What are causing underpayments of employees’ wages?

Australia has over 120 Modern Awards, plus many enterprise bargaining agreements in place to ensure employees are paid fairly for their work. Within these awards and agreements there are many provisions relating to different penalty rates and entitlements employers must give to their employees. When these provisions aren’t met, employees can be underpaid their correct wages. In the 2020-21 financial year, the Fair Work Ombudsmen recovered almost $150 million in underpayments, illustrating how significant the issue is.

How do underpayments happen?

Prior to the uncovering of large-scale underpayments, there was a general lack of awareness and understanding about paying employees correctly. Many businesses believed that their payroll system would be capable of interpreting the award and paying the employee the correct amount. This often wasn’t the case and it meant many employees didn’t have the correct penalty rates applied to their shifts when they should have.

Another cause of underpayments is where businesses assume a salary will cover all entitlements under the relevant award or agreement. Many of the large-scale underpayments that were publicised in the media were due to salaries being insufficient to cover overtime payments, allowances and penalty rates. The Woolworth’s case was one of the most prominent, in which 5,700 salaried managers were underpaid roughly $500 million over the course of 4 years.

Errors within a business’s payroll will also increase the likelihood of underpayments. Throughout the thousands of payroll audits we’ve undertaken, there have been a number of errors that we see time and time again. Here are the five ones we see the most:

  • Incorrectly classifying an employee or using the wrong award rates,
  • Not paying overtime correctly,
  • Employees not being paid for all their hours worked,
  • Meal breaks not being taken correctly, leading to issues with split shifts and overtime applying, and
  • Employees not being engaged or paid the minimum shift requirement.

The impacts of underpayments?

Underpaying employees on their wages can have numerous impacts to the various stakeholders involved in the process. These impacts can be on the:

  • Employee’s standard of living,
  • Reputation of the business, and
  • Ability of a business to retain and hire suitable employees.

Impacts to the employee

Employees will suffer the immediate impacts of being underpaid through having less money than they should have received. Many employees rely heavily on their pay cheque to pay for their general cost of living, whether it be for food, clothing, or rent, or mortgage repayment. For employees to have less money, it can significantly impact their financial situation and limit their options within their day-to-day lives. Furthermore, due to recent increases in the cost of living, underpayments would no doubt have a larger impact, than they would have previously.

Impacts on the business

Businesses won’t feel the immediate impacts that their employees will face, however once underpayments are uncovered within the business, the damage can be much more severe and longer lasting. One of these impacts is the damage to the brand of the business. This is particularly significant for businesses who rely on their branding and reputation to generate revenue. Once consumers associate a brand with underpaying employees, it can be extremely difficult to change the perception that the business is unethical. Businesses will need to invest heavily in marketing and public relations in order to minimise the damage caused to the brand by negative media reporting.

Poor perception is not just limited to consumers, or potential consumers, it can impact employees or prospective employees too. Current employees may feel betrayed by their employer and lose trust in them, which could impact their morale and increase the likelihood that they depart the business. Prospective employees may second-guess the option to go and work at a business with a poor perception. Overall, this can lead to the business struggling to retain and attract good employees without paying above what they may have previously.

Avoiding Underpayments

Most businesses want to avoid underpayments. However, as we can see from the many businesses who are found to underpay employees, it isn’t always that simple. There are several things businesses can do to improve their payroll compliance and make it less likely that they will underpay their employees.

Adopting a more compliance focused mindset across a business can assist in minimising payroll and employment compliance risk. This can be done through educating not just management staff, but employees too. Ideally, if employees are aware of their entitlements, they may be able to identify if they have been underpaid or not given all their entitlements.

Payroll auditing is a useful measure in identifying employee underpayments through looking back at payroll records. If done regularly enough, errors are likely to be picked up, which will mean employees are back paid quickly and the errors can be fixed up before they grow into large-scale underpayments.

If you are interested in payroll audits, ER Strategies can assist. We have already checked over $630 million of payroll records across more than 3,000 audits. Take a look at how we can help you by clicking here.

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