Inaccurate payroll can be a silent but costly problem, especially if it goes unnoticed for an extended period.
The potential costs of non-compliance might be all it takes to consider an audit of your payroll systems.
With that in mind, we thought we’d outline how these costs can accumulate, extending beyond just employee repayments.
The high stakes of payroll accuracy
Mistakes in payroll can be costly, both financially and legally. Errors can result in substantial financial losses, and even worse, they can land your business in serious legal trouble.
The repercussions range from fines imposed by the Fair Work Ombudsman or the Australian Taxation Office (ATO) to potential lawsuits and damage to your company’s reputation.
It is estimated that staff underpayments costs Australians $1.8billion on average, every year. In Australia, business owners and management wear the consequences of any payroll mistakes.
If a business is found to be in the wrong a court may impose orders against a business owner found to have done the wrong thing. Those court orders may:
-
- Make a person pay an amount of money as a penalty for not doing what the law says, up to:
- $18,780 per contravention for an individual
- $93,900 per contravention for a company with less than 15 employees
- $469,500 per contravention for a company with 15 or more employees.
- Make a person pay a higher penalty for some ‘serious contraventions’, up to:
- $187,800 per contravention for an individual
- $939,000 per contravention for a company with less than 15 employees
- $4,695,000 per contravention for a company with 15 or more employees.
- Make a person pay an amount of money as a penalty for not doing what the law says, up to:
These numbers are nothing to sneeze at, which brings us to looking at …
Common payroll errors and how to avoid them
Despite the high stakes, payroll errors are not uncommon. Mistakes can occur due to human error, a lack of understanding of legal obligations, or confusion caused by the complexities of modern awards and registered agreements. Most of which is completely preventable with the right advice . So, let’s look which errors are most common …
1: Underpayment
Employers are responsible for ensuring their employees receive all entitlements when paid for the work they do. However, calculating these entitlements isn’t always straightforward. Errors can happen in calculating base salary, overtime, penalties, allowances, and superannuation, leading to underpayment.
Deliberate underpayment, known as “wage theft,” has become a significant issue in Australia. From 1 January 2025, deliberate underpayment will be illegal under the Fair Work Act. There are already fines for such actions, with penalties running into hundreds of thousands of dollars. For example, in 2019, A & S Wholesale Fruit and Vegetables Pty Ltd were fined $243,000 for underpaying workers.
To avoid underpayment, it’s best to review your payroll system regularly to ensure all payments are correct and comply with current legislation and awards.
2: Overpayment
Although less common than underpayments, overpayments can be just as damaging to your business.
In 2020, the Australian Payroll Association found that 27 out of 39 audits on clients’ payroll processes uncovered overpayments, some of which cost employers millions of dollars.Overpayments can be challenging to recover and may strain relationships with employees, especially if they were unaware of the issue.
3: Minimum wage compliance
Compliance with minimum wage laws is non-negotiable. As of 1 July 2024 the National Minimum Wage is $24.10 per hour or $915.90 per week. Most employees are covered by an award that stipulates a minimum rate higher than the national minimum.
Failing to pay the minimum wage can lead to significant penalties, and businesses must stay updated with the latest rates through the Fair Work Commission’s annual reviews.
This leans neatly into correctly classifying the awards your employees are working under – if they’re not set up the right way, you’re heading for an issue.
4: Unlawful deductions
Deductions from an employee’s wages must be lawful, reasonable, and agreed upon in writing by the employee. However, some businesses either through ignorance or deliberately, make illegal deductions.Unlawful deductions can lead to significant penalties, and employees have the right to challenge them before the Fair Work Commission. The easiest rule to follow here is – don’t take deductions without first conversing with your employee about it…
5: Payslips and record-keeping
Proper documentation is just as crucial as making accurate payments. Employers are required to provide payslips to employees within one working day of payment and maintain comprehensive time and wage records for seven years.
Failure to keep accurate records can result in fines, and the Fair Work Ombudsman actively prosecutes businesses for such breaches.
The importance of a robust payroll system
The process of calculating and distributing pay can be complex but having a robust payroll system is crucial to ensuring compliance with all legal requirements. Whoever manages payroll in your organisation is doing more than just data entry, they are safeguarding your company from significant risks.
Legislation and modern awards frequently change, so your payroll system must be up-to-date with classifications, pay rates, leave loading, and allowances. Investing in good payroll software tailored to the Australian business environment, coupled with strong HR oversight, will ensure accuracy and legal compliance.
