KordaMentha's Behind Business podcast discusses the most pressing commercial, financial and operational issues facing business today.
In the last few years we have seen Australia's biggest companies in the headlines for all the wrong reasons. Allegations of wage theft have been levied against trusted brands, and these allegations have tarnished reputations, finances and employee relationships.
In this episode of Behind Business, KordaMentha's data analytics expert Ronald Holtshausen and Norton Rose Fulbright's employment and labour partner Alexandra Shields join Sean Aylmer to tackle the topic of employee underpayment - what it is, why it happens and how it can be avoided.
Transcript
Welcome to Behind Business, the podcast where KordaMentha experts discuss the most pressing issues facing business today. I'm Sean Aylmer, an economist and journalist for 25 years and the host of the Fear and Greed daily podcast. In the relationship between employees and employers, there are few more important issues than pay. Once the employment is agreed upon, it becomes a legal and important bond. Employers pay on time every time, and employees expect that it will be done correctly. Where it goes wrong, it frequently goes beyond the professional realm. It can feel very personal. It can also be explosive. Before COVID-19 dominated our lives, we saw some of Australia's biggest companies in the headlines for all the wrong reasons. Allegations of wage theft have been levied against trusted brands. Woolworths, Commonwealth Bank, and even the ABC. And these allegations have tarnished, reputations, finances, and employee relationships.
It can be a complex field, but we have two experts to help. In this edition of the Behind Business podcast, we have Ronald Holtshausen, a KordaMentha partner specializing in data analytics and forensic technology. And to help us navigate the legal perspective, we have Alexandra Shields, an employment and labor partner at global law firm, Norton Rose Fulbright. Ron, Ali, welcome to Behind Business.
Alexandra
Thank you for having us, Sean.
Ronald
Thanks for having us, Sean.
Sean
Ron, let's start with you. How do we get our heads around the
value of employee underpayments? How big a problem is it?
Ronald
I think it's a difficult question, Sean, given the variety of
issues that end up causing the potential employee underpayments.
But if we look at a quantum perspective and we look at some of the
headlines that we've seen recently, including in the retail
sector and the banking sector, they can get large. We've seen
cases and there are cases reported at the moment in the hundreds of
millions of dollars. Also, when you look at the public scrutiny
that comes with having a matter like this brought to the public
attention, you can understand that there's a few cases that are
probably in the public eye, but there are probably many cases that
are being worked on behind closed doors.
Sean
Ali, do you have a sense of the size of it? I mean, Ron just
mentioned that there must be a lot going on behind closed doors. Do
you get a feel for that as well?
Alexandra
Oh, absolutely. It's very hard to put a figure on the size of
it, but certainly, it is something that's facing all employers.
But whether it be large companies or small companies, as soon as
there are employees, we are starting to see a question of are those
employees being paid correctly.
Sean
Why does that occur, Ali?
Alexandra
It's a complex answer as to why it occurs, and there's
really two answers here. The first question is what do your
employees do? And that then determines whether they've been
classified correctly under an applicable modern award or an
enterprise agreement. And that's because modern awards and
enterprise agreements will apply to employees based on the work
that they do and the industry within which they work, rather than
whether or not you've agreed to it at the outset. So that's
the first question. What do they do?
The second question is how do they work? And that's because the hours that they work or the times at which they work will also dictate whether they should be entitled to additional pay such as penalties, overtime, allowances. And all of those additional payments are also owed to the employees. So the first question is, do we have the right minimum rate of pay? And the second question is, do we have the right additional payments based on how they're actually working?
Sean
Ron, in your experience, is they're the main reasons why it
happens?
Ronald
Yeah, I think many of them can come down to those aspects, but I
think what is insightful to look at is the economics and the
industry that we are working in at the moment. We're working in
an economic world that's being disrupted in many areas and in
many sectors of business. And so I think we are seeing
organizations shift, change, diversify, and adapt, but we need to
be conscious of adapting our workplace relations aspects, our
payroll aspects, and our classification of staff at the same time.
And when those things come out of kilter, we definitely see the
aspects that Ali is talking about, where staff are being paid
under, potentially, the incorrect award or being paid under a
misclassification of that award.
Sean
So maybe, Ron, have you seen examples where there's willful
intent to minimize employee payments? Or is it mostly a systems
issue?
