To avoid big fines due to non-compliance in payroll laws, small and medium businesses must skill up or outsource.
Processing payroll correctly is not an easy feat, and without specialised help or training many small and medium businesses (SMBs) are making very costly mistakes. In fact, according to the Australian Payroll Association, and as outlined in a 2017 PWC Making Payroll Pay report, many big businesses are getting it wrong too, with Australia’s top employers making payroll errors exceeding $4.4 million per year.
The job of payroll – to make sure people are paid correctly and on time – may seem fairly easy. With complex rules and regulations and ever-changing employer obligations, such as adjustments to income tax rates, minimum wages and penalty rates, it can be difficult to get it right. The result is that non-compliance to the Fair Work Act seems to be on the up, and with it, SMBs are at increasing risk of facing significant fines that could send them broke.
Employment is very complicated in Australia, says Australian Payroll Association CEO Tracy Angwin. It’s not easy for SMBs to be on top of the inner workings and intricacies surrounding pay, and without the proper qualifications or training things can be disastrous, she says.
“If you run a café, you might be good at making coffee and running the café, but you may not be so good with the back-office processes.”
“The challenge with Australian employment is that the local plumbing company has the same obligations as big companies such as BHP or the Commonwealth Bank, but the latter have teams of lawyers. It can be very difficult for small businesses if they’re not experts in it.”
According to Angwin, the main issues with payroll management for Australian SMBs include a failure to understand or keep up to date with regulatory requirements such as:
- Choosing the right award for employees
- Setting up superannuation correctly
- Upcoming changes such as Single Touch Payroll, which will mandate streamlined reporting of wages, tax and superannuation contributions to the Australian Taxation Office, and affect employers with 20 or more employees from July 1, 2018.
“Sometimes employers are exposing themselves by underpaying, either knowingly or unknowingly, and other times they are overpaying staff, meaning their cost of employment is more than it needs to be,” she says. “An example of this is employers who pay superannuation on overtime when they do not need to do so.”
She adds that superannuation is also complicated, with the rules easily misunderstood. Most people think super is 9.5% of gross wages, for instance, but it’s not – it’s paid on ordinary time earnings and each payment may or may not attract super.
There are also plenty of SMBs failing to do the proper paperwork for employees. They’re just negotiating a rate of pay with no formal contract in place, says Angwin. That works if everything is amicable but if something goes wrong, you need paperwork in the form of an employment or common law contract, she says. And if you’re paying someone by the hour, you need some way of keeping track of the hours they work electronically or on a timesheet.
“Many, many small employers don’t do the proper paperwork – it’s employers with 20 to 200 employees, who, in my experience, get themselves into the most trouble and have the most risk.”
Ignorance is not a defence
There are no penalties for overpaying employees of course, although a business will suffer financially. But if employers are found to have underpaid staff the formal penalties can be very significant; in some cases big enough to send the business broke.
There are three types of fines for breaches of the Fair Work Act, explains Angwin, applicable to the company, directors and employees who are complicit in the underpayment, such as HR managers or those in payroll. It’s a maximum $63,000 per breach for the company and $12,600 for the individual.
“That’s per breach,” says Angwin. “And they can throw the book at you. There are businesses that have had fines for hundreds of thousands of dollars.”
The Fair Work Amendment (Protecting Vulnerable Workers) law imposes big fines on businesses that deliberately do the wrong thing by their employees or employers who should have known better, so saying you didn’t know is no excuse.
Even genuine employers trying to do the right thing can get it wrong and get fined, sometimes to the point where they go broke, she says. “There aren’t many small businesses that can sustain a five or six figure fine.”
Skill up or outsource
It’s up to SMBs to be proactive in acquiring the knowledge and know-how they need to adhere to regulations and laws through courses and training, and or else outsource their payroll system to experts. Technology can help with implementing better processes to stay compliant, but it can’t be solely relied upon, as it can’t tell you what all the rules are.
The Australian Payroll Association recommends any employer with less than 300 employees outsource their payroll. It’s often impossible for SMBs to have the necessary expertise in-house to manage the payroll function in a compliant manner, says Angwin.
The savings from outsourcing payroll management can be more than the cost, particularly if you cop fines, so businesses shouldn’t automatically discount it due to the expense. Angwin says the cost of doing it yourself is probably greater than you realise, especially if you’re not doing it right, due to the time it consumes, both in terms of administration and contacting lawyers.
According to the Australian Payroll Association 2017 Payroll Benchmarking Report, most Australian employers currently have an in-house payroll management function, but there’s an increasing trend towards outsourcing, particularly for employers with less than 200 employees. Outsourced payrolls make up 21.3% of respondents. It found the average cost per payslip when payroll is outsourced is $6.36, but in-house it’s $7.07, with the majority of the financial benefits in the less than 200 and 10,000+ employer bands.
What have been your biggest challenges when it comes to small business payroll management and how have you overcome them?