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Overpayment and underpayment of wages



Compliance Alert


Overpaying or underpaying your staff puts your business at risk. It’s important for employers to know how to prevent and remedy the overpayment or underpayment of staff.


Overpayment


Overpayments can happen when an employer misinterprets the employee’s entitlements, or because of a payroll error. According to the Australian Payroll Association, overpayments are almost as common as underpayments.


The Fair Work Ombudsman advises that employers can’t take money out of an employee’s pay to fix an overpayment. Instead, the employer and employee should discuss and agree on a repayment arrangement and put this in writing. If the repayment can’t be agreed on, the employer should seek professional advice.


The process for fixing an overpayment is:

1. Work out how long the employee was overpaid

2. Work out how much the employee was paid and what they were entitled to be paid

3. Calculate how much the employee has been overpaid

4. Discuss with the employee and confirm repayment arrangements.

5. Implement the agreed arrangement and make any adjustments in the payroll that are required.


A deduction can only be made to get back an overpayment if it’s allowed under a registered agreement (and the employee agrees to it), award, legislation or a court or Fair Work Commission order. Employers should check the award or agreement to find out when deductions can be made.


Underpayment


Employees must be paid at least their minimum pay rates and entitlements. Like overpayments, underpayments often happen because of a mistake or payroll error.


Employers who fail to fix the errors promptly and prevent them from recurring face serious penalties. Wage theft is now a criminal offence in Victoria and Queensland, with calls for other states and territories to also introduce similar offences for systemic and deliberate wage theft.


The process for fixing an underpayment is:

1. Work out how long the employee was underpaid

2. Work out how much the employee was paid and what they were entitled to be paid

3. Calculate how much the employee has been underpaid

4. Discuss with the employee and confirm back payment arrangements

5. Make any adjustments in the payroll that are required.

6. Keep up to date with future wage increases.


The end of financial year and the end of calendar year are optimal times to review your HR systems and processes to ensure you are paying your staff correctly. This can include checking new pay rates and superannuation requirements, reviewing employment contracts and agreements, and auditing your payroll transactions.


For more information or tailored support, please contact us today.