Compliance risk can lurk even behind clean pay runs. From reliance on manual workarounds to poor payroll governance, an expert explains the signs to look for and how HR can respond.
Every month, when the right pay lands in every employee’s account, payroll breathes a sigh of relief.
But what looks like a well-oiled machine on the surface might be hiding a team of overstretched payroll experts applying workarounds, manual adjustments and a significant cognitive load, as they interpret the complex Australian Award landscape.
It’s an issue showing up more frequently in the courts, with costly repercussions for employers. In fact, the cumulative back-payments for Australian workers across the last six financial years is close to $2.5 billion, according to the Fair Work Ombudsman.
“A payroll team can look stable until a key expert leaves or is unavailable,” says Matthew Kane, Vice President of Solution Advisory at Dayforce.
“Payroll people need to take leave too and should be allowed to take it in more than blocks of two weeks without causing a business failure.”
It’s a pattern emerging across the workforce. Fifty-four per cent of Australian employees surveyed as part of Dayforce’s 17th Annual Pulse of Talent report believe important knowledge is becoming concentrated among fewer people.
Aside from legal exposure and underpayment risks, miscalculated payments can create reputational damage for your organisation.
“It impacts your employee value proposition and your brand, making it difficult to attract talent. It can also create cultural issues. There’s a long tail of downstream impacts that are often not considered,” says Kane.
Kane will be speaking at AHRI’s upcoming Payroll Compliance in Practice webinar on 11 November, where participants will learn how HR and payroll teams can build a more proactive approach to wage and pay compliance.
Below, he identifies common ‘red flags’ HR should look out for:
1. Systems aren’t set up compliantly
A recent $55.2 million settlement approved by the Federal Court against a major supermarket retailer highlighted the importance of deeply scrutinising your pay processes.
Among the issues raised was an automated rounding rule that adjusted recorded punch-in and punch-out times to match the roster, which, according to the claim, meant time employees actually worked wasn’t always paid.
What began as up to 10 minutes of rounded-down time per shift grew into an alleged underpayment affecting about 32,300 current and former ALDI employees across Australia.
What can HR do?
Key action points for payroll teams are to:
- Audit payroll and rostering systems end to end, including any rounding rules that you might not be aware of, against the relevant award or agreement.
- Have someone independent of payroll test the outputs for underpayment.
“Good payroll compliance starts not where the roster ends but with what employees are genuinely required to do.” – Matthew Kane, Vice President of Solution Advisory at Dayforce.
2. Manual workarounds behind a ‘clean’ pay run
Rules built into payroll systems are one way that pay can drift from reality. Another is the pressure on the people running those systems.
As understaffing becomes more normalised, overextended payroll experts are often struggling to manage their organisation’s payroll in less-than-ideal conditions, says Kane.
“The payroll superstars in your team might be frantically trying to fix and manually adjust things to get the pay across the line before the deadline.”
This can lead to undocumented workarounds and decisions which may pose compliance risk down the line, such as a payroll officer manually overriding a system-calculated penalty rate to get the pay run out on time, with no record of why or who approved it.
What can HR do?
- Regularly reconcile scheduled, recorded and paid time.
“Employers need to test the gap between the roster, the clock-in system records and what happens on the shop floor, in the warehouse or in your head office,” says Kane.
“Good payroll compliance starts not where the roster ends but with what employees are genuinely required to do.”
- Make it easy for staff to flag pay errors.
“Ensure employees have a straightforward way to flag missed or incorrect pay. Those reports or cases that they raise [should] trigger root cause analysis rather than just one-off corrections,” he says.
To learn how you can create a single source of truth across HR and payroll and establish effective checks and controls to support continuous compliance, register for AHRI’s Payroll Compliance in Practice webinar on November 11.
3. Failing to regularly capture payroll expertise
When a payroll expert departs the business, the risk isn’t just about losing headcount.
“It’s losing judgment. It’s losing history. It’s losing the workarounds and the corporate knowledge that sit in that person’s head,” says Kane.
In what Dayforce is calling ‘high-fragility organisations’ – those facing intense pressure and concentrated dependency – 39 per cent said that work depends heavily on a small number of people.
“This is going to be amplified in the payroll space… payroll teams and also HR teams are stretched because most organisations underinvest in the resourcing of both functions,” says Kane.
What can HR do?
- Map every payroll role, critical activity and decision point to named people.
Include documented backup, crisis cover and successors, and flag any single points of failure.
“If we have two payroll team members, who are our backups? Who’s our crisis cover? Who are our possible successors?”
- Build cross-training into day-to-day operations, not just handovers.
“Payroll teams need to have a continuous learning mindset and adapt to changes in modern awards, enterprise agreements and Fair Work decisions, as well as evolving workforce practices such as flexible work, varied employment arrangements and changing schedules.
“Each change should be documented, tested and governed before it affects a pay run,” says Kane.
- Treat succession planning as a compliance control.
“Succession planning in payroll should be treated as a compliance control, not as simply a talent activity,” he adds.
It must have an owner, a review cycle and evidence, so it isn’t dropped when the team is busy.
“Compliance cannot exist without the people, process and technology ‘triangle’. All three are critical, particularly in the payroll sphere.” – Matthew Kane, Vice President of Solution Advisory at Dayforce.
4. Poor payroll governance
The complexity of the Australian employment landscape means payroll experts are often making crucial judgements each pay cycle, such as applying award interpretations.
“Australia has one of the most complex employment landscapes in the world, with the modern award system and enterprise agreements through unions.
“It requires deep business knowledge and knowledge of how employment works in Australia,” says Kane.
To help manage compliance risks, organisations should document and regularly review the processes around payroll decisions.
“It’s about operational coverage because, ultimately, organisations are creating business risk by not having these processes and controls built into their payroll governance models.”
What can HR do?
- Document award interpretation decisions and the reasoning behind them.
“It’s the processes that surround those decisions and the ongoing reviews and checks of those decisions that make organisations more successful in achieving their compliance goals,” says Kane.
- Set up a governance committee.
“There needs to be governance committees in place, so knowledge is shared across multiple people within the organisation and the decisions that have been made aren’t just sitting in one person’s head.”
- Implement a payroll governance plan, approved by your executive team or board, and audit regularly.
“I don’t think there’s a one-size-fits-all for reviews, but a common practice that we see is a monthly or quarterly governance committee with risk registers, audit checks, KPIs around the metrics that matter,” says Kane.
Important metrics might include how many exceptions were generated per run, how many off-cycles are being run and how many manual adjustments are being made.
The people, process and technology ‘triangle’
“Compliance cannot exist without the people, process and technology ‘triangle’. All three are critical, particularly in the payroll sphere,” says Kane.
“Good payroll compliance doesn’t end where the roster ends… Compliance can’t solely rely on whether a system has been configured correctly. Employers need to have processes and governance frameworks in place to help ensure the system reflects the real work practices.”
Ultimately, employers remain responsible for getting pay right and HR plays a central role in balancing these three elements to help reduce legal exposure for the business.
Want to learn more about how HR and payroll teams can build a more proactive approach to wage and pay compliance? Register for AHRI’s Payroll Compliance in Practice webinar on 11 November.
