Paying your staff correctly and on time is not just good business practice, it’s also your legal obligation. But keeping on top of payroll can be complex and challenging. Getting to grips with minimum wage requirements, modern awards, overtime and penalty rate calculations, deductions, benefits, super contributions and tax obligations can be overwhelming. And the penalties for non-compliance are significant.
In this article, we’ll explore the top payroll risks that small businesses face and how you can avoid them.
1. Underpaying or Overpaying Employees
One of the most common payroll risks is the possibility of underpaying or overpaying your employees. This can happen for several reasons, including:
- incorrect salary calculations
- improper classification of employees
- simple human error
Here are some specific areas where mistakes are often made:
- Incorrect salary payments: Employees may challenge their pay if they believe they’ve been incorrectly compensated. This often happens if they’ve been wrongly classified under the relevant award.
- Age-based pay increases for junior staff: If you employ junior staff, remember their pay should increase each year with their age. Failing to adjust wages will need lead to back payments to cover the underpayment and may have significant legal repercussions.
- Incorrect Overtime Calculations: Overtime rates vary depending on the employee’s award, and not paying the correct amount can result in disputes and potential penalties.
- Missed Deductions and Incorrect Superannuation Contributions: Failing to make the correct deductions from employee’s payment, such as tax and superannuation, can lead to hefty fines.
How to mitigate this risk:
- Educate yourself and your HR/Admin staff: The Fair Work Ombudsman provides basic information and resources to help business owners understand their obligations and calculate pay correctly.
- Consult with HR experts: Given the complexities across pay conditions and classifications, consider working with an HR advisor who can help you ensure that employees are correctly classified and paid according to their entitlements.
2. Non-Compliance with Employment Law
Employment laws protect employee rights. Failing to follow these laws can result in legal action, fines, and damage to your business reputation.
Here we highlight some of the key aspects of employment law you need to be aware of in relation to payroll:
- Provision of payslips: Every employee is entitled to receive a payslip that details their earnings, deductions, and superannuation contributions. Failure to provide these can lead to fines and disputes.
- Record-Keeping: As a business owner, you must keep records of employee time, payments and agreements for seven years. In the case of any disputes or investigations of your staff payments, the onus is on you as the employer to prove what has been agreed upon and paid.
- Clear Policies and documented agreement: Having clear, written policies is crucial. You should also obtain written agreement from each employee that they have read, understood and agree with your policies. This is particularly important for things like leave entitlements, pay conditions, benefits eligibility and workplace behaviour.
- Casual employment and conversion: If you employ casual workers, you may need to provide them with a pathway to permanent employment under the National Employment Standards.
- Employee vs. contractor classification: There are considerable penalties and risks for incorrectly treating an employee as a contractor. Understanding the distinctions between employees and contractors is critical for remaining compliant and meeting your tax and reporting obligations.
How to Mitigate This Risk:
- Put in place robust record-keeping practices: Ensure that all employee agreements and payments are well-documented, stored securely and comply with data privacy requirements.
- Regularly review and update policies: Make sure your business policies are up to date and reflect current laws. Ensure employees are aware of and agree to these policies in writing.
- Seek expert advice: Work with a trusted HR Advisor who understands the relevant employment laws and can help you navigate how they apply to the specifics of your business.
3. Employee Payroll Fraud
Payroll fraud involves the manipulation of payroll data and systems for financial gain. Common examples of employee payroll fraud include:
- Incorrectly recording hours work
- Clocking in for other employees
- Not recording leave days taken
- Creating ‘ghost’ employees in the payroll system and collecting their pay
How to Mitigate This Risk:
- Set clear policies and expectations: Have clear policies that outline expectations and consequences around pay conditions and related behaviours. For example, make it clear that employees are not allowed to clock in or out for someone else.
- Communicate leave recording processes: A lack of clarity around leave recording responsibilities can lead to payroll errors. For example, is the employee or their manager expected to report sick leave to HR?
- Track outputs or outcomes: In businesses where time tracking isn’t common practice, it’s still essential to monitor employee outputs through things like key performance indicators (KPIs). This can help you detect any discrepancies that might indicate fraudulent behaviour.
- Conduct regular audits: Regularly audit your payroll system to identify any discrepancies or unusual patterns that could indicate fraud. You can also outsource your payroll audits to an independent provider.
Payroll is a complex and high-stakes area. The risks of underpayment, non-compliance, and fraud can have severe consequences for your small business.
Just as you would outsource your business financials to an accountant or bookkeeper, it’s wise to seek help from an experienced HR advisor.
A HR professional can help you identify potential issues, ensure compliance with employment laws, and implement more effective processes to safeguard your business from these payroll risks.
If you need guidance around identifying and interpreting modern awards, drafting and reviewing employee contracts or developing your HR policies, book in for a free, no obligation consultation with Dream Admin HR Advisor Tenielle Milani. Contact us at [email protected] or give us a call on 4821 2559.
