Are you Aware of Your Obligations When Employing People?
Australia has some of the most complex payroll laws in the world. There is a great deal to take care of when employing people and increasingly we are seeing the Fair Work Ombudsman taking legal action against employers who have done the wrong thing.
Mistakes may be unwittingly made, but the penalties can be severe!
It is the business owner’s responsibility to get the employment engagement correct and to know all the provisions that apply—or at least they must know where to go for correct guidance and information!
Too often we (registered agents and advisors) hear of business owners employing people without taking the time to find out what their obligations as an employer are. With the new reporting obligation of Single Touch Payroll now here for all employers, employers need to get payroll right.
The Basics of Employing People
Before you do any payroll processing in your accounting software, you need to know some basics:
- Is the worker an employee or contractor? If an employee, are they casual, part-time, full-time or contract?
- The applicable award or other legal instrument
- Rate of pay plus applicable penalties, loadings, allowances and entitlements
- How to record payroll timesheets
- Payroll record-keeping obligations
- Tax and superannuation obligations
- Pay slips
When an Employee Starts Work
An employer must provide the following documents to all employees upon engagement:
- Tax File Declaration form
- Superannuation Choice form
- Fair Work Information Statement, which includes the 10 National Employment Standards—minimum workplace entitlements that apply to ALL employees
- Access to the relevant modern award or other industrial instrument for the employee’s position
It is best practice (but not legally required) to also provide a letter of engagement, copy of business policies and procedures, and to record emergency contact details.
Other Employer Obligations
An employer has other obligations such as providing a safe workplace, workcover insurance, payroll tax once over certain thresholds, written dispute resolution process, not discriminating against existing or potential employees on any basis—race, sexuality, gender, age, religion or anything else.
The employer also has an obligation to not allow bullying to occur at the workplace, and to take effective and appropriate action if it occurs. Finally, the employer must take the proper process for performance management and disciplinary action.
Laws Related to Payroll and Employment
Some laws apply to all employers, such as the Fair Work Act 2009 and tax laws, however there may be laws that are relevant for a particular state or industry. Anyone employing people for the first time should get advice from Fair Work Ombudsman or even an employment law expert to make sure they understand what is involved in employing people.
The main laws that apply are:
- Fair Work Act 2009 and Fair Work Regulations 2009—the Fair Work Act is the law and the Fair Work Regulations provide guidance on understanding the terminology and practical application of the law.
- Income Tax Assessment Act 1997—this governs who must pay tax and how much
- Superannuation Guarantee (Administration) Act 1992
- Privacy Act 1988
- Work Health and Safety Act 2011
- And others such as federal and state anti-discrimination laws
What About Processing Payroll?
Fair Work Ombudsman compliance, employment law compliance and other employer issues are the hard part! Once this is researched and documented, processing the actual pay runs in your accounting software should be straightforward for most employers.
It is worth taking the time to set up payroll correctly and get expert advice before any processing is done. This means payroll processing should then be simple and is more likely to be correct and fully compliant. This then results in the correct financial and entitlement reporting for both employer and employee.
Of course there are some larger employers who have complex payroll and they would generally outsource their payroll to a qualified professional, and/or they would use a specialised add-on to their accounting software to manage payroll and employment law matters. But for most small businesses in Australia, it is feasible to process payroll within the accounting software.
Common Mistakes Employers Make
There are some common errors that employers make in processing payroll, either because of not knowing enough or incorrect setup of the software:
- Unlawful deductions
- Underpaying employees
- Thinking that allowances and superannuation are optional extras
- Annualised salaries incorrectly calculated and documented
- Cashing out leave incorrectly
- Disciplinary action not taken in accordance with Fair Work Ombudsman guidelines
- Thinking that a high pay rate overrides the award
- Unfair dismissal
- Lack of payroll records
- Not providing pay slips to employees
Thinking that written agreements about anything will override the statutory obligations imposed by the NES and modern award or other legal instrument is the most common mistake employers make. Just because an employee has agreed to something and it’s in writing, doesn’t mean that this overrides an employer’s obligation to follow the law.
For example, an employer and the employee may agree to cash out excess annual leave of 4 weeks. However, an employee may only cash out a maximum of 2 weeks per year. The employee has the right to take the extra 2 weeks of leave, even though they agreed to it being cashed out. The employer is the one who is expected to know the correct rules, not the employee.
What payroll records must be kept?
- Employee details, name, DOB, address, contact info, emergency contact
- Start date
- Proof of provision of Super Choice statement, TFN declaration, Fair Work Information Statement
- Award, classification, employment status, other legal instrument or industry specific considerations
- Hours worked each pay period
- Record of keys provided, access to software, equipment, buildings, vehicles etc
- Employment agreement that sets out all previous information
- Other agreements—for example, flexibility arrangement, averaging of hours arrangement, performance management, salary sacrifice arrangement
- Hierarchy—who employee reports to, any other business procedures
- Leave records—amount accrued and taken, balance at any given time, details of type, date and amount of leave taken
- Cashed out leave, directed leave, annual business closure
- Superannuation choice fund, amount accrued and contributions paid
- Dismissal, resignation, redundancy, retirement, illness or injury
- Reason, type of termination, finish date
- If dismissal, proof of warnings, mediation, discussions, meetings etc as part of performance management plan
- If redundancy, proof of change in business that necessitates redundancy
- Any communication by ATO or Fair Work regarding any payroll matters
- Final pay details
- Keep everything for seven years!
Talk to me if I can assist with understanding your obligations as an employer or with setting up your Xero payroll.