The Risk of Underpayment of Wages
Underpayment of wages is a significant issue that can have far-reaching consequences for both employees and employers.
Wage underpayment occurs when employees are paid less than the minimum wage or less than what they are legally entitled to under their employment agreement/contract.
More often than not, this occurs unintentionally for various reasons – e.g. administrative errors, misclassification of employees or lack of awareness around overtime.
But whatever the cause, underpayment of wages can lead to serious consequences. In this week’s Akyra blog, we explore the causes and consequences of wage underpayment, as well as how to mitigate the risks.
Why is underpayment a problem?
Wage underpayment is a serious issue, which can be damaging to employees, and lead to serious consequences for employers.
For employees, underpayment can lead to financial stress, reduced morale and a sense of injustice. It can affect their ability to meet basic needs, such as housing, food, and healthcare.
For employers, the consequences of wage underpayment can be severe. Underpayment can result in legal penalties, damage to reputation, and loss of trust among employees and customers.
5 common causes of underpayment & how to avoid them
- Administrative Errors: Mistakes in payroll processing can lead to incorrect wage calculations. Conduct regular audits of payroll processes to ensure accuracy. This can help identify and correct errors before they become significant issues. Implement reliable payroll software that can automate calculations and reduce the risk of human error. Provide training for HR and payroll staff on legislation that impacts payroll – e.g. Awards, long service leave etc. Keeping up-to-date with changes in legislation is crucial.
- Failing to apply the relevant industrial instrument: Failing to apply the correct industrial instrument can cause a chain of events that leads to underpayments and impacting everything from the wages paid through to leave entitlements and superannuation. Determining what industrial instrument applies should be a simple exercise, but it can be complicated. There are potentially non-award employees, or more than one Award could apply to the workplace. Some employers are also unaware of their obligation to apply an award in the first place, particularly if a salary is paid. An employer cannot opt out of a modern award if it applies to their workplace.
- Misclassification of employee: Incorrectly classifying employees as independent contractors is sham contracting with major financial and reputational ramifications. Ensure employees are correctly classified according to their job roles and responsibilities. This includes understanding the differences between full-time, part-time, casual and independent contractor statuses. A clear position description that forms part of the recruitment process and is then reviewed at least annually will also assist with mitigating the risk of misclassification.
- Lack of awareness around overtime: Employers may not be fully aware of the legal requirements for overtime and the ramifications, particularly where it is a salaried position. One statement we often hear at Akyra is that ‘we pay them a salary’ and assume that, because a salary is paid with a set-off clause, there is no requirement to consider overtime. However, the premium in the salary might not be sufficient to cover the amount of overtime worked, so there ends up being an underpayment. A number of large, sophisticated employers have been caught out by this. A way to manage this is to monitor the hours of salaried employees to ensure the set-off clause actually covers the overtime worked and conduct a review at least annually (preferably 6-monthly) by comparing what the employee would have been paid if paid strictly in accordance with the Award against what they were paid.
- Overlooking leave entitlements (including long service leave): The National Employment Standards details the standard leave entitlements on which most Modern Awards are based. However, managing long service leave entitlements is more complicated as this remains under state legislation… and each state is different. Ensure your payroll can differentiate with accrual of long service leave where there are employees in different state jurisdictions in Australia.
Steps to mitigate the risk of underpayment
- Maintain open lines of communication with your employees regarding their wages and encourage them to report any discrepancies they notice as soon as they notice the discrepancy.
- Stay informed about the industrial instruments that govern the terms and conditions of employment in your workplace and touch base with a professional expert if you are not sure..
- Develop and enforce clear policies regarding wage payments and ensure all employees are aware of them.
The role of technology in preventing underpayment
Modern payroll systems can significantly reduce the risk of underpayment. These systems can automate many aspects of payroll processing, from calculating hours worked to applying the correct wage rates. They can also generate reports that help identify potential issues before they become problems. However, it is also important to regularly audit the system itself to ensure it has been set up correctly.
What to do when a mistake is made
But how should you handle things if a mistake is made?
If there is an accidental underpayment, your response should be immediate and transparent in order to avoid the appearance of intentionality and the associated penalties.
The Fair Work Ombudsman (FWO) has prepared a guide to help employers rectify an underpayment. So, once you gather all relevant information – e.g. wage records, the relevant industrial instrument and then undertake the following:
- Determine how long the employee was underpaid. Review the pay records to identify the specific pay periods in which the underpayment occurred. If you’re uncertain, examine the records for the employee’s entire employment period.
