Workforce compliance

5 questions directors should ask about payroll compliance

5 questions directors should ask about payroll compliance
Marcus Zeltzer
Marcus Zeltzer
minute read
March 18, 2024

Under the current Labor government, industrial relations laws have undergone a substantial shift, moving from a reactive approach, where employers respond to issues and incidents, to a proactive stance, requiring directors to prevent breaches from occurring in the first place.  

This requirement to operate proactively includes preventing inadvertent underpayments to workers. If adequate mechanisms and risk mitigation protocols are not in place, directors can be held personally liable, and companies face substantially increased fines of up to the higher of $4,696,000 or three times the underpayment amount.

The government has made it clear, through these reforms, that the responsibility of overseeing and ensuring payroll compliance sits squarely within the board’s remit. The five questions below serve as an initial action for board members to assess their company’s compliance risk.  

1. Who has ultimate accountability for payroll compliance?  

Determining ultimate accountability for payroll compliance is a common challenge for many companies, often leading to a lack of clarity as responsibilities are dispersed across payroll, workforce planning, legal, and technology teams.  

In reality, the responsibility for ensuring payroll compliance rests firmly with the board, particularly within its risk or audit function. As directors can be held personally liable for any payroll compliance issues, it is crucial for the board to actively oversee and stay informed about the organisation's compliance status. While the board should delegate the day-to-day management of payroll compliance, it must not disengage entirely. High-level updates and reporting should be provided regularly to ensure ongoing oversight (similar to WHS issues).  

The delegated operational responsibility of payroll compliance and processes depends on the size and structure of the company. Typically, we find that the responsibility will fall to the:  

  • Chief Executive Officer in smaller organisations with fewer than 750 employees;
  • Chief Financial Officer if payroll and HR compliance functions report to them; or  
  • Chief People Officer if HR compliance functions are under their purview.  

This clear delineation of responsibility and a defined point of accountability facilitates better compliance management and reduces the risk of non-compliance.

2. How confident is the board and the management team that payroll compliance at the organisation is 100% right?

Directors and management teams should be 100% confident that they have the right processes and procedures in place to substantially mitigate payroll compliance risks. Similar to WHS issues, boards should have a zero-risk appetite or tolerance for payroll compliance issues.  

Despite the best efforts of employers, we consistently discover underpayments in payroll, typically ranging between 1% and 3% of total labour costs. This seemingly small percentage can translate into significant financial implications. For example, an organisation with $10 million in labour costs might face an average underpayment of $200,000 annually, accumulating to $1.2 million over a six-year period.  

It is a stark reminder that achieving 99% accuracy is not sufficient. The remaining 1% of inaccuracies are where the problems occur. These 1% of inaccuracies can lead to underpayments that damage a company’s reputation, attract legal action from the Fair Work Ombudsman, and result in substantial remediation payments to workers. This underscores the critical importance of striving for absolute accuracy in payroll compliance to safeguard the organisation's reputation and financial stability.

3. What systems and processes does the company have in place to ensure payments made to employees are legally compliant?

When interrogating the systems and processes the management team has put in place to facilitate legally compliant payments to employees, directors should pay attention to key risk indicators.  

Answers that indicate a high level of risk within current processes include:  

  • reliance on the payroll system alone for compliance;  
  • manual processes, which are prone to human error;
  • payroll teams working in isolation with minimal input from legal or workforce planning teams; and
  • the use of sample testing to complete compliance reviews.  

Answers that indicate a low level of risk within current processes include:

  • clearly documented and defined process, roles, and responsibilities in payroll compliance reviews;
  • processes that have been developed based on legal advice;
  • the integration of automation and technology in the review process;
  • providing comprehensive reporting delivering insight into the current compliance status to the board; and  
  • regular reviews and prompt rectification of payroll issues.

4. What reporting and information can be provided to the board to provide them comfort of the organisation’s compliance status?

As director obligations continue to increase in both complexity and scope, the risk of personal liability for non-compliance has become a significant concern. Directors are tasked with overseeing a myriad of issues, making it challenging to stay informed without delving into operational details.  

Leveraging technology has become a necessity to bridge this gap and provide the board with the necessary visibility to monitor compliance effectively. Advanced technological solutions offer concise and insightful reporting, enabling directors to maintain a comprehensive understanding of the organisation's compliance status without being overwhelmed by operational intricacies. For instance, Yellow Canary’s platform provides boards with a comprehensive overview of high-level information that is easy to navigate. This feature streamlines the monitoring process and provides the flexibility to explore specific details as necessary, ensuring informed decision-making and effective governance.

5. Do we have a culture of compliance that trickles down through the organisation?

In the ever-evolving landscape of compliance obligations, relying solely on processes can quickly lead to outdated solutions. The cornerstone of sustained compliance lies in fostering a compliance culture. This cultural shift must originate at the board level, permeating through the organisation to create an environment where compliance is embedded in every action and decision.  

Boards that actively engage with compliance information and prioritise it in their decision-making processes effectively set the tone for a compliance-centric culture. Top management should visibly support and actively promote compliance, setting a clear example for the rest of the organisation. Leveraging technology to simplify compliance tasks and integrating compliance objectives into the company’s Environmental, Social, and Governance (ESG) program can also reinforce this culture, ensuring that compliance becomes a natural and integral part of the company ethos.  

By instilling a culture of compliance that creates a supportive environment that resonates from the boardroom to every corner of the organisation, companies can navigate the complexities of regulatory requirements with confidence, safeguard their reputation, and ensure long-term success.

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