A penny for your thoughts? It should be a dollar.

As multiple Australian employers reveal they have been underpaying employees to the tune of millions of dollars, companies and boards need to be aware of the potential legal, financial, organisation and reputational risks at stake when wages and allowances aren’t strictly monitored. 

In the latest of a long list, Woolworths have revealed that over the course of 9 years, 5,700 supermarket and metro store employees have been underpaid by more than $300 million. FWO is investigating what is believed to be Australia’s biggest ever wage underpayment case.  It is likely that the extent of the underpayment will increase as Woolworths continue to analyse their pay records.

Woolworths detected the error when a review was undertaken following the implementation of a new enterprise agreement. The review highlighted pay inconsistencies between salaried store employees and those covered by the enterprise agreement. The salaries had not adequately factored in the penalty rates and number of hours actually worked by the 19,000 salaried store employees. Woolworths has pledged to pay all employees their full entitlements with the first interim payment made before Christmas.

The Woolworths underpayment announcement comes as a shock after multiple other large-scale businesses have admitted to not classifying staff correctly, failing to pay overtime or penalty rates, or not completing annual pay reconciliations where required.

In 2018, 7-Eleven was found to have underpaid workers $160 million. This appears to be just the tip of the iceberg. In 2019, some of Australia’s highest profile and largest companies have admitted to large scale underpayment of wages. These companies include George Calombaris’ (MAdE Establishment) – $7.8 million, Super Retail Group – $32 million, Commonwealth Bank – $15 million, Michael Hill Jewellers – $25 million, Sunglass Hut – $2.3 million, Rockpool Dining Group – $1.6 million and Maurice Blackburn Lawyers – $1 million. Even QANTAS and the ABC have admitted to underpaying their employees.

Sandra Parker, Ombudsman, has encouraged employers who have underpaid employees to self disclose. Ms Parker has said that while self-disclosure will be considered a mitigating factor, admission is not absolution and employers must be held to account for breaching workplace law. Ms Parker believes that ineffective governance, complacency and carelessness are largely to blame for the underpayments.

The Woolworths revelation shines a light on the need for comprehensive pay and condition reviews. All employers, whether small or large, are required to understand and accurately apply Australia’s somewhat complicated industrial relations system in order to ensure that their employees are paid all their entitlements. Woolworths and most of the companies identified in this article did not actively embark on an overt campaign to underpay their workers and commit (what the unions have called) “wages theft”.  Regardless, significant underpayments have occurred, presumably through errors, lack of understanding and inaction.

The financial risk is obvious. Employers are forced to fund unbudgeted, potentially significant, back pay claims in addition to possible penalties and contrition payments. For example, George Calombaris made a $200,000 contrition payment in addition to the back pay. Furthermore, there are also significant indirect costs involved in undertaking lengthy, complex wages audits.

The reputational risks and associated costs to business are difficult to quantify. However, there is no doubting that a company that has been underpaying their employees is not seen favourably in the public eye.

The final area of risk is organisational. While most commentary has focused on financial and reputational risk, this has neglected the organisational or cultural impact. Underpayment of wages breaches the psychological contract between individuals and their employer.  How organisations address this breach is a make or break “moment of truth” for their culture in the future.  Positive cultures will adopt a solution-focused approach, with genuine concern for how people have been negatively impacted, working transparently and collaboratively to learn from the situation to resolve the problem now and into the future. Blame cannot be the name of the game. Critically, when seeking to restore trust, compensation should be of sufficient value to make individual employees feel respected and that the inconvenience to them is acknowledged.

Ms Parker states the notion of Companies underpaying their staff is considered “almost cavalier in the sense that you don’t put the effort in to make sure your greatest asset is getting paid properly.”

Over the last 12 months the Mapien payroll analysis and audit team have assisted a number of clients with audits to identify potential underpayments of salaries or leave benefits.

If you would like to “check” your payroll and ensure your company is compliant contact our payroll consulting team on +61 8 9485 4200.