Thursday, 5 August 2021 KordaMentha’s Behind Business podcast discusses the most pressing commercial, financial and operational issues facing business today. In the last few years we have seen Australia's biggest companies in the headlines for all the wrong reasons. Allegations of wage theft have been levied against trusted brands, and these allegations have tarnished reputations, finances and employee relationships. In this episode of Behind Business, KordaMentha’s data analytics expert Ronald Holtshausen and Norton Rose Fulbright’s employment and labour partner Alexandra Shields join Sean Aylmer to tackle the topic of employee underpayment – what it is, why it happens and how it can be avoided. Transcript Sean Welcome to Behind Business, the podcast where KordaMentha experts discuss the most pressing issues facing business today. I'm Sean Aylmer, an economist and journalist for 25 years and the host of the Fear and Greed daily podcast. In the relationship between employees and employers, there are few more important issues than pay. Once the employment is agreed upon, it becomes a legal and important bond. Employers pay on time every time, and employees expect that it will be done correctly. Where it goes wrong, it frequently goes beyond the professional realm. It can feel very personal. It can also be explosive. Before COVID-19 dominated our lives, we saw some of Australia's biggest companies in the headlines for all the wrong reasons. Allegations of wage theft have been levied against trusted brands. Woolworths, Commonwealth Bank, and even the ABC. And these allegations have tarnished, reputations, finances, and employee relationships. It can be a complex field, but we have two experts to help. In this edition of the Behind Business podcast, we have Ronald Holtshausen, a KordaMentha partner specializing in data analytics and forensic technology. And to help us navigate the legal perspective, we have Alexandra Shields, an employment and labor partner at global law firm, Norton Rose Fulbright. Ron, Ali, welcome to Behind Business. Alexandra Thank you for having us, Sean. Ronald Thanks for having us, Sean. Sean Ron, let's start with you. How do we get our heads around the value of employee underpayments? How big a problem is it? Ronald I think it's a difficult question, Sean, given the variety of issues that end up causing the potential employee underpayments. But if we look at a quantum perspective and we look at some of the headlines that we've seen recently, including in the retail sector and the banking sector, they can get large. We've seen cases and there are cases reported at the moment in the hundreds of millions of dollars. Also, when you look at the public scrutiny that comes with having a matter like this brought to the public attention, you can understand that there's a few cases that are probably in the public eye, but there are probably many cases that are being worked on behind closed doors. Sean Ali, do you have a sense of the size of it? I mean, Ron just mentioned that there must be a lot going on behind closed doors. Do you get a feel for that as well? Alexandra Oh, absolutely. It's very hard to put a figure on the size of it, but certainly, it is something that's facing all employers. But whether it be large companies or small companies, as soon as there are employees, we are starting to see a question of are those employees being paid correctly. Sean Why does that occur, Ali? Alexandra It's a complex answer as to why it occurs, and there's really two answers here. The first question is what do your employees do? And that then determines whether they've been classified correctly under an applicable modern award or an enterprise agreement. And that's because modern awards and enterprise agreements will apply to employees based on the work that they do and the industry within which they work, rather than whether or not you've agreed to it at the outset. So that's the first question. What do they do? The second question is how do they work? And that's because the hours that they work or the times at which they work will also dictate whether they should be entitled to additional pay such as penalties, overtime, allowances. And all of those additional payments are also owed to the employees. So the first question is, do we have the right minimum rate of pay? And the second question is, do we have the right additional payments based on how they're actually working? Sean Ron, in your experience, is they're the main reasons why it happens? Ronald Yeah, I think many of them can come down to those aspects, but I think what is insightful to look at is the economics and the industry that we are working in at the moment. We're working in an economic world that's being disrupted in many areas and in many sectors of business. And so I think we are seeing organizations shift, change, diversify, and adapt, but we need to be conscious of adapting our workplace relations aspects, our payroll aspects, and our classification of staff at the same time. And when those things come out of kilter, we definitely see the aspects that Ali is talking about, where staff are being paid under, potentially, the incorrect award or being paid under a misclassification of that award. Sean So maybe, Ron, have you seen examples where there's willful intent to minimize employee payments? Or is it mostly a systems issue? Ronald Yeah, I can't say with the clients that I've worked at where I've actually seen there has been an intent to underpay staff. I don't think that has been the case. And I think in many cases, the titles of wage theft might go a little bit too far. There are definitely circumstances where organizations just don't have the policies