Wage theft: What is it and why must it be addressed

After 7-Eleven was found to be systemically underpaying its workers across Australia, the Fair Work Office investigated and required the chain to pay back $144.5 million in wages, $19.5 million in interest and $9.6 million in superannuation. The chain did so after publicly acknowledging its non-compliance and submitting to an investigation. It paid back an average of $21,903.96 to current and former franchise employees between September 2015 and February 2020. Countless other examples of massive corporate underpayment of staff have been well publicised in Australia over recent years.

This is a nightmare scenario for everyone involved; employees would rather be paid correctly each pay period, and payroll staff would prefer to be resourced with the right-size tools to do accurate, ethical work. Executive teams, boards and shareholders do not want their organisations associated with employee underpayments for a whole host of reasons. Aside from the costs associated with remediation and repayment; press coverage, potential public relations and ESG damage can have a huge and long term impact on any business or organisation.

Perhaps one silver lining of this ongoing public scandal is the acceleration of laws and policies to prevent wage theft. Alongside the ever increasing focus of the Fair Work Ombudsman in this area, Victoria and Queensland have both recently criminalised ‘wage theft’, and New South Wales will soon do the same. This will lead to a significant increase in investigations and audit activities, with real penalties likely for those, including directors, who are responsible for getting payroll wrong.

BDO regularly work with companies to help them get it right. Our Payroll Advisory team know how to comb through records and payroll systems to make sure each modern award or pay instrument is applied accurately and consistently. We know the value of proactively improving processes and addressing payroll issues, particularly as governments apply stricter scrutiny to compliance.

What is wage theft?

It’s easy to agree that workers need to be paid properly. It’s much more difficult to apply a magnifying glass to years of payroll processes and transaction data to find misapplied payment codes or incorrectly interpreted award clauses that have perhaps been improperly applied for years, and then determine how the issue came to pass.

But it happens all too frequently. Perhaps a pay code was incorrectly configured to not apply superannuation contributions because someone forgot to tick a box, or appropriate consideration was not given to whether annualised salary levels were sufficient to meet all award obligations, resulting in employees being underpaid for overtime hours worked. Do these errors, likely made years ago, constitute ‘theft’?

It’s certainly a real and pressing question. Away from newspaper headlines, the legal definition of wage theft underlines one word in particular: deliberate.

Wage theft can take various forms but is typically characterised by deliberate underpayment of wages and entitlements such as annual leave or Superannuation.

Payroll errors can, and do, happen - but is it theft? Legally, this is a question of intent.

Payroll errors are a compliance issue, and need to be addressed. Regardless of whether a legal ‘theft’ has occurred, and we expect that in a large majority of cases it hasn’t, these issues are best assessed, addressed and resolved before state and federal bodies become involved.

Where it can go wrong

There are four problematic areas impacting payroll compliance which businesses and organisations will likely need to consider:

Time and attendance recording

Without a standardised way of recording time and inputting payroll data, it’s easy for things to go wrong. Human error can happen easily and result in incorrect payments or accruals. Say, for example, that a grocery store employee should receive a higher rate of pay when they work more than one hour in a cold storage area. If the proper time and attendance tracking isn't in place — or if payroll codes aren’t configured properly — the employee won’t receive their full entitlement.

Indeed, when end-to-end employee activity isn’t tracked properly and processes aren’t up to scratch, problems will result.

Paper log books should be a thing of the past, especially for employees whose entitlements might include different rates of pay for overtime penalties or working in certain conditions. After all, the more difficult it is for each employee to communicate to payroll staff the kind of work they’ve done and when, the harder it is to pay each employee what they are entitled to.

Award Interpretation

Correct time and attendance data is clearly important, but is only the starting point. The Australian Industrial Relations (IR) landscape incorporates 121 Modern Awards together with countless Enterprise Bargaining Agreements (EBAs).

Understanding which applies, and then interpreting the clauses found within the relevant instrument, is far from straight forward and is a common driver for errors in pay. Constant attention is required to ensure that employees are classified correctly, are paid the correct rates and allowances for the work they do, and are allowed the correct breaks both during work hours and between shifts. Employee contracts need to be drafted with an eye on compliance, and annual changes to Modern Awards need to be considered and implemented.

Fit for purpose payroll technology

As a consequence of the above, ensuring that the setup and configuration of the payroll technology software accurately reflects the pay instrument and can accommodate complex entitlements and regular changes, is critical. Payroll solutions need to be built to deal effectively with both time and attendance data, and modern award rules in order to pay employees correctly. Payroll also needs to be configurable as rules change, incorporate a user-friendly, repeatable and well controlled process in order to reduce the risk of undetected error, and able to produce reports to support both BAU and periodic review and audit processes.

Resourcing, training and collaboration

Many businesses grow quickly after starting up, with perhaps just one person handling payroll as an adjacent duty. Failing to see the need for a professional approach to supporting back office functions like payroll can create a risk of non-compliance. Teams need to be resourced appropriately as a business grows and becomes more complex.

As with any other part of the business, training, career progression and succession planning all need to be carefully considered. For end-to-end payroll to be successful, input and collaboration will also be needed from finance and legal as well as front line employees and managers.

Older small-to-medium sized businesses may employ one long-time colleague to handle payroll. When that person leaves, they take their knowledge and understanding of the company’s creaky payroll system with them. This is a massive problem.

BDO can assist with your payroll compliance

As the landscape becomes more complex, and both Federal and State bodies continue to ramp up their approach to investigations and penalties, leaders and managers must make sure fit-for-purpose, end-to-end payroll functions are implemented and maintained. BDO has a wealth of experience in this area.

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.