Recently, Tanda released a webinar outlining the five most common reasons businesses disclose underpayments to the Fair Work Ombudsman. As part of the series, we’re also releasing articles on each of the five issues, for ease of access and understanding.
In this article, we’ll outline the dangers of not applying awards or enterprise agreements to the right people, one of the most common, and most costly mistakes made by businesses.
The Cost of Non-Compliance
Failing to correctly classify a worker under the appropriate award or enterprise agreement can have major consequences for your Australian business. All pay rates and entitlements like annual leave are calculated based on the coverage of an award or enterprise agreement.
The Fair Work Ombudsman has been cracking down on underpayments, recovering more than $140 million from business Australia-wide in the last financial year alone. One of the quickest paths to underpayment is by incorrectly classifying an employee. With this in mind, it’s important to understand some common causes of this issue, as well as some processes that can be put in place to ensure it doesn’t occur.
Tanda believes incorrect classification of an employee’s appropriate award or enterprise agreement is often caused by a few common errors. These are set out below:
Many of the award classifications are poorly written and don’t describe the types of work they cover very well. In particular, white-collar job classifications in Australia are difficult to interpret. This can often lead to confusion and to incorrect classification of many employees, or indeed incorrectly treating employees as not award covered at all.
Many businesses often take a “set and forget” attitude towards classifying employees. For example, a business might hire someone and conclude that they are not award covered. When they leave, the employee who replaces them is also treated as not being award covered. This process then repeats indefinitely – often for years at a time.
Not only does this process rely on the original classification decision being correct – which may not actually be the case – it also doesn’t take into account the fact that the law could change, or new rulings could entitle workers to more benefits.
Misunderstanding the interaction between contracts and awards
In some Australian businesses, it is common to refer to a subset of employees as being “common law contract” employees. This subset is treated as not having an award apply to them because they have a “common law contract”.
All employees have an employment contract. Having a contract does not affect whether the employee is award covered, because it is not possible to contract out of award coverage. The only exception is that highly paid employees can be given a “high income guarantee”, which means that any award will not apply to them.
Many Australian businesses use contractors for some tasks without fully understanding the complex rule sets around using contractors. Fair Work has recently been targeting “sham” contracts and punishing businesses that misclassify workers as contractors when they are actually employees.
There are a wide variety of conditions that could deem a contractor to actually be an employee. Tanda recommends following Fair Work’s guide and seeking legal advice on your arrangements.
We believe that by implementing simple changes to processes and systems you can reduce the risk of misclassifying workers.
Having well-trained staff is one of the easiest ways to avoid classification problems. If your staff have a strong understanding of Australia’s award and enterprise agreement system then they’re less likely to misclassify an employee
Reviewing employment arrangements every couple of years is a great way to avoid the “set and forget” issues set out earlier. You could discover that some employees have been misclassified, or that a pay rate has changed, or even a new allowance has been granted.
How often you should perform these reviews is at your discretion. For example, If you only employ a limited number of staff across a few awards and agreements, a review every few years could be adequate. If you have an enterprise agreement, you should at least review your classifications before entering into renegotiations, because this will affect who you give the notice of employee representation rights to.
Click here to view the next article in Tanda’s Fair Work Five series: Not Properly Implementing Award or Enterprise Agreement Terms