and the procedures and they don't have the systems set up to accurately record time. And I think that's an interesting circumstance because there definitely is a strong obligations for organizations to record time of their staff accurately and pay that accurately. But in many cases that I've worked on and in some aspects that I've worked on, it's really just hasn't been deliberate. It has more been a case of just misinterpretation or misunderstanding, or maybe a lack of knowledge and understanding how these awards should be applied or these enterprise agreements should be applied. Alexandra Yeah, absolutely. I would echo that. It's certainly not something that we regularly see as a deliberate intention to rob staff of wages, or at all to deliberately underpay staff. But the difficulties come from different levels within the organization applying a classification. So for example, in some organizations, you might have a ground-level manager determining what awards should be covering the employee and therefore what rate they should be paid. And that manager doesn't necessarily have a background in legal or in HR. And similarly, then we don't necessarily have the right record keeping to determine how the employees are actually working. It's more of a case of do we have all areas of the business talking to each other. So is executive management aware of the way in which employees are engaged and the way in which employees are working such that they can feel confident that the employees are being paid appropriately. Or are decisions being made by one aspect of the business that's not visible to another. Sean Okay. And so what sort of penalties can be involved just in terms of legal penalties? Alexandra Certainly, if there is an underpayment, there are penalties under the Fair Work Act for breach of the Fair Work Act. So if you fail to pay your employees in accordance with a modern award or an enterprise agreement or otherwise fail to give them entitlements under the Fair Work Act, there are penalties for breaching that. There's also the obligation to back pay employees and that back pay may come with interest as well. Sean Okay. Ron, I suspect you're going to say that even a bigger penalty often is reputation and culture. Ronald Without a doubt. And again, we go back to different industries are affected in different ways. For some industries, the financial repercussions could be massive where, in other industries, let's say hospitality and the restaurant industry, your reputation can be your livelihood. So I think we've got to think about this from not just a financial point of view, but we've also got to think of it from the non-financial perspectives, such as reputation. Sean It must be very difficult, I'm going to stay with you Ron, to actually go through and work out what's happened, analytics and the forensic nature of trying to work out what went wrong when, and who in the organization hasn't been paid correctly. I mean, that's exactly, that's your [inaudible]. That's what you do. Very complex, I'd imagine. Ronald Yes, correct. It is a very interesting process from start to finish. There's high anxiety in the beginning. There's a very much a knowledge-building process that happens after that. There is a sense of we need to get this done. We need to get this done quickly. But as time unfolds, I think organizations really do understand the requirement to get it done right. For me and my background as a forensic practitioner, I think there are two really key attributes that my skill set helps out in working on these matters. As you can imagine, organizations that have large employee workforces, when we start looking at a couple thousand of employees that might be susceptible to potential underpayments, this really does become a data problem, particularly when you're looking at a couple thousand employees, and you're looking at a couple years that you have to do these calculations for. In many cases, six years. You really start understanding the quantum of a data problem that this turns out to be. So analytics and the ability to write algorithms that run these calculations in line with the interpretations that we get from individuals like Ali and the legal teams that we work with, the economies of scale really come to the fore. And so using technology really gives you that added advantage that you can do it again, and you can repeat it without minimal human intervention and human error. But the second aspect is really that forensic mindset and that forensic mentality. Being a forensic practitioner, we are very much under the scrutiny of the work that we do. We definitely need to be able to justify our assumptions when we make them. We need to be able to construct our calculations, such that they can be re-performed by others. And the stakeholders in these matters find that extremely valuable, whether those stakeholders are the organization that might be engaging you or the employers who want to understand how their remuneration has been recalculated or, in many cases, maybe even the ombudsman who wants to understand how this process was undertaken. That forensic approach becomes very valuable. Sean Ali, what's your take on how managers view these sorts of issues by the time it gets to you? Alexandra It's interesting, Sean, because it gets to me at a few different stages, depending on the client. We have a number of clients who are taking a proactive review and in doing so there's exec level or board level, which is saying, we want to make sure we're doing the right thing before anybody has actually complained or suggested otherwise. So it's an audit. And that can be as labor-intensive as Ron has described already. But also, you're