RSM Australia

The case of employee underpayments

Tax Insights

Several large companies, including Westpac, Woolworths, Bunnings, and the Commonwealth Bank, have made front-page headlines for employee underpayments.

Minor errors have resulted in significant financial consequences and reputational damage, receiving increased attention from the Fair Work Ombudsman. The Government had also commissioned several inquiries.

employee underpaymentsNon-compliance will not only mean harming the profile of the organisation, but also the Directors personally, as they may be exposed to the Director Penalty Regime for non-compliance with PAYG-W, and employer superannuation contributions. Not to mention the additional costs associated with rectifying any underpayments, together with the associated penalties and interest charges, which may be imposed by the ATO and/or Fair Work.

While we are being reminded of the importance of legislative compliance, we often overlook the financial reporting implications this issue can bring to an organisation. The following issues may have a material impact to the entity’s financial statements:

  • Have you considered if it constitutes a provision or a contingent liability under AASB 137?
  • Have you considered if it also triggers a provision for tax uncertainty as per Interpretation 23?
  • Which financial year did the underpayment occur, and hence should have been reported?
  • If the underpayment relates to the prior financial year, do you need to restate prior-year figures and disclose a 3rd Balance sheet as per AASB 108?
  • What are the disclosures requirements?

AASB recently published a Staff FAQ on Remuneration Underpayments. It outlines accounting standards that may be applicable when accounting for the underpayments.

Employee underpaymentsMinor errors may have caused material impact

Woolworths admits underpayments of approximately $390 million since early 2010. Westpac announced that it is expected to pay $8 million to 8,000 staff who were underpaid their long-service leave entitlements. These were a result of minor mistakes that were made inadvertently.

What are some of the common causes of these mistakes?

  • Knowledge gaps: the calculation of an employee’s entitlements may not be as simple as you thought. Employers often have a knowledge gap of the application of relevant employment awards, industrial instruments, and other legislative requirements of PAYG withholding, superannuation and other compliance obligations.
  • Multiple awards: in some industries, such as health care, employees can be subject to several awards with subtle differences between them. This complicates the configuration of the payroll system.
  • Rapid growth: the payroll system simply cannot keep up with the rapid growth of the company.
  • Annualised salaries: some employers incorrectly rely on the use of annualised salaries, without realising that it may not be permitted by most industrial awards, over the use of discrete awards or enterprise agreement entitlements.
  • Poor record keeping: some awards require the actual hours worked to calculate minimum requirements and failing to keep accurate records of working and break hours makes this task almost impossible.

What are your next steps?

Firstly, companies should address knowledge gaps. In our publication, Old Payroll Systems Are a Recipe for Disaster, we named the following key questions that a company should consider regarding payroll compliance:

  1. Wemployee underpaymentshat is the staff turnover rate?
  2. Is the business undergoing rapid growth?
  3. Are employees paid cash salaries?
  4. Does the business know its payroll obligations?
  5. Is the business complying with legislative requirements?

Secondly, analyse your payroll data. You can invest in data analytics tools, like PowerBI, which will provide rapid insights into your payroll data. Data analytics tools will help you sort through complex payroll data, make sense of the data, draw meaningful conclusions and assist in making informed decisions. You may also gain insight into your company’s current position, spot hidden trends or relationships you can act on.

Lastly, attend to potential tax and financial reporting implications. You should ask your tax professional, auditor or business adviser for guidance on the best course of action. Some common issues to address include:

  • Employee underpaymentsTax for statutory requirements addressing PAYG-W, reporting obligations under the Single Touch Reporting (STP) regime
  • Ensuring Employer Superannuation contributions are based on the appropriate components of an employee’s remuneration, paid within the appropriate timing to the employee’s nominated complying Australian superannuation fund
  • Complying with State based legislation in respect of WorkCover and Payroll Tax
  • Technology for data analytics and automation tools and systems
  • Forensics for spotting exposure points and to manage the full set of pay obligations in an efficient and effective way
  • Payroll Assurance Review on your existing remuneration processes and obligations to identify issues and, importantly, root causes of potential discrepancies
  • Update your existing remuneration processes for future payments, recalculating correct past amounts, and developing a remediation process where required.

HOW CAN RSM HELP?

If you have any questions regarding payroll or financial reporting, please get in contact with your local RSM adviser.

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