With the often complicated employment environment it is not uncommon for honest errors to be made when processing payroll. While these errors are almost always made without malice or intent, it is important for all businesses to understand what the requirements are, and what the options are, when addressing errors that have resulted in inadvertent underpayment, or indeed, overpayment of staff and to ensure that they have systems in place to identify and rectify any issues in a complete and timely manner.
Where there has been an underpayment of a staff member, either through a misclassification resulting in a lower than required base rate, or the incorrect application of loadings or penalties, the employee is entitled to receive the monies they should have in the form of backpay and in some cases (particularly those where the underpayment has happened over a long period of time) there is an argument for the application of lost interest.
When a business identifies that there has been an underpayment they should immediately investigate to determine the extent of the issues and if they may apply to other staff. This investigation should be a thorough look at the system and how it was applied to this employee and all employees. It can be helpful to have an industry association or other external professional review the system as part of this process.
Once the business has established the nature and value of the underpayment they should communicate with the effected employees regarding what caused the underpayment, the exact nature of the underpayment and the businesses rectification of the system and the repayment options. It is vital that this communication is clear and comprehensive. Failure to clearly state all of the elements that were used to calculate the backpay and all of the pay periods that they applied to may result in the employee lodging a claim for backpay later that may have already have been addressed by this process, but due to vague documentation was contentious.
The employee is entitled to be paid without delay the amount they are entitled to, however, by genuine agreement between the employee and employer the parties can agree to alternative repayment options, including options such as crediting leave balances with the equivalent value or a weekly payment in installments up to the value of the backpay amount.
The communication of the issue of the underpayment, its nature and cause should be made in person if possible, as well as documented in writing. If it is not practical to meet in person at the very least should be documented in writing. Similarly the communication of the agreement that was made on resolution of the underpayment (including exactly the hours/days/weeks equivalent payment that is being provided, at what rate, and how it is being disbursed) should also be documented in writing.
It is important that if an installment approach is being taken that the agreement document what is to happen if the employees employment comes to an end (by termination, resignation, redundancy or death) before the final installment is paid. The standard would be that the balance would be paid out immediately, and the business should ensure it has the cash flow to meet this requirement of they would be in breach of the agreement.
Once the issue has been identified and the underpayment either paid or agreed resolution documented the business should ensure that the system that allowed the error to happen is reviewed and corrected if necessary.
In the event of an underpayment there are a series of questions that businesses often ask;
- Q: How far back should we go?
- A: Underpayments will need to be rectified from when they occurred. In some cases this will be from day one of employment
- Q: What about staff who have left?
- A: Staff are entitled to receive payment for the time they worked and this includes staff who have left. Every effort should be made to locate them to provide the backpay, however if they cannot be found due to address changes etc, the monies should be left in trust with the Fair Work Ombudsman for the employee to claim later
While it is less common, there are still instances of overpayments of staff. In the event of an overpayment of staff that is due to staff fraud or genuine error a similar process should be followed as with underpayments. The extent should be identified, systems should be rectified and consultation with staff about the situation should be had and documented.
The central question becomes ‘’can the business get the money back’’, the answer is yes, but in most cases it would be considered problematic or counterproductive and can not be done through garnishing wages
In the main overpayments are caused by an administrative error by the business, and most overpayments amount to smaller relative amounts. In this case it would be prudent for the business to communicate that the overpayment has happened, communicate the value of the overpayment over time, and communicate to the employee that the system will be fixed and the overpayment will stop – it is advisable to allow 1-2 weeks notice of the ceasing of overpayment where possible.
Where the overpayment is significant, such as the recent cases of employees who received millions of dollars pay in error, then swift action to have the funds locked and returned should be undertaken – businesses in this situation are advised to seek legal counsel.
For more on what is (and is not) an overpayment see: https://www.fairwork.gov.au/pay/deducting-pay-and-overpayments
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Elisha Radwanowski BCom(HRM &IR)
Executive Manager Employment and Training