey research in Australia shows that 24% of employees experience burnout, creating psychosocial risk.
When a business does not pay its staff correctly, it can inadvertently impact the well-being of its employees. For example, where employees are paid a salary yet are exempted from overtime regulations, they will not get compensated for excessively long workweeks. Supporting fair pay practices and adhering to labour laws not only supports employee welfare but also creates a healthier, compliant workplace essential for long-term success.
Shift from reactive measures
Leadership plays a crucial role in establishing a culture of compliance. Leaders must model the behaviours they expect from their teams, take responsibility for compliance outcomes, and ensure that the right teams are engaged in mitigating risks. Proactive leadership can help organisations move from a reactive approach to one that anticipates and addresses issues before they escalate.
Key tips for adopting a proactive approach to compliance and employee well-being:
- Taking responsibility: Individuals with the capacity to influence outcomes should take ownership of compliance within their roles.
- Modeling desired behaviours: Leadership should exemplify and encourage the compliance behaviours they expect from their teams.
- Centralised accountability: Designate a key individual to oversee compliance risks and promote accountability organisation-wide.
- Encouraging collaboration: Foster open dialogue and collaboration among teams to identify and mitigate compliance risks effectively.
- Invest in well-being programs: The program could include a reduction in healthcare costs. Reports from the Australian HR Institute (AHRI) demonstrate that organisations prioritising employee well-being experience higher job satisfaction, organisational commitment, and overall performance.
- Regular audits: Conduct regular payroll compliance reviews to avoid contraventions of the Fair Work Act and ensure your employees are being paid correctly.
People-first governance: A guide to proactive compliance
By focusing on the human impact of compliance and fostering a proactive culture, organisations can not only meet regulatory requirements but also create thriving workplaces. This approach not only protects the business from financial and reputational risks but also enhances employee well-being, job satisfaction, and overall performance. As the regulatory landscape continues to evolve, staying ahead of compliance through a human-centered approach will be key to long-term success.
