Article:

Payroll compliance and mitigating risk

30 September 2021

Ben Renshaw, Partner, People Advisory, Global Expatriate Services & Employment Taxes |

With recent and ongoing changes to pay-related legislation such as the criminalisation of wage theft in Queensland and Victoria, the new national minimum wage, and changes to superannuation and taxation requirements, this is a pivotal time for companies to assess their payroll compliance. Failure to accurately pay entitlements owed to employees can result in monetary penalties, imprisonment for individuals committing wage theft, additional interest payments to employees on top of any outstanding underpayments and, perhaps the most visually impactful, reputational damage should an organisation be associated with wage theft and/or payroll discrepancies.

A comprehensive payroll review can mitigate risk and help your business stay out of the headlines. Periodically applying strict scrutiny to this essential business function won’t necessarily be a fun process, but it will keep your company in compliance, uplift and enhance the payroll function, help you avoid hefty penalties, and most importantly keep your employees happy and productive.

Payroll compliance focus

Compliance should be a focus for all businesses, and this should extend to the payroll function. An understanding of the compliance obligations required of the business is the first step. Without understanding what they need to comply with, a business cannot be confident that they have all the checks and balances in place to ensure employees are paid correctly. While organisations generally have good intentions with relation to paying employee entitlements, the day-to-day conflicting workload priorities, complex pay instruments and intricate payroll software systems can be overwhelming, resulting in payroll non-compliance. Regular reviews of the payroll function can give organisations the confidence and road map to compliance.

Four-phase review

At the outset of an internal payroll review, it’s important to remember that payroll is complex. You don’t know what you don’t know. As a result, the review needs to be a collaborative and holistic examination and contextualisation of the payroll landscape.

Phase one

The goal here is to understand key people, processes and technology within the payroll function with a view to assessing areas of risk to the organisation.

A detailed examination of the key payroll process is undertaken and each area is mapped out to understand all key risks and controls, identifying and fixing existing gaps. How are new employees onboarded? How do terminations happen? What about pay runs? What are the allowances and superannuation contributions?

To understand the payroll landscape you also need to know what agreements are in place. What is the basis on which you pay your employees? This phase looks at all the pay obligations that could be outlined through a mix of modern awards, enterprise bargaining agreements, common law contracts and business decisions made.

Understanding people involves looking at the payroll office and noting who takes on which roles in the payroll team. Does segregation of duties help serve as a check and balance to catch human error? Is there an in-house lawyer or an external firm? What support does the business have to help with complex payroll rule interpretation?

Finally, what payroll software system is the business using? Does the business rely on the system, or do you have manual processes that are implemented instead?

This phase is key to identifying where issues of compliance for the organisation may arise, and where resources and analysis could be focused.

Phase two

Now we know the ‘what’ of the payroll function at an organisation, phase two examines whether your systems are set up in compliance with the pay instruments, superannuation and taxation legislation.

This step includes processes looking at pay codes and allowances to see:

  • Do the rates align with the pay instrument?
  • Are you paying tax against them?
  • Are you paying superannuation — and reporting it to the ATO where needed?
  • Are you appropriately applying casual loading and leave loading?
  • Are your accrual rates for leave accurate?

A deep dive is conducted into the payroll software system to look at the configuration and confirm it is in compliance with your obligations i.e. are triggers correctly set-up to pay overtime and penalty rates? Can it determine when allowances should be paid?

In this phase we also look at whether the software has been maintained. Are updates put in when new wage legislation passes? Are there a lot of manual interventions? Is access to the system restricted to only those who need access?

If the payroll software system is set up incorrectly, chances are, you may be paying employees incorrectly without realising.

Phase three

In this phase we undertake transaction testing of the application of pay for employees, to identify any pay anomalies in the application of pay based on real time attendance and employee data. End-to-end sample testing is used to confirm the accuracy of payments to employees.

This step may also include quantifying pay anomalies that are identified in phase one and/or two. When there’s an issue with one employee’s overtime pay rate, we need to not only examine that employee’s payroll history to understand what’s been withheld over the years, but also every other similar employee.

In this phase we can run risk-based data analytics over population payroll data. There are approximately 90 tests we can do at this point, identifying anomalies of all sorts. The resulting data often proves useful beyond payroll purposes, helping to identify outliers and anomalies. Visualisations of pay and employee data can also identify trends and behaviour that may not have been previously recognised.

Phase four

All of the phases come together into a payroll improvement plan, creating an achievable plan for correcting errors, uplifting and enhancing the payroll function, and providing initiatives for continuous improvement.

BDO can help with your payroll compliance

Contact us to proactively assess your payroll process and systems. BDO’s Payroll Advisory team can support a program of work to resolve uncovered issues and enable you to do the right thing by your employees, while reducing the risk of penalties and reputational damage.

The team at BDO also includes many outsourcing payroll specialists who work alongside third-party time and attendance solutions and payroll providers to ensure your organisation has all the tools you need to remain compliant.

If you would like to find out more about Fair Work compliance and our other Payroll Advisory services, please contact the team at BDO today.