The Risks of Staff Underpayments

Overview

• Everyone is talking about it, the media, industry and customers.

• Employees increasingly know their rights and their rates

• Employees are connecting, mobilising and sharing info using online groups and modern unions.

• Since July 1st 2019, every pay run has been electronically sent directly to the ATO, in real-time. Yes, really.

• The ATO has been in softly-softly 'collaboration' mode. But they are about to start baring their teeth.

Takeaway: Paying your staff below the award wage and entitlements, is no longer an option. You WILL eventually get caught and fined.

Underpayments are currently a scorching hot topic, and with the recent revelations about Woolworths and Bunnings, the debate could spill over from hospitality into all industries.

The government might be forced to take action and criminalising 'wage theft' is an idea already being mooted. It has become clear that for some large businesses, systemic underpayments are a business plan, expecting that forgiveness would be easier to come by than permission.

Back in the hospitality industry, unfortunately, under-payments have been normalised in many workplaces, and in our experience, can take a variety of shapes and forms.

Flat Rates

"Awards and penalty rates are too complicated, so how about we just do $xx per hour?" Sure, that's easier for everyone, right?!

There are some circumstances where weekly or annual salaries are beneficial to employee and employer for regular and ongoing work. However, the award insists that wages are at least 25% above the equivalent hourly rates to compensate for the lack of opportunity for penalty and overtime rates. 

Salaries with Extras

Full-time salaries are where most of the fine dining restaurants have been caught out. Providing a contract and pay for 38 hours (with a provision for reasonable overtime) but rostering and expecting staff to work 50-60 hours per week or sometimes even more.

Scheduled breaks and rest periods are often ignored or at best, not recorded.

Mis-classifications

The classification system is probably the area where confusion reigns the most. The business must pay staff at the classification level that represents the duties they perform and their qualifications or experience.

Classification levels can be hard to assess, and for some reason, the breakdowns are buried in the depths of the award documentation.

If a FairWork investigation found that you had misclassified an employee, they could order a back payment for the difference on every hour they ever worked. Another huge potential liability that you wouldn't want to have hanging over you.

On-the-books / Off-the-books

Perhaps this is the most common payroll issue in small businesses up and down the country. The thinking being, that if a business pays one or two casual staff members 'under-the-table' or 'off-the-books', they might be doing them a favour and also giving the business a helping hand.

A staff member might already have a primary job and not want to work extra hours without the tax-free threshold, or perhaps they are in Australia on a student visa and have already worked their maximum of 20 hours per week during term time.

At first, it might seem like a double win for the business. If a business hides a little of the cash sales, it is not recorded, so they don't pay the GST on revenue. If this were $1000 per week, that would be $52,000 a year: which might also represent a chunk of annual profit on which they wouldn't pay business income tax.

Secondly, paying the staff member via a cash envelope means no 9.5% superannuation contribution and perhaps the staff member would agree to a lower hourly rate as they in-turn will pay no PAYG tax on it? 

When you then factor-in that some companies could also then remove the wage from workers comp insurance or payroll tax calculations, it becomes obvious why this has become endemic.

How did we get here?

There may be an argument that the lack of enforcement over the last decade has allowed bad operators to keep prices relatively stable while nearly all operating costs have increased dramatically. 

Some operators, who pay their employees at or above the award rates, claim it is difficult to stay competitive with the bad operators, who don’t.

No one wants to be the first to put up prices, but they have to reflect the costs of running a business profitably while paying staff award wages and entitlements.

Winds of Change

Times are changing and mostly due to technology, that underpayments above will become harder, if not impossible, to get away with.

The ATO are increasingly using sophisticated data matching and analytics to find irregularities and launch investigations.

They use their vast data sets to create KPI's for each industry and individual types of businesses. These are known as the ATO Business Performance Benchmarks. Hiding cash sales or wages will affect these ratios, increasing the risk of getting flagged or audited.

Cash Sales have been falling steadily for the last decade with the advent of PayWave and now digital wallets on smartphones.

Single Touch Payroll (STP)

The new, digital reporting of all payroll activity has been compulsory for businesses with more than four employees since July 1st 2019.

To be clear what this means:

The ATO now receives details of all salaries, wages (both hours & rates), PAYG and Superannuation totals, in close to real-time, in a data format that they designed.

If you don't know about this, you should ask your bookkeeper or whoever processes your payroll. If you haven't yet set up STP, you are going to start receiving additional fines from the ATO in the coming months.

Staff are understanding their entitlements better than ever before

And this is a good thing. Motivated and fairly compensated employees are exactly the people who are going to keep your customers coming back. The award system can be complicated but FairWork continues to make improvements to their documentation with tools and calculators on their website to help workers understand the system.

In addition, facebook groups and new unions such as HospoVoice in Victoria have popped up to organise and make (a lot of) noise in the direction of businesses accused of underpaying staff.

Think you can't afford to pay your staff the award wage?

Can you afford not to?

Yes, running a profitable hospitality business is harder than ever. You need to be growing revenue, keeping regular customers happy, marketing cleverly and watching the dollars and cents on every expense. It's hard, but cutting corners on staff wages is not the low-hanging-fruit.

Business Risk

Businesses are required to keep records for seven years, and this is also the length of time that a FairWork audit can cover.

Consistent underpayments would leave businesses with a financial time-bomb on their hands, one that could make the business insolvent. Is it worth it?

Imagine a member of staff working diligently away for three years with no issue then leaves for another job. 6 Months later, someone tells them that if you call FairWork, send them your timesheets and payslips, you might get a $20,000 back-payment!

Reputation Risk

The media has loved this story for the last couple of years, and they keep coming with new revelations about hospitality operators big and small you can read about a few of them here, here and here.

Stories such as these are certainly not a good look and could draw uncomfortable questions with friends, family and future employers.

What We Do

At Cafe Bookkeepers, we provide bookkeeping, accounting and managed payroll services exclusively to the hospitality industry. 

Because of this, we know how successful and profitable venues work.

It certainly is possible to navigate the industry awards and to pay your employees correctly and efficiently.

Find out more about our Managed Payroll Service here or get in touch with us here for a chat about your business.

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