Ronald
Yeah, I can't say with the clients that I've worked at
where I've actually seen there has been an intent to underpay
staff. I don't think that has been the case. And I think in
many cases, the titles of wage theft might go a little bit too far.
There are definitely circumstances where organizations just
don't have the policies and the procedures and they don't
have the systems set up to accurately record time. And I think
that's an interesting circumstance because there definitely is
a strong obligations for organizations to record time of their
staff accurately and pay that accurately. But in many cases that
I've worked on and in some aspects that I've worked on,
it's really just hasn't been deliberate. It has more been a
case of just misinterpretation or misunderstanding, or maybe a lack
of knowledge and understanding how these awards should be applied
or these enterprise agreements should be applied.
Alexandra
Yeah, absolutely. I would echo that. It's certainly not
something that we regularly see as a deliberate intention to rob
staff of wages, or at all to deliberately underpay staff. But the
difficulties come from different levels within the organization
applying a classification. So for example, in some organizations,
you might have a ground-level manager determining what awards
should be covering the employee and therefore what rate they should
be paid. And that manager doesn't necessarily have a background
in legal or in HR. And similarly, then we don't necessarily
have the right record keeping to determine how the employees are
actually working.
It's more of a case of do we have all areas of the business talking to each other. So is executive management aware of the way in which employees are engaged and the way in which employees are working such that they can feel confident that the employees are being paid appropriately. Or are decisions being made by one aspect of the business that's not visible to another.
Sean
Okay. And so what sort of penalties can be involved just in terms
of legal penalties?
Alexandra
Certainly, if there is an underpayment, there are penalties under
the Fair Work Act for breach of the Fair Work Act. So if you fail
to pay your employees in accordance with a modern award or an
enterprise agreement or otherwise fail to give them entitlements
under the Fair Work Act, there are penalties for breaching that.
There's also the obligation to back pay employees and that back
pay may come with interest as well.
Sean
Okay. Ron, I suspect you're going to say that even a bigger
penalty often is reputation and culture.
Ronald
Without a doubt. And again, we go back to different industries are
affected in different ways. For some industries, the financial
repercussions could be massive where, in other industries,
let's say hospitality and the restaurant industry, your
reputation can be your livelihood. So I think we've got to
think about this from not just a financial point of view, but
we've also got to think of it from the non-financial
perspectives, such as reputation.
Sean
It must be very difficult, I'm going to stay with you Ron, to
actually go through and work out what's happened, analytics and
the forensic nature of trying to work out what went wrong when, and
who in the organization hasn't been paid correctly. I mean,
that's exactly, that's your [inaudible]. That's what
you do. Very complex, I'd imagine.
Ronald
Yes, correct. It is a very interesting process from start to
finish. There's high anxiety in the beginning. There's a
very much a knowledge-building process that happens after that.
There is a sense of we need to get this done. We need to get this
done quickly. But as time unfolds, I think organizations really do
understand the requirement to get it done right. For me and my
background as a forensic practitioner, I think there are two really
key attributes that my skill set helps out in working on these
matters. As you can imagine, organizations that have large employee
workforces, when we start looking at a couple thousand of employees
that might be susceptible to potential underpayments, this really
does become a data problem, particularly when you're looking at
a couple thousand employees, and you're looking at a couple
years that you have to do these calculations for. In many cases,
six years. You really start understanding the quantum of a data
problem that this turns out to be.
So analytics and the ability to write algorithms that run these calculations in line with the interpretations that we get from individuals like Ali and the legal teams that we work with, the economies of scale really come to the fore. And so using technology really gives you that added advantage that you can do it again, and you can repeat it without minimal human intervention and human error.
But the second aspect is really that forensic mindset and that forensic mentality. Being a forensic practitioner, we are very much under the scrutiny of the work that we do. We definitely need to be able to justify our assumptions when we make them. We need to be able to construct our calculations, such that they can be re-performed by others. And the stakeholders in these matters find that extremely valuable, whether those stakeholders are the organization that might be engaging you or the employers who want to understand how their remuneration has been recalculated or, in many cases, maybe even the ombudsman who wants to understand how this process was undertaken. That forensic approach becomes very valuable.
Sean
Ali, what's your take on how managers view these sorts of
issues by the time it gets to you?
Alexandra
It's interesting, Sean, because it gets to me at a few
different stages, depending on the client. We have a number of
clients who are taking a proactive review and in doing so
there's exec level or board level, which is saying, we want to
make sure we're doing the right thing before anybody has
actually complained or suggested otherwise. So it's an audit.
