How to avoid costly underpayments and payroll issues

In recent years, the spotlight has been on Australia’s hospitality industry as a result of major restaurant groups underpaying staff.

Most famously in 2019, restaurant group MAdE Establishment was ordered to backpay $7.8 million in wages and superannuation after it underpaid over 500 current and former employees.

While underpayments occur in every industry, the reality is it disproportionately impacts hospitality workers, who make up just 7.2 per cent of the labour market but account for more than 25 per cent of all underpaid workers, as uncovered by the Fair Work Ombudsman.[1] This is due to the industry’s high proportion of casual and contract workers, penalty rates and extended operating hours, as well as high rates of overtime worked.

As an employer, you have an obligation under the Fair Work Act 2009 to correctly pay staff according to contract agreements for their hours worked. Employers must also understand that correctly paying staff is not just about correctly paying wages, but also entitlements such as superannuation guarantee, annual leave, time in lieu or overtime, ensuring adequate breaks between shifts, and more. Having a payroll system that generates accurate time and wage records is critical.

What are the consequences of underpaying staff?

Underpaying staff can have severe consequences for hospitality businesses and can result in financial penalties, cash flow pressure, high staff turnover and reputational damage. For staff, it can lead to decreased workplace motivation, absenteeism and high stress. In Victoria, where wage theft is a crime, employers can face $1.1 million in fines and ten years prison time.[2]

Why do underpayments occur?

It is rare that businesses underpay their staff intentionally. Most of the time, underpayments occur when employers do not understand their payroll obligations or do not have administrative procedures in place to ensure compliance.

The most common forms of underpayments and payroll errors we see in the hospitality industry are:

• ‘set and forget’ use of annualised salaries and loaded up pay rates
• outdated payroll and timesheet systems
• staff working overtime or using penalty rates that are not recorded
• superannuation guarantee not being correctly paid
• employees not being paid their minimum shift requirement
• staff taking breaks too late or too early in their shift, causing issues with split shifts
• incorrectly classifying an employee or using the wrong award rate.
  
  

“Reasonable” overtime

Underpayments often occur due to the expectation that workers receiving an annualised salary should work reasonable additional hours without overtime pay.

While this is accepted and common practice, it is only permitted when workers are paid well enough or above their respective award hourly rate, so their additional pay compensates for the overtime hours.

In 2018, the Vue Group came under fire for this when their pay rates of 25 per cent above Award was deemed insufficient to cover the large amount of overtime they expected from workers.[3]

How can employers prevent underpayments?

To protect your business from costly losses, employers can best avoid underpayments by:

• conducting regular audits to catch and resolve payroll issues early
• ensuring staff are classified under the right Award, and regularly reviewing this classification as it can change with staff picking up additional responsibilities
• keeping detailed timesheets and pay records to make sure employees are properly paid and have the proof to support it
• ensuring staff are taking appropriate breaks and using their time off as required
• ensuring you are up to date with wage increases, employee benefits and any other changes that could affect payments
• establishing accounting practices that correctly pay the employees’ superannuation guarantee.

Changes to Awards, vague terminology and a myriad of other factors can make the process of keeping compliant and properly paying employees unnecessarily confusing. Reaching out for legal counsel is the best way to prevent any misunderstandings and protect your business from the large penalties, bad publicity and increased turnover rate that can follow underpayment claims.

About Charles Power

Charles is a Partner and the National Chair of the Workplace Relations & Safety team at Holding Redlich. He has a strong practice representing employers in all aspects of employment and industrial law, including wages and compensation, HR policies, enterprise bargaining, employment contract negotiation and more. 

If have any questions about underpayments or how to be legally compliant, please contact Charles at charles.power@holdingredlich.com.