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Underpayment Caused by Annual Salaries

3 min read ·  

Recently, Tanda released a Webinar discussing ways companies can avoid underpaying employees who are paid an annual salary. This article is a summary of the webinar, which is available in full online, featuring Tanda’s Head Of Product Compliance, Andrew Stirling.

Underpaying Employees on Annual Salaries

One of the biggest mistakes Australian business owners make is to simply assume offering someone a salary means that award benefits and other entitlements no longer apply. If someone is covered by an award, they’re entitled to those benefits, except in very rare circumstances.

Tanda’s Head of Product Compliance Andrew Stirling believes a good way to think of this problem is to imagine a buoy sitting on top of a pontoon on a river. Normally, the buoy will just sit on top of the pontoon. But what happens if the river rises? The buoy will rise too. 

In this analogy, the buoy represents how much an Australian employee should be paid. The pontoon represents the annual salary. Like the buoy sitting on the pontoon, usually the employee should be paid the annual salary. However, occasionally the employee’s award entitlements will move above the annual salary – like the river rising above the pontoon. Australian businesses get caught out when the ‘rising tide’ of award entitlements moves above what they offer workers.

The problem is that underpaying people in Australia isn’t an issue that will float away. You’ll be forced to pay back the money by the Fair Work Ombudsman, as well as face heavy fines. So, how can you avoid it? Here are Tanda’s three steps:

1. Use Technology To Reduce Human Error

The first step is to cut out the potential for human error by using the latest technology. If you pay someone a salary who is also covered by an award, you need to reconcile the salary against the award. 

For Australian employees paid a contractual annual salary, that’s every pay run! Yep, that’s as often as every week, and it’s a lot of work.

A modern Workforce Management System should be able to check if your salary is compliant in real-time. Typically, employees clock in and out when they arrive at work using a timeclock. This allows the system to record the exact time they’ve worked to the minute. The system can then check the annual salary amount against the exact hours the employee works. 

This will allow Australian employers to spend less time coming up with hypothetical models of how much an employee might work to work out if the annual salary will cover award entitlements. Andrew says, “If you’re using technology to do the comparison between the award entitlements and annual salary in real time, you can forget about all of the complicated modelling.”

This will also identify in real time one of the biggest causes of underpayment – employees working overtime to the point they are being paid less than the award rate. 

2. Make Sure That You Have the Right Data 

Not every Australian industry has clock-in, clock-out timeclocks in use. In many professional, white-collar jobs the practice isn’t in place. However, this leaves you exposed, without a formal record of what hours your employees have worked. The solution: employee-filled timesheets.

These are timesheets that employees must submit each pay cycle as a record of their hours worked. Depending on the businesses preference, you can pre-fill them or have them empty for employees to fill out. However, the timesheets should be signed off by the employee.

3. Periodically Review Your Contracts

Using technology can make reconciliations far easier, but you still need to make sure you’re sitting on a solid foundation. 

You should still periodically review your contract and award settings, avoiding a “set and forget” strategy which could see awards and entitlements change, leaving contracts out of date.

Andrew suggests regular reviews of:

  • which award your employee is covered by;
  • which classification they have; and
  • your template contracts, making sure you have the right wording to offset annual salaries against all award entitlements.

This is important, because decisions about award coverage and classifications cannot be automated! You need well-trained people to get this right.

The other problem here is that awards and classifications are often poorly written in Australia. It’s easy to misinterpret what the award says and end up comparing their salary to the wrong award rate. You should use professional judgement and a rigorous approach to reviewing award classifications.

4. Use The High Income Guarantee

It should be clear by now that having to reconcile annual salaries against awards is a pain and you could still face the risk of underpayment from annual salaries. 

If you pay an employee a salary of more than the high income threshold (currently $158,500, excluding super and excluding bonuses), you can use the high income guarantee. Even though an award still covers an employee, you can avoid complying with it if you use the high income guarantee. This is a tool that basically says, “hey, you’re paid a lot of money, it covers all the award entitlements”.

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