And that can be as labor-intensive as Ron has described already.
But also, you're taking into account then that it's not
something that you want to alert the organization that you're
undertaking, because we don't want to raise alarm bells. You
want to try and gather the information without actually concerning
your employee or your workforce in order to be able to conduct a
review and have your own conclusions at hand.
The second approach, and probably the more difficult approach to navigate, is when you are dealing with a complaint or you're dealing with a query from the ombudsman, the Fair Work Ombudsman. And that's when you really have to try and juggle a number of stakeholder balls, because that's when you are trying to manage your employee confidence. You want to minimize the amount of work that is going into the review. So you don't necessarily want to be reviewing timesheets from every single employee for the past six years. But on the other hand, you need to understand the depth of the issue. So I think it's really a multifaceted approach and it depends at the way in which the client's coming into it in the first place. But certainly, you're on the front foot when you're taking a proactive audit.
Sean
So in a sense, that's the best practice, Ali, is to make sure
you are proactive about the potential challenge. If it's
already come up and you didn't expect it to come up, what's
the best way to handle that as an organization?
Alexandra
Well, the best approach actually is to be on the front foot in the
first place. So have the right records and engage employees
properly in the first place. Then we've got the proactive
audit. And then when you've got the complaint that's coming
and how you actually have to deal with that, you really want to be
managing it culturally and through communications, not just the
legal audit. Because any kind of audit will take time and money.
But at the same time, you've got employees who are sitting
there saying, "Well, where's my pay? What's happening?
When am I going to find out an answer on this?" And the more
agitated an employee gets, the more likely they are to report it to
the ombudsman, to engage with the union, or to go public with
allegations that haven't yet been actually established. So
really it then becomes a multifaceted approach where you are
managing communications, managing employee confidence, but at the
same time, trying to understand the facts and figures.
Sean
Ron, how hard is it for an organization to recover when something
has gone wrong?
Ronald
There's not one magic answer here for what is the ramifications
for an industry. How you manage it, I think, is a very important
proponent to that, though. If you can manage your workforce and
build confidence with them throughout the process, if you can
manage the public perception that's being put out about your
organization, you're definitely going to come out on a more
front foot perspective than those that don't. So being
proactive about it here, even in the circumstance of how you take
it forward, can be very important for how you get to the other
side.
Sean
Ali, do you see any specific risks in 2021 and beyond?
Alexandra
Yeah, absolutely. And what we're seeing with COVID is a real
change in the way we work, and that change is likely to be a
permanent change moving forward. So that means when we talk about
employees working more flexibly, it means that the times at which
they're working is more flexible, and the locations that
they're working is more flexible. And the flip side of that is
that managers don't necessarily have that oversight. So they
don't necessarily know when the employees are working or what
they're doing.
And so over the course of the interview today, we've discussed the development of roles and the development of working hours and not having that properly recorded by managers. And that problem is even more acute when you don't have direct oversight over your employees all the time. So absolutely, the change in the way in which we're working and the flexible approach that we're taking to working is going to mean that employers and companies have to be more vigilant about what their employees are doing and when they're doing it. And there is, without doubt, a heightened interest from the Fair Work Ombudsman, and there's a heightened awareness of employees as to what they should be receiving as their basic entitlements.
Sean
So Ron, given your experience and what you've worked on, what
are the one or two or three things that an organization needs to
keep on top of to make sure they're at best practice?
Ronald
I think there's two things, Sean, in industries and in
organizations that I think should be front and center with
management. And one is the aspect that workplace relation laws and
setting up your payroll is not a set and forget perspective. We
touched on earlier that organizations change, but so do the
workplace relation laws and so do the awards. So do the
interpretations of these awards. And as we know, the rates change
every year for many awards. So that set and forget mentality, I
think is a dangerous one. And if we can drive that out of
organizations, that will take us a long way down the road in terms
of being able to get better compliance.
The next one is record keeping. There have been a number of matters that I've worked on where the record keeping has ultimately been one of the most costly factors in performing the recalculations. So keeping good records, for a simplified perspective, the timesheet perspective, when your employees have worked, how many hours have they worked, can you access that information for the statutory requirement? Can you go back three years? Can you go back four years to find out what hours a particular employee worked? Can you see changes in their roles? Can you see changes in their rosters? Can you very quickly and adequately get that information at hand and be able to support calculations or support analysis that you've done? So those are the two. It's not a set and forget mentality in this area. And the next one is keep good records.