- Work out how much the employee was paid and what they were entitled to be paid. Record the total amount the employee was paid during the underpayment period, noting this is the gross amount before taxes. Next, calculate what the employee should have been paid, considering their pay rate, hours worked and any applicable entitlements like penalty rates, overtime, allowances or leave payments. Ensure entitlements are clearly separated in your calculations to help identify underpaid amounts. Also account for any taxes and superannuation your business should have paid during that time. It is preferable to do these calculations in quarters so that any superannuation can be appropriately calculated to the correct quarter.
- Calculate how much the employee has been underpaid by subtracting what the employee was actually paid from what they should have been paid.
- Discuss with the employee and confirm back payment arrangements. Arrange a meeting to discuss the underpayment with the affected employee. Explain the cause, how it was resolved, and be transparent about the calculations showing the underpayment amount.
- Pay the owed amount as soon as possible, either in the next pay cycle or as a separate payment. If the total is too large for the business to afford as a single payment, agree on a payment plan with the employee and put it in writing, detailing the amount, frequency and method of payment. Ensure the back payment is recorded in the employee’s pay records. Also ensure any superannuation associated with the back payment is also paid.
Case studies and real-world examples
29 August 2024: The Fair Work Ombudsman (FWO) has secured $7,992 in penalties in court against the former operators of a greengrocer in Melbourne’s east for a breach affecting a young international student. The Federal Circuit and Family Court has imposed a $6,660 penalty against Nilkanth Enterprise Pty Ltd, which operated ‘Strawberry Point’ in Forest Hill, and a $1,332 penalty against the company’s owner and sole director, Ashvinkumar Mavjibhai Chavan. The penalties were imposed in response to Nilkanth Enterprise failing to comply with a Compliance Notice requiring it to calculate and back-pay entitlements owing to a casual retail assistant it employed from May 2021 to May 2022. Mr Chavan was involved in the contravention. The worker, aged between 21 and 23 at the time of employment, was an international student from India. Nilkanth Enterprise back-paid the worker a total of $5,474 only after the Fair Work Ombudsman commenced legal action.
18 September 2024: The Fair Work Ombudsman has secured $16,000 in penalties in court against a company that formerly operated two Cash Converters stores in Melbourne. The Federal Circuit and Family Court has imposed the penalty against Yarraville Business Pty Ltd, which formerly operated Cash Converters stores located in Yarraville and Taylors Lakes. The penalty was imposed in response to Yarraville Business failing to comply with a Compliance Notice requiring it to calculate and back-pay entitlements owing to a worker it employed on a full-time basis at the Yarraville store between July 2015 and April 2018 and at the Taylors Lakes store between May 2018 and March 2020. The Court has also ordered the company to take the steps that were required to comply with the Notice, including calculating and paying any outstanding entitlements for a particular period.
23 September 2024: The Fair Work Ombudsman (FWO) has secured a total of $117,190 in penalties in court against the operators of a finance and mortgage-broking company in Sydney, after they failed to back-pay three workers and knowingly issued false or misleading pay slips. The Federal Circuit and Family Court has imposed a $97,710 penalty against First Step Finance Pty Ltd, based in Pyrmont, and a $19,480 penalty against the company’s sole director and secretary, David Brian Ward. The penalties were imposed in response to First Step Finance breaching the Fair Work Act by failing to comply with three Compliance Notices requiring it to back-pay three workers it had employed in management roles and knowingly issuing two of the workers false or misleading pay slips. Mr Ward was involved in the contraventions. In addition to the penalties, the Court has ordered First Step Finance to back-pay the workers their outstanding entitlements.
23 September 2024: The Fair Work Ombudsman has secured $11,990 in penalties in court against the operators of a milk bar in Victoria’s Bellarine Peninsula area. The Federal Circuit and Family Court has imposed a $9,990 penalty against Double Hao International Pty Ltd, which operates ‘The Springs Milkbar’ at Clifton Springs, east of Geelong, and a $2,000 penalty against company director Rong Liu. The penalties were imposed in response to Double Hao International failing to comply with a Compliance Notice requiring it to calculate and back-pay entitlements owing to a worker it employed as a retail worker between March 2018 and November 2020. Mr Liu was involved in the contravention. The Court has also ordered that $3,970 of the penalty imposed on Double Hao International be paid to the worker, which was the amount estimated to be the loss suffered by the worker because Double Hao failed to comply with the Compliance Notice.
Key takeaways
- Underpayment of wages is a serious issue that requires proactive measures to prevent.
- By conducting regular audits, ensuring proper employee classification, providing training, and using reliable payroll systems, employers can mitigate the risk of underpayment.
- Not only does this protect the company from legal repercussions, but it also fosters a fair and positive work environment.
Akyra can assist your business with your wages analysis needs, helping you avoid the challenges of underpayment. Contact us today for an obligation-free consultation.
Disclaimer – Reliance on Content
The material distributed is general information only. The information supplied is not intended to be legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.
