You don’t jump out of bed at the opportunity to undertake a wage review. No one does. You might drag your feet begrudgingly or you might want to rip the band aid off and get it over with. But again, certainly not jumping out of bed at the sheer thought.
Let’s say you have identified that you haven’t correctly applied the higher duties allowance or an overtime trigger for part time employees. You’ve uncovered the issue, done some initial digging, reported it to your leadership team and there’s pressure from the board and executive to hurry up and ‘just get it done’. It’s time to get cracking.
You’ve assembled a team, engaged your legal advisors and a provider to quantify the impact of the underpayment, extracted the data, settled the pay rules and the project is well underway. After a lengthy process that leaves you and the team battle-weary, you have finally made the payments, prepared the payslips and sent the letters to your employees. It’s almost time for the project completion dinner when someone asks “…but what about the impact on super?” or “you don’t think this would impact payroll tax, do you?”.
Oh no. Please no. Not again.
You may think of the wage review as being triggered by a single issue and in your bid to ‘just get it done’, may not consider the unintended consequences of underpaid wages. In a sense, the wage review is like the little snowball that starts to roll down the hill, with each additional issue you uncover, it gets bigger and bigger, and by the time you reach the bottom of the hill it’s out of control.
At Yellow Canary, we call this the ‘Snowball Effect’.
You may think you are dealing with a wage review when you are really dealing with a broader review of payroll and employee entitlements. It is important to consider this effect before rushing to a solution, as you may miss the unintended consequences only for those to snowball and become a bigger headache down the track.
In wage reviews, the phrase “‘preparation is key” ’ is critical to a project’s success. Too often we see this step skipped, when it really is the single most important step that will determine a project’s ultimate success or failure.
We want to save you the pain of experiencing the ‘snowball effect’ so you can tackle it once and tackle it early. We’ll be covering the five key issues you may not initially consider when thinking about your wage review and what to do about them.
Lump sum payments in arrears
The trap: the impact of underpayments relating to periods more than 12 months ago on income tax.
When undertaking wage reviews, you’re aware that you will need to withhold PAYG tax on the payment as you would with any other payment to employees. However, for underpayments relating to previous financial years you may not realise that the calculation and presentation is different to that of normal wage payments.
The Australian Taxation Office (ATO) considers lump sum payments for underpaid salary and wages relating to earlier income periods (12 months or more) as Lump Sum Payments in Arrears. Lump Sum Payments in Arrears are taxable in the year they are paid and this is where the problem lies. Lump Sum Payments are taxed in the year they are paid and theoretically could skew an employee’s income tax, student loans or child support and welfare payments. To deal with this, the ATO allow offsets to be claimed on eligible Lump Sum Payments in Arrears, requires back payments to be split out by financial year and has special PAYG withholding instructions.
When identified early in the process, this is an easy issue to handle.
The trap: paying superannuation on the underpaid wages but not performing a historical review of superannuation.
You know that you will need to pay superannuation on the ordinary time earnings (OTE) component of the back pay. What you may not realise is that if you‘ve had a problem in the way you are applying the award, you may also have a problem with the way you’ve been calculating superannuation. For example, there may be a pay code for OTE that hasn’t been ticked to calculate superannuation and unintentionally superannuation hasn’t been paid for any payments attributed to that pay code, or a new pay code may have been added and wasn’t set up correctly. Again, errors happen, even at Australia’s largest employers.
If you recognise this and scope it at the beginning of the review, you can run the reviews in parallel, dealing with both issues at once and in the same time it would take to perform the wage review alone.
The trap: ignoring the impact of underpaid wages or incorrect application of the award on paid and accrued leave, particularly long service leave.
Naturally, you recognise that you need to include leave paid to employees in the scope of your review. Less obvious is the effect on (i) leave accrued or (ii) the basis of the payment of leave in the case of long service leave.
In the case of leave accrued, where you realise that you had not correctly accrued additional leave to shift workers or other eligible employees, you need to make good on remedying their historical accruals and the underlying accrual rate moving forward.
Long service leave is a little more complex and entitlements vary by state. For example, in NSW long service leave is required to be paid at the higher of the employee’s current ordinary remuneration or the average remuneration over the last 5 years including bonuses or commissions. That particular clause is not given a lot of airtime and is often overlooked. If you are doing a wage review, and identify an underpayment, there will also be an underpayment arising in your calculation of any long service leave paid throughout the period.
The trap: forgetting about payroll tax obligations.
Payroll tax obligations vary in each state, but generally speaking employee back payments will attract payroll tax.
Increasingly, state-based revenue bodies are paying close attention to the remediation of wage underpayments and are seeking to claw back the underpaid payroll tax arising on the payments. As with most tax or revenue bodies, they don’t take kindly to tax avoidance and we are seeing more regulation introduced to allow revenue bodies better visibility of wage underpayments so they can tighten compliance with payroll tax legislation. For example, the NSW Government is seeking to introduce laws that allow companies avoiding payroll tax to be named and shamed, and grant Revenue NSW the ability to reassess payroll tax more than five years after the assessment when wages have been underpaid, and increase penalties.
Luckily, remedying the payroll tax arising on wage underpayments is a much simpler task than some of the other elements in a wage review. Typically, the full amount of the back pay attracts payroll tax and therefore it is a matter of calculating the payroll tax as you normally would. In most states you are permitted to make a voluntary disclosure for the additional payroll tax on the wage underpayment with the support of your finance team or taxation advisors.
The trap: ignoring the impact of underpaid wages on wages declarations for workers compensation in certain states in Australia.
Generally, in states where workers compensation is governed by a regulator (ie New South Wales, Queensland, South Australia and Victoria), it is expected that remediation payments are disclosed to the respective authority. Depending on the materiality of the amounts, it may or may not result in an adjustment to premiums.
Helping you get on the front foot of compliance
We understand that wage reviews are an overwhelming process at the best of times and factoring in Lump Sum Payments in Arrears, superannuation, leave , payroll tax and workers compensation into the review can make it even more so. But when these elements are scoped within the project plan at the beginning of the wage review it is much easier than it seems. Handling the peripheral issues upfront allows you to control the direction of the project with the confidence that you have anticipated the issues and have clarity over the journey to the finish line. Thus, avoiding the nasty surprises that come with ignoring the snowball effect.
As with every aspect of a Yellow Canary project, we work closely with your legal advisors, payroll and operations teams to ensure you are considering all the issues that may arise in the review upfront. If you want to speak to us about the best way to handle these issues in your wage review, contact us here and we’ll give you a call.
* Yellow Canary content on this website is intended solely for the purpose of offering commentary and general knowledge. The content is not intended to constitute legal advice. You should seek legal or other professional advice before acting or relying on any of the content.