Missing wages. Who’s responsible: Bad bosses or bad systems?
Wage underpayments are being unearthed almost daily. So what’s the root cause of the problem and how can it be fixed?
- 2019 PwC research found 13% of the total Australian workforce had been underpaid A$1.35 billion a year.
- While some media reports blame dishonest employers for wage theft, it seems many employers are inadvertently underpaying staff.
- A set-and-forget approach to the payroll function is a major cause of wage underpayment.
By Lynda Dugdale
Are all employees in Australia and New Zealand getting a fair day’s pay for a fair day’s work? Recent media reports suggest not. Headlines in the past few years have been sensational. “How 7-Eleven is ripping off its workers”, “Woolworths pay scandal”, “Bunnings joins the wage thieves” are just a few that have scrolled across Australian news sites.
In November 2019, PwC released modelling using Fair Work Ombudsman (FWO) data that estimated up to 13% of the total Australian workforce had been underpaid A$1.35 billion a year. Industry Super also estimates 2.8 million Australian workers have A$3.6 billion in superannuation stolen each year.
In New Zealand, NZ Post has had to hand 22,000 workers a total of NZ$38 million in miscalculated holiday pay. Fast-food chain McDonald’s has also admitted to a holiday pay hiccup. The Unite Union, which represents McDonald’s workers, claims 60,000 Kiwi staff could be owed NZ$45-90 million in payments going back a decade. (In November 2019, McDonald’s reached a US$26 million settlement with workers in California over underpayment claims.)
While media reports paint a picture of dishonest employers short-changing their staff, that’s not the whole story. Doubtless, some employers are dodgy, but it looks like an alarming number of businesses are inadvertently underpaying their staff.
In many cases, this failure of compliance has been going on for years, with payroll staff and management oblivious to the looming multimillion-dollar liability. One small error replicated every pay cycle for thousands of employees over several years adds up to a large amount.
Super Retail Group, Wesfarmers, Lush, Michael Hill Jewellers and the George Calombaris and Rockpool restaurant groups have fallen short on worker payments, on a massive scale. (And that’s just a few names from a much longer list of employers.)
In October 2019, Woolworths revealed it had underpaid 5700 Australian employees under the General Retail Industry Award (GRIA) over a period of 10 years to the tune of A$200-300 million. The discovery was made during an internal review when the supermarket group implemented a new enterprise agreement. Inconsistencies in pay for salaried employees were found when compared with those paid under the new enterprise agreement.
“Annual salaries for store team members are set to cover ordinary working hours and reasonable overtime… The review has found the number of hours worked, and when they were worked, were not adequately factored into the individual salary settings for some salaried store team members,” Woolworths said in a statement at the time.
Shocked, but not surprised
Picture: Sandra Parker, Australia’s Fair Work Ombudsman.
Australia’s Fair Work Ombudsman, Sandra Parker, says she was shocked and frustrated large listed companies, that should have the resources to do better, continue to classify staff incorrectly, not pay penalty or overtime rates or complete annual pay reconciliations.
How Woolworths came to underpay its staff is a story many industry observers have heard before and expect to hear again. In November 2019, the Australian Senate announced an inquiry into the causes, extent and effects of unlawful non-payment or underpayment of employees, and what measures were needed to address the issue. Submissions close on 6 March 2020 [extended from 14 Feb] and the report is due on 3 December 2020.
In the past financial year, the FWO had 67 matters before the court, many alleging exploitation of vulnerable workers. More than 80% of new litigations involved protecting migrant workers. More than 50% of litigations involved businesses in the fast food, restaurant and cafe sector.
“Whistleblow,” urges Parker. “People need to tell us and they need to tell each other. And we need to deal with it in a pretty tough way.
“There’s no level playing field when you’ve got people deliberately ripping off workers as it affects everybody,” she adds. “It might give a nice profit to that company but everybody else suffers because of the competitive issue that occurs.”
Unions, industry associations, regulators and accounting and professional services firms all welcome the chance to uncover what’s going wrong and provide fixes.
Asleep at the wheel
“Non-compliance is really down to ineffective governance. It sounds negative but it’s true,” says Parker. “There’s been quite a bit of complacency… they are not assuring themselves.”
Tracy Angwin, chief executive of the Australian Payroll Association, which provides training to payroll consultants nationwide, says the issue is that, too often, payroll falls victim to set and forget.
“Or, actually, it’s set and neglect. Everyone just thinks it’s a process, that you press a button and it all happens. What I’m finding is there is almost zero attention to the outputs of payroll. They just set up the system and process it. No-one is checking that the outcomes we get are the outcomes we expect.”
Angwin says those people responsible for paying staff – whether it’s a dedicated payroll team or a small business owner – need to be taught what they should be checking. While a variance report can compare this week’s pay with last week’s, it won’t check that the pay was done correctly in the first place.
Employees, too, should pay more attention to their payslips. “Are you getting all the overtime you’re allowed? Are we paying super on the right things? Is your long-service leave being calculated correctly?” says Angwin.
Although Australia’s Single Touch Payroll regime, which reports real-time payments, can detect issues with super payments, it is not yet developed enough to pick up below-award wage payments. It’s hoped that capacity will come in the future.
