We want to talk to you about payroll mistakes and ways you can avoid them before they become costly. If you're here, it's likely because your business is in an enviable position - it's growing! But when you start employing more staff to meet demand, that comes with its own set of problems.
When your business grows to the point where you need to start taking on more employees, your responsibilities also grow. Now, you have to ensure you pay your employees the correct amount, and you need to submit your payroll on time. Considering the different hourly rates, awards, working hours, and overtime hours you need to account for, it's a lot of hard work.
Let's explore some of the most common payroll mistakes in Australia and find ways to help you avoid them.
What Happens If You Make A Payroll Mistake?
Payroll mistakes are often the result of an innocent human error. But you could face legal consequences if you don't fix those mistakes. As long as you are open and honest with your employees and take steps to work together to resolve the issue, payroll mistakes are manageable, so long as you fix them in accordance with the law.
Employee Entitlements
The Australian payroll rules and regulations are in place to protect both you and your employees. But they can be complex and tricky to manage. By law, you have to follow the National Employment Standards (NES), a set of minimum entitlements that cover all employees, regardless of which award, agreement, or contract an employee is covered by. The NES is made up of 11 major entitlements, many of which relate to types of leave, maximum weekly working hours and other similar entitlements. Most employers use Awards or Enterprise Agreements to understand:
- How much they should pay their employees
- Entitlements to breaks and allowances
- When to apply overtime or other loadings
- Other employment conditions.
Payroll Mistakes And Australian Laws
Getting payroll wrong can be a major financial and legal risk. As a business owner or payroll officer, you're responsible for any pay mistakes. You're also responsible for the consequences of those mistakes, which could be:
- A fine from a Fair Work Ombudsman Inspector
- A fine from the Australian Taxation Office
- Interest on missed payments
- Legal fees.
Maintaining Employee Trust
Mishandling pay can also harm employees' trust and confidence in the business, which can end up sapping morale and damaging your reputation.
Unfortunately, pay errors aren't rare. A 2018 study estimated 2.4 million Australian employees could be affected by payroll underpayments at a cost of $3.6 billion.
The combination of good payroll and bookkeeping systems will help reduce mistakes and non-compliance and make identifying and resolving any issues quicker.
Most Common Payroll Mistakes
There's always a risk of human error when it comes to payroll. There are just so many different factors and regulations to take into account. When you don't implement an efficient system, payroll mistakes are easily made, including:
- Overpaying staff
- Underpaying staff
- Forgetting statutory deductions
- Failing to meet your obligations as an employer.
Unfortunately, many Australian businesses aren't great at managing their payroll. In fact, a study by the Australian Payroll Association (APA) revealed that 33% of the organisations surveyed made a mistake every pay run. Every pay run. Furthermore, just over 40% of employees discovered the payroll mistakes themselves and had to alert the payroll manager.
And just FYI, a separate study by the APA found that 25% of employees look for new employment opportunities after two rounds of incorrect pay. Are you prepared to replace a quarter of your staff over a poor payroll system?
Here are some of the most common payroll mistakes Australian businesses make.
Misclassifying Employees
Classifying workers can be complex under Australia's Modern Awards system. To avoid misclassifying your employees, you'll need to ensure you correctly input your workers' classifications and update them as required.
It sounds like a lot, but it's far less work setting up your employees correctly in the beginning than backtracking your calculations to manage under/overpayments.
Using Unreliable Payroll Methods/Software
Pen and paper or spreadsheet payroll systems are prone to error. The most common culprits are:
- Poor handwriting
- Incorrect inputting of dates
- Misreading columns
- Payroll employees rushing calculations to meet deadlines.
Even if you use technology to simplify payroll, the wrong software can be just as tricky to manage as pen and paper. Outdated programs, for example, can cause a myriad of non-compliance issues.
Modern technology, such as our payment gateway software, can help you make payroll easy and stress-free and reduce the risk of compliance errors.
Not Differentiating Exempt Vs. Non-exempt Employees
The fundamental difference between exempt and non-exempt employees is that non-exempt workers qualify for certain protections under fair work legislation. This national legislation sets minimum wage and overtime requirements. Exempt employees do not get paid overtime because they are not paid the minimum wage.
Do you know which of your employees fall under which category? If not, you could be paying them incorrectly.
Unlawful Deductions
Pay As You Go deductions, more commonly known as PAYG deductions, are an essential part of remuneration. It's crucial to have PAYG set up, without error, for every employee on your books to ensure you are withholding tax on your employees' behalf for the ATO.
Payroll mistakes to do with PAYG can be costly. More importantly, they're unlawful. So, you need to ensure you have your PAYG set up correctly before you start paying employees. Also, remember to:
- Avoid manual payroll processes where possible
- Check that your employee is legally permitted to work in Australia
- Be aware: PAYG withholding is specific to payroll tax, which is a state-based (not national) tax.
Underpaying overtime
The complicated rules that cover overtime calculation can be tricky to crack. Rates can vary depending on the:
- Day
- Time
- Date
- Duration of hours worked.
Shift and part-time workers may also be subject to different overtime rates than full-time staff.
Mistaking Tax Rates
Incorrectly calculating the tax rate is an incredibly common mistake. It can result in employees either paying too much or too little in taxes. Unfortunately, it's a mistake that can be extremely difficult to fix. That's because if you're over or under-taxing your employees, you'll need to go back and correct every single pay cycle they've been part of since the new tax rate was introduced. But if you know the tax rates and keep on top of changes, you can avoid this mistake altogether.
Related: 5 Tips for Choosing the Right Accounting Software
Tax rates can change each year. Some do! Those changes can cause payroll issues if you don't keep track of the current tax rate. If you can't keep up with changes, you could be paying your employees at the wrong rate. If this happens, you could be liable to pay late fees, penalties, or interest on the taxes you owe.
How To Avoid Payroll Mistakes
Managing payroll is one of the most error-prone and time-consuming challenges that business owners of today have to face. Labour regulations and litigations are continually rising, meaning payroll errors are often the most costly mistake your business can make.
So, what can your business do to avoid making payroll mistakes?
Implement The Right Payroll Software
Common payroll mistakes are simple human errors. Any business owner can make them. For example, do you always record bonuses on your payroll, even when they're in the form of a gift card? It's a well-intentioned mistake, but it can negatively impact your employees if you don't keep track.
Balancing spreadsheets, timesheets, and banking information is time-consuming and mundane, which can ultimately lead to miscalculations. Those miscalculations make record-keeping even harder.
The right payroll software can mitigate payroll mistakes by automating the process by taking human error out of the equation.
Streamline Communication
Payroll apps can prevent payroll mistakes (and potential future litigation concerns) by providing tools for employees to communicate with you about their work hours, requests and any inaccuracies they spot.
Time and attendance tools also let your employees review and verify their work hours when they clock in and out.
Make Sure You Have The Right Employee Data
Payroll mistakes can occur when you input the wrong employee onboarding information. It's an easy fix, but it's even easier to avoid the error in the first place. Create a verification process for new employees and managers to confirm staff details when they begin working for you. If it's in your budget, employee onboarding software can help ensure you have all the right information where you need it.
Payroll Mistakes Happen To The Best Of Us
A lot of work goes into managing payroll. The bigger your staff grows, the more opportunities you'll find to make payroll mistakes. But there are cost-effective tools that can help you alleviate all those payroll headaches and maintain your reputation as a good employer.
It doesn't matter whether you're new to running payroll or have been handling wages for years; payroll mistakes are easy to make. But with the right tools, payroll can become one of your business' simplest administrative tasks.
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