taking into account then that it's not something that you want to alert the organization that you're undertaking, because we don't want to raise alarm bells. You want to try and gather the information without actually concerning your employee or your workforce in order to be able to conduct a review and have your own conclusions at hand. The second approach, and probably the more difficult approach to navigate, is when you are dealing with a complaint or you're dealing with a query from the ombudsman, the Fair Work Ombudsman. And that's when you really have to try and juggle a number of stakeholder balls, because that's when you are trying to manage your employee confidence. You want to minimize the amount of work that is going into the review. So you don't necessarily want to be reviewing timesheets from every single employee for the past six years. But on the other hand, you need to understand the depth of the issue. So I think it's really a multifaceted approach and it depends at the way in which the client's coming into it in the first place. But certainly, you're on the front foot when you're taking a proactive audit. Sean So in a sense, that's the best practice, Ali, is to make sure you are proactive about the potential challenge. If it's already come up and you didn't expect it to come up, what's the best way to handle that as an organization? Alexandra Well, the best approach actually is to be on the front foot in the first place. So have the right records and engage employees properly in the first place. Then we've got the proactive audit. And then when you've got the complaint that's coming and how you actually have to deal with that, you really want to be managing it culturally and through communications, not just the legal audit. Because any kind of audit will take time and money. But at the same time, you've got employees who are sitting there saying, "Well, where's my pay? What's happening? When am I going to find out an answer on this?" And the more agitated an employee gets, the more likely they are to report it to the ombudsman, to engage with the union, or to go public with allegations that haven't yet been actually established. So really it then becomes a multifaceted approach where you are managing communications, managing employee confidence, but at the same time, trying to understand the facts and figures. Sean Ron, how hard is it for an organization to recover when something has gone wrong? Ronald There's not one magic answer here for what is the ramifications for an industry. How you manage it, I think, is a very important proponent to that, though. If you can manage your workforce and build confidence with them throughout the process, if you can manage the public perception that's being put out about your organization, you're definitely going to come out on a more front foot perspective than those that don't. So being proactive about it here, even in the circumstance of how you take it forward, can be very important for how you get to the other side. Sean Ali, do you see any specific risks in 2021 and beyond? Alexandra Yeah, absolutely. And what we're seeing with COVID is a real change in the way we work, and that change is likely to be a permanent change moving forward. So that means when we talk about employees working more flexibly, it means that the times at which they're working is more flexible, and the locations that they're working is more flexible. And the flip side of that is that managers don't necessarily have that oversight. So they don't necessarily know when the employees are working or what they're doing. And so over the course of the interview today, we've discussed the development of roles and the development of working hours and not having that properly recorded by managers. And that problem is even more acute when you don't have direct oversight over your employees all the time. So absolutely, the change in the way in which we're working and the flexible approach that we're taking to working is going to mean that employers and companies have to be more vigilant about what their employees are doing and when they're doing it. And there is, without doubt, a heightened interest from the Fair Work Ombudsman, and there's a heightened awareness of employees as to what they should be receiving as their basic entitlements. Sean So Ron, given your experience and what you've worked on, what are the one or two or three things that an organization needs to keep on top of to make sure they're at best practice? Ronald I think there's two things, Sean, in industries and in organizations that I think should be front and center with management. And one is the aspect that workplace relation laws and setting up your payroll is not a set and forget perspective. We touched on earlier that organizations change, but so do the workplace relation laws and so do the awards. So do the interpretations of these awards. And as we know, the rates change every year for many awards. So that set and forget mentality, I think is a dangerous one. And if we can drive that out of organizations, that will take us a long way down the road in terms of being able to get better compliance. The next one is record keeping. There have been a number of matters that I've worked on where the record keeping has ultimately been one of the most costly factors in performing the recalculations. So keeping good records, for a simplified perspective, the timesheet perspective, when your employees have worked, how many hours have they worked, can you access that information for the statutory requirement? Can you go back three years? Can you go back four years to find out what hours a particular employee worked? Can you see changes in their