National payroll manager at PwC, Rohan Geddes, cites an example that brings many a pay office unstuck. He relates the story of an organisation that pays its employees overtime, which is 150%, or it could pay them Saturday shift penalties, which is also 150%. Whichever code is used, the employee gets the same gross number. In that case, payroll might choose to use just one code. The problem is that overtime is not subject to the superannuation guarantee but the shift penalty is.
The ‘complex’ awards excuse
It’s a scenario familiar to Bernie Smith, the New South Wales branch secretary of the Shop, Distributive and Allied Employees’ Association (SDA), the union for workers in the fast food, retail and warehouse sectors. He says errors are often made at the time salaries are set and often the award is not applied appropriately. An arbitrary salary is applied to cover all the bases but, in fact, employees end up not being remunerated for the actual hours they work.
“They need to have something in the system that flags when people are working additional hours,” Smith says. “It seems they’ve set it off an arbitrary number of hours and not taken into account penalty rates and overtime – just the base rates.”
When Lush cosmetics group self-reported to Australia’s Fair Work Ombudsman in 2018 that it had underpaid more than 5000 staff A$2million over eight years, the company said its payroll system was not “sophisticated enough to interpret and correctly calculate” the intricacies in workplace awards.
The complexity of awards is often cited as a factor in employee underpayments. However, big inroads have been made to simplify Australia’s industrial relations system, slashing the number of awards from more than 1000 to just 122.
“There are some awards, particularly covering workers in hospitality, retail and restaurants, that may have a level of complication to them – some, for example, with more than 50 pay points,” notes a spokesperson from the federal attorney-general’s department. “But this is not an excuse for major employers like we have seen underpaying staff. Large, sophisticated organisations should be able to work out what they need to pay their staff.”
Angwin agrees that some awards are complex and change two or three times a year, particularly in the retail sector. But she says plenty of employers are doing the right thing and have compliant systems.
Adding it up
Outdated technology could lead to mistakes, but ultimately it’s not the system but operator error.
According to the Australian Payroll Association, 83% of 2500 businesses it surveyed in 2019 were using payroll systems developed more than 20 years ago.
“There’s a lot of old technology around,” Angwin says. “That’s not to say it’s poor technology but we do find that people stay on a payroll system for a long time… if you don’t check them and you’re making mistakes, then those mistakes are being replicated every single pay period.”
Geddes says some pay offices come unstuck when technologies don’t talk to each other, necessitating manual intervention. “But we’re seeing that change. There’s more cloud-based technologies coming onto the market that have better integration between time and attendance and the payroll system,” he says.
What about internal controls?
Payroll compliance ultimately is the responsibility of an organisation’s executive and board. However, the intricacies of the function traditionally have not been on their radar. But that’s no longer the case. Requests for payroll compliance audits have surged in the past six months and at least 30% of requests have originated at board level, according to the Australian Payroll Association.
Angwin says external payroll compliance audits are necessary because standard internal audits are designed to check things such as tax calculations and governance. “That’s not going to test that you’re paying part-time staff on the weekends correctly.”
The FWO says boards are not executing enough oversight or seeking the assurance they need.
“Directors should be saying to management, ‘Are our workers being paid for all their hours worked? Are our workers receiving the correct penalty rates for overtime or weekend hours? And if we have workers on annual salary arrangements, are we completing at least annual reconciliation to ensure what they are paid matches the actual hours worked?’” says Parker.
It is crucial that companies keep records of actual hours worked and update pay rates to reflect the changes to award and national minimum pay rates.
“I don’t mean to scare people, but we have attained court penalties against directors as well as accountants where they have been held to be involved in workplace breaches,” continues Parker. “That includes either turning a blind eye that looks deliberate, as in ‘I don’t want to see this’, or where they are encouraging cost saving that is likely to lead to underpayment.”
“I don’t mean to scare people, but we have attained court penalties against directors as well as accountants where they have been held to be involved in workplace breaches.”
Even the Australian government holds the view that many companies are asleep at the wheel. To deter what it calls a growing complacency, it is threatening significantly increased penalties for deliberate and systemic underpayment. In 2017, it increased by ten-fold the penalties for deliberate wage underpayment: up to A$630,000 per contravention for companies and A$126,000 for individuals.
It’s also considering legislation that would criminalise deliberate underpayment, punishing the worst breaches with jail time. Also on the agenda is extending responsibility up the supply chain to combat issues with outsourcing and labour hire companies. (A discussion paper on these changes was released in September 2019, with submissions closing on 25 October 2019.)
Steps to getting payroll right
Geddes cites three elements to run a successful payroll function: people, process and technology, underpinned by quality governance and controls.
Pay office staff need to be properly trained and supported. Angwin says the skills needed to perform the payroll function are very specific and that, on the whole, payroll staff are not adequately qualified. “Pay office staff should have a minimum of a Certificate IV in payroll administration,” she says. “If there was just one thing we could do, that’d be it.”
Geddes adds that the payroll process needs to be grounded in robust internal controls that monitor how the data moves through the system, ensuring there is one source of truth and limited re-inputting.
