The issues of underpaying wages and wage theft have been highlighted by numerous high-profile cases in recent years. Payroll might not seem like a high-risk function in your business, but it can be associated with significant compliance risks. The complexities of payroll regulations, wage calculations, and constantly changing laws can make compliance a headache for a lot of small businesses. In addition to legal ramifications, the prospect of reputational damage can prove to be costly for organisations that fail to comply. Knowing the key risks is the best starting point to managing payroll and ensuring you’re fulfilling your legal obligations. Here, we’ve outlined the top seven payroll risks with a few insights on how to avoid or deal with them.
The law requires employees to be paid at least their minimum pay rates and entitlements, with extra pay for overtime and penalty rates applied for certain specified times. Wage underpayments, especially deliberate cases, come with serious penalties and fines, and even criminal penalties in some states. Even if it’s an honest mistake and you’ve accidentally underpaid your staff due to error, you could attract the attention of government authorities and experience reputational damage. An accurate, up-to-date system for calculating wages and entitlements can help mitigate this risk.
2. Recordkeeping and payslips
Employers are required to keep accurate employee records and issue pay slips with relevant details. Records must be kept for seven years. Noncompliance in terms of recordkeeping and payslips can also lead to serious penalties. Careless errors may not provide a defence and could lead to serious consequences as the onus of proof will be on the employer to prove they did meet these obligations.
3. Tax and entitlements
Employers may be required to register for payroll tax and comply with calculations and reporting obligations. You need to ensure you’re including all liable wages in the calculation of the total wage, for example, and declare all fringe benefits and benefits under employee share schemes. The timing of lodgement and payment of returns is also a possible compliance risk; the ATO has strict due dates for these. Penalties apply for the failure to register and for providing false or misleading information in submitted payroll tax returns.
4. Employee classification
Incorrectly classifying employees can be another payroll risk. Perhaps you’ve classified an employee as a contractor, or a full-time employee as a part-time or casual employee. These, even where due to honest mistakes, can lead to underpayments and other legal breaches. In turn, they can result in significant penalties and reputational damage for your business.
Do you regularly audit the work of your in-house payroll team? In addition to human error, payroll fraud could lead to significant risks for your business. Any fraudulent activities can prove to be costly for your business, draining your cash flow and revenue while exposing you to legal risks associated with poor recordkeeping and compliance. Regular audits and oversight are essential to counter this risk. Alternatively, outsourcing your payroll to a trusted provider can prevent this type of fraudulent activity from occurring.
6. Poor security and backups
Are you confident your payroll system is well secured with the right infrastructure and security measures? Consider the amount of private data that your system houses, from employee addresses and contact numbers to tax file numbers. Your system should be secured with multiple layers of security for access. Employee data and personal information may be protected by laws like the Fair Work Act 2009 and the Privacy Act 1988, and you might need to take stronger measures to keep this data secure.
Additionally, regular backups are vital for guarding against data loss. Without regular backups, you could be exposing your business to penalties for poor recordkeeping. Moreover, you’ll likely experience business interruption as you may be unable to pay your employees on time. Schedule regular backups that are stored away from your main storage system.
7. Reliance on a single employee
Are you relying on a single employee in your payroll function to do all the work? If your employee leaves, what happens on payday? You could avoid this risk by establishing a plan for easy handover. You should have detailed documentation of payroll processes that allow other staff to pick up the function quickly. Alternatively, make sure you have at least two or three employees able to take on payroll responsibilities.
Strategies for countering payroll risks
One of the best things you can do is outsource payroll to a dedicated vendor, to ensure everything from reporting to pay conditions reflect the latest regulatory changes. You’ll be able to focus on your core business activities and rest in the knowledge that your payroll is being looked after by experts.
However, if you’re processing payroll in-house, start by controlling access to your payroll system and employee data. Have an independent auditor check your system and records regularly. Require multiple staff to approve, check, and review pay processing. Staff should keep up with the latest compliance changes. Sign up for regulatory alerts to keep ahead of legislative changes. Offer training and encourage them to attend seminars, webinars, and other events for the latest knowledge.
If you’re migrating employee data, have an IT expert oversee the process so you can avoid losing crucial records and data you’re legally obligated to keep. Use payroll variance analysis, ideally every month, to scan for variations and discrepancies. However, it’s advisable to reconcile your key accounts with every pay cycle rather than every month or quarter. Speak to your accountant for advice about optimising your payroll and keeping your records accurate and up to date. Finally, this easy-to-use payroll compliance checklist will help maximise compliance by allowing you to identify areas of risk in your payroll.
Payroll is a function that ideally runs smoothly in the background of your business while you and your team concentrate on principal activities that generate revenue. For this to happen, you’ll need to be aware of the major risks and have tools and procedures in place to mitigate them. Costly penalties, reputational damage, and business interruptions are some of the potential consequences of not addressing payroll risks. If you have an in-house payroll team, support them with ongoing training activities and a well-designed payroll system, with regular audits and checks. By managing your payroll risks, you’re fulfilling legal obligations and facilitating a system that allows your staff to be paid correctly and on time, both of which are vital for the ongoing success of your organisation.
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