roles? Can you see changes in their rosters? Can you very quickly and adequately get that information at hand and be able to support calculations or support analysis that you've done? So those are the two. It's not a set and forget mentality in this area. And the next one is keep good records. Sean Ali, your take on that? Alexandra Absolutely. I mean, this is something that you've got to get right at the start and then right the way through. So Ron was talking about the fact that legislation might change and award rates change, but remember, what your employees do change as well. And as they develop through their careers, they'll go from a level one to a level two to a level three. And all of that carries with it different rates of pay, different entitlements. So you have employees who are changing what they do, and that might affect the way in which they're classified or the award under which they're classified. And secondly, do you know how your employees are working? So Ron talked about keeping good records. This is not just ensuring that you have pay records in place, but do you have a way of actually ensuring that you know how many hours a week your employee is working? We've come a long way as employers from the days of the bundy clock, but in some ways, we haven't. And we need to have some kind of time and recording system in place so that we can demonstrate that this is how many hours this employee's worked and that they've therefore been paid correctly. Sean What about individuals? How do they protect themselves, Ron? Ronald I think individuals have become a lot more aware of the legislation and the awards under which they work. And I think, at the moment, there is a big movement with employees to understand more about what award I sit under and what am I entitled to under that award. So I think employees can self-educate through the Fair Work site and they can get a little bit more information about what they're entitled to, particularly even going to their union. So I think it is a self-education perspective here, like anything else in life, that if you spend a bit of time understanding what you're entitled to, you have a far more fruitful discussion with your employer. Sean And you'd agree with that, Ali? Alexandra I would. I think that employees need to have an awareness of what they're working and the way in which they're being paid, but they also have a voice and they should be raising issues early on with their employers, asking their managers, asking HR if they've got any concerns about the way in which they're being paid, rather than letting it escalate to where we see a lot of these issues arise, which is the point of termination. And usually, that's the point where employees say, "Well, hang on a second, I think that there's been a problem for the last six or eight or 16 or 18 years." And employers are scrambling to go back and try and work out what they were paid during that time. So the best advice I would have is to have a constant conversation between the company and the employee. Sean So wrapping it up, it certainly is a complex issue. And Ron, to what you were just saying there, I suspect that best practice is to actually check in with an expert fairly regularly. Ronald Yeah, I definitely would agree with that sentiment. I think there are a lot of proactive things employers can do. And many of them don't have to necessarily be the most expensive or incur the most costs to do them. But having a look at, most organizations have payroll systems and in those payroll systems, there are a number of payroll codes. I think, looking at how you've configured your system and what payroll codes you have and whether it complies with the awards under which you pay your staff is one step that employers can look at. Doing annual reviews of the rates. We all know that the rates can escalate every year, depending on what award you're under. And so making sure your systems are up to date with those rates and the aspect that you can undertake. Again, as Ali has touched on, making sure your classifications are correct, I think is a big aspect as well. But above and beyond both of those, I think it's important to liaise with experts like us, and Ali in the legal front, to be able to give you that advice. Because some advice at the outset of these aspects can pay big dividends in your organization later on. Sean Ali, you'd agree with that? Alexandra Oh, absolutely. I think that the value of a short phone call upfront to sanity check, whether that be classifications, the way in which employees have been engaged, or the way in which you propose that they're going to work, is going to make a massive difference than trying to recreate that down the track. Sean Ron, Ali, thank you for talking to Behind Business. Clearly, underpayment and incorrect payment of income is a problem for many businesses, albeit one that is normally inadvertent. The rules can be complex and hard to interpret. Failure to follow the rules can lead to legal, cultural, operational, and reputational damage. It may well be a larger problem than we know about. Because while some cases have hit the headlines, many others go unreported. What we learned today is that the problem isn't going away and working from home is going to blur the lines even more. If you're a business that's unsure about whether you're paying correctly, or know you've made a mistake, get help. Ask an advisor for assistance in getting your books in order. And do it early. Don't wait until you're in the headlines. I thank my guests today, Ronald Holtshausen from KordaMentha, and Alexandra Shields from Norton Rose Fulbright. I'm Sean Aylmer. Thanks for listening to Behind Business. Subscribe