Technology, including data visualisation, also has a big role to play in detecting and preventing payroll non-compliance.
“The ability to visualise payroll data, roster patterns and hours worked across an entire workforce can bring great insight and value to an organisation,” states a recent research paper by PwC. “This visualisation also enables identification of small past errors, errors that were often minor but have become magnified over long periods.”
But the report warns that the digital skills of staff also need to keep pace. “Over reliance on technology or incorrect use of technology can also exacerbate the underpayment challenge.”
Lindsay Carroll, deputy CEO and legal director at the National Retail Association, says employers need to be better informed and senior leadership more involved.
“It’s not enough any more that your payroll managers be the gatekeepers for all this information,” she says. “It needs to be something that people teams generally, the HR teams and senior leadership teams, need to be asking questions about.”
“It’s not enough any more that your payroll managers be the gatekeepers for all this information.”
One of the most obvious, effective and affordable fixes is an annual end-to-end payroll compliance audit: companies must add a deeper dive into the payroll function and list it as a specific section in the annual audit process.
“There’s a series of stakeholders involved in this – the government, unions, employers and advisers all coming together to look at this issue,” says Carroll. “No one organisation is going to solve this. Businesses all want to do the right thing by their employees.”
Picture: Lindsay Carroll, deputy CEO and legal director at the National Retail Association.
Unions once played a bigger role
One reason underpayments are not being picked up is the diminished presence of unions in Australian workplaces. Until 1996, when statute changes reduced unions’ access to workplaces, union representatives could check roster, time sheet and payroll records to ensure a business was abiding by awards.
According to PwC, the presence of unions was a powerful tool in oversight and compliance and its diminished presence has coincided with a surge in underpayments and non-compliance.
SDA Employees’ Association NSW secretary Bernie Smith cites 7-Eleven as an example. Some of the convenience store chain’s franchisees engaged in significant and chronic underpayment of wages – with some employees earning as little as $11 an hour – and falsifying records.
Smith says that before 1996, the union could have book checked all 7-Eleven workers and would have identified instances of non-compliance.
“It’s in our members’ interests to be able to check,” he says. “If people aren’t getting the hours because they’re being paid correctly and more hours are going to those being exploited, that’s in nobody’s interest.”
Employers with a wages shortfall
This is not an exhaustive list. Many of these employers in Australia and New Zealand self-reported the underpayment issues and have been transparent about their steps to fix underlying issues.
7-Eleven franchisees in Australia were revealed to have inflicted persistent and deliberate wage underpayments on vulnerable migrant workers in an investigation in 2015 by the ABC and Fairfax Media, and a formal inquiry by the Fair Work Ombudsman that identified “a wholesale disregard for minimum wages in some stores”.
Burger King New Zealand’s parent company, Antares Restaurant Group, was banned in August 2018 from hiring migrant workers for a year after it breached the Minimum Wage Act 1983.
Lush cosmetics in 2018 reported it underpaid more than 5000 employees in Australia A$2 million over eight years.
ABC, Australia’s national broadcaster, admitted in January 2019 it had underpaid about 2500 casual staff over the past six years by not applying allowances and loadings.
MAdE Establishment boss George Calombaris (Press Club, Gazi and Hellenic Republic restaurants and the Jimmy Grants chain) announced in July 2019 the group had repaid A$7.8 million to 524 employees, who were underpaid wages and superannuation between 2011 to 2017. The group rebranded its restaurants after a public backlash, but went into administration in February 2020.
Michael Hill Jewellers reported in July 2019 it underpaid workers A$25 million over six years.
Woolworths discovered in August 2019 that it had underpaid about 5700 salaried staff over the past nine years, and could owe them up to A$300 million.
Thales Australia in 2019 repaid A$7.44 million to 407 current and former staff who were paid annual salaries below their enterprise agreements between 2011 and 2018.
Bunnings hardware group in September 2019 admitted it had underpaid superannuation to part-time workers.
Rockpool Dining Group (Rockpool, Fratelli Fresh, The Bavarian and The Argyle restaurants), fronted by celebrity chef Neil Perry, in October 2019 revealed it owed staff more than A$1.6 million in back pay.
Super Retail Group (Rebel Sport, Supercheap Auto, BCF and more) in 2019 reported it had not paid 3000 managers overtime worth A$32 million over six years.
Wesfarmers reported in October 2019 it had underpaid staff by A$15 million.
NZ Post in October 2019 revealed it had to hand NZ$38 million in miscalculated holiday pay to 22,000 employees.
McDonald’s in New Zealand announced in November 2019 it had miscalculated holiday pay to 60,000 staff going back a decade, which could cost NZ$40 billion in repayments. (In the same month, McDonald’s in California reached a US$26 million settlement with workers over underpayment claims.)
Grill’d burger chain in Australia faced allegations in December 2019 it had underpaid staff by up to A$4.23 an hour by classifying them as trainees for an unreasonable length of time. Grill’d has emailed Acuity stating it has a lawful and valid enterprise agreement and that there is no suggestion that Grill’d has ever underpaid staff.
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