Sean
Ali, your take on that?
Alexandra
Absolutely. I mean, this is something that you've got to get
right at the start and then right the way through. So Ron was
talking about the fact that legislation might change and award
rates change, but remember, what your employees do change as well.
And as they develop through their careers, they'll go from a
level one to a level two to a level three. And all of that carries
with it different rates of pay, different entitlements. So you have
employees who are changing what they do, and that might affect the
way in which they're classified or the award under which
they're classified.
And secondly, do you know how your employees are working? So Ron talked about keeping good records. This is not just ensuring that you have pay records in place, but do you have a way of actually ensuring that you know how many hours a week your employee is working? We've come a long way as employers from the days of the bundy clock, but in some ways, we haven't. And we need to have some kind of time and recording system in place so that we can demonstrate that this is how many hours this employee's worked and that they've therefore been paid correctly.
Sean
What about individuals? How do they protect themselves, Ron?
Ronald
I think individuals have become a lot more aware of the legislation
and the awards under which they work. And I think, at the moment,
there is a big movement with employees to understand more about
what award I sit under and what am I entitled to under that award.
So I think employees can self-educate through the Fair Work site
and they can get a little bit more information about what
they're entitled to, particularly even going to their union. So
I think it is a self-education perspective here, like anything else
in life, that if you spend a bit of time understanding what
you're entitled to, you have a far more fruitful discussion
with your employer.
Sean
And you'd agree with that, Ali?
Alexandra
I would. I think that employees need to have an awareness of what
they're working and the way in which they're being paid,
but they also have a voice and they should be raising issues early
on with their employers, asking their managers, asking HR if
they've got any concerns about the way in which they're
being paid, rather than letting it escalate to where we see a lot
of these issues arise, which is the point of termination. And
usually, that's the point where employees say, "Well, hang
on a second, I think that there's been a problem for the last
six or eight or 16 or 18 years." And employers are scrambling
to go back and try and work out what they were paid during that
time. So the best advice I would have is to have a constant
conversation between the company and the employee.
Sean
So wrapping it up, it certainly is a complex issue. And Ron, to
what you were just saying there, I suspect that best practice is to
actually check in with an expert fairly regularly.
Ronald
Yeah, I definitely would agree with that sentiment. I think there
are a lot of proactive things employers can do. And many of them
don't have to necessarily be the most expensive or incur the
most costs to do them. But having a look at, most organizations
have payroll systems and in those payroll systems, there are a
number of payroll codes. I think, looking at how you've
configured your system and what payroll codes you have and whether
it complies with the awards under which you pay your staff is one
step that employers can look at. Doing annual reviews of the rates.
We all know that the rates can escalate every year, depending on
what award you're under.
And so making sure your systems are up to date with those rates and
the aspect that you can undertake. Again, as Ali has touched on,
making sure your classifications are correct, I think is a big
aspect as well. But above and beyond both of those, I think
it's important to liaise with experts like us, and Ali in the
legal front, to be able to give you that advice. Because some
advice at the outset of these aspects can pay big dividends in your
organization later on.
Sean
Ali, you'd agree with that?
Alexandra
Oh, absolutely. I think that the value of a short phone call
upfront to sanity check, whether that be classifications, the way
in which employees have been engaged, or the way in which you
propose that they're going to work, is going to make a massive
difference than trying to recreate that down the track.
Sean
Ron, Ali, thank you for talking to Behind Business.
Clearly, underpayment and incorrect payment of income is a problem for many businesses, albeit one that is normally inadvertent. The rules can be complex and hard to interpret. Failure to follow the rules can lead to legal, cultural, operational, and reputational damage. It may well be a larger problem than we know about. Because while some cases have hit the headlines, many others go unreported.
What we learned today is that the problem isn't going away and working from home is going to blur the lines even more. If you're a business that's unsure about whether you're paying correctly, or know you've made a mistake, get help. Ask an advisor for assistance in getting your books in order. And do it early. Don't wait until you're in the headlines. I thank my guests today, Ronald Holtshausen from KordaMentha, and Alexandra Shields from Norton Rose Fulbright. I'm Sean Aylmer. Thanks for listening to Behind Business.
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