CFOs Play a Critical Role in Navigating Payroll Compliance

A number of major Australian businesses have been in the news for all the wrong reasons because they have underpaid staff, often to the tune of millions of dollars going back years. But it’s all too easy for companies to make payroll mistakes, given how complex employment laws and the payroll system is – even if it has been simplified.

CFO Magazine Australia’s most recent webinar, The CFO’s Role in Navigating Payroll, was an opportunity to hear from the experts about how CFOs can approach compliance when it comes to payroll.

Systems critical in payroll

Kevin Brooks, national sales manager for Australia’s largest tech company Datacom, says any systemic problems CFOs may have with payroll are compounded by the new operating environment created by the pandemic.

Measures such as the first and second iterations of Single Touch Payroll, JobKeeper and changed business conditions as a result of working from home and hybrid ways of working are making it even trickier for finance teams to ensure their payroll processes are legally compliant. Which makes it more important than ever to ensure the correct payroll processes are in place across the business.

At the same time, CFOs now have a less visible workforce, so they need new ways to measure outcomes. Says Fisher: “COVID has accelerated this process. But there’s a collision between modern working practices and the legal constructs in which we operate.”

Payroll is demanding, which is why it’s essential to have well-designed systems, says Brooks. One million businesses have staff who are employed under an award, so it’s critical to ensure annualised salaries are accurately calculated.

“Tracking full-time employees’ hours is absolutely essential. If a business is audited by the Fair Work Commission and called in for failing to follow correct procedures, directors may be subject to fines,” he adds.

Given the shift to working from home, Brooks’ advice is to implement a business continuity plan to ensure payroll data is secure. This includes the ability to back up data remotely using location-independent services.

“More organisations are looking to outsource payroll using cloud-based solutions so they have access to accurate payroll data on demand,” he says.

Different types of underpayment

Campbell Fisher is the managing partner and solicitor director of Australia’s leading workplace relations lawyers and consultants, FCB Group. He says one of the challenges for businesses and their CFOs is the media lumps underpayment in the same category as wage theft, which makes payroll a reputational issue.

Fisher explains there are actually three categories of underpayment. The first is genuine wage theft, which happens when businesses deprive their staff of their wages or salary by not paying them. “Or you might find they stand over staff when they are at an ATM and ask for their cash back,” he says.

The second category of underpayment happens when people don’t pay staff members property because there is pressure in the business to produce financial results. “This is known non-compliance with the law, where managers turn a blind eye to non-payment of staff, says Fisher.

The third and most common category of non-payment happens when businesses fail to invest in the right systems to make sure they comply with employment law. “While this behaviour may be inadvertent, it’s still lumped under wage theft,” he adds.

Wages are often one of a business’s largest expenses and research indicates the extent of  payroll non-compliance. One study by professional services firm PricewaterhouseCoopers indicates businesses underpay staff to the tune of $1.35 billion each year.

It’s surprisingly easy, however, for firms to find themselves in hot water for not paying staff if they don’t have the right systems in place. For instance, on Fisher’s figures, they can easily accrue a $2 million underpayment problem simply by underpaying 300 people in a business with 1000 staff by one dollar a week for 52 weeks.

“It’s a real challenge for businesses if there is a systemic problem with payroll – and it’s an even worse issue if there are three or four problems in the system,” Fisher says.

As James Solomons, global CFO of online reference checking platform Xref and the webinar’s host told the audience, “a one-dollar mistake can really add up. You can see how payroll problems get out of control, even when businesses are not intentionally underpaying or not paying staff.”

Opportunities to be proactive

For CFOs, the first step to manage payroll risks is to use an external audit function. It’s also an idea to ensure payroll is on the business’s risk register. There are also other mitigation tactics CFOs can put in place.

“Maintaining systems is important. Be proactive and remember investing in preventative audits to identify potential problems in payroll is far less expensive that having to perform remediation audits when things go wrong,” says Campbell.

Given the degree of complexity involved, it’s also useful to outsource payroll data management. “Organisations want to control the data themselves. But this is often a huge mistake. Businesses underestimate what’s involved in getting the data right,” he adds.

Brooks’ advice is to insure information is validated before it enters payroll systems. “The future of payroll is systems. Businesses that fail to invest in this have very little chance of having access to accurate data that allows them to comply with employment law,” he stresses.

Aside from compliance risks, it’s essential to get payroll right to cement the appropriate culture across an organisation. After all, if a company gets a staff member’s pay wrong, it can threaten their trust in their employer, which can affect retention rates and the business’s ability to attract good employees.

Payroll is complex and challenging, which is all the more reason to pay it as much attention as possible. Because businesses that don’t risk more than just compliance breaches. It can have effects right across the enterprise well into the future.

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