Payroll remediation: Stage 2, Recalculation

In our first article, we identified five significant stages for companies and their legal advisors to consider and discussed the first stage in detail:

1.  Risk Review
2.  Recalculation
3.  Issue rectification
4.  Remediation for employees
5.  Dealing with regulators

Running recalculations

In our experience, recalculations  usually occur when either:

• A Risk Review has identified issues such as systems that have not been set up correctly; or 
• It has come to light that one or more employees have been underpaid over a period of time.  

What is a recalculation? 

A recalculation is where a calculation is prepared for some or all employees to determine the amount owed to employees based on the relevant Award(s) or Enterprise Agreement. This calculation is compared to the dollar amounts paid to each employee.

Undertaking a recalculation requires accounting and law firms to work together closely, as this comparison requires careful legal consideration and advice.

In our experience, recalculations are often performed on an entitlement-by-entitlements basis. That is, we compare calculated penalty against paid penalty and calculated overtime against paid overtime, rather than an overall test of whether the employee was underpaid. 

However, some employee contracts include clauses that allow entitlements to offset each other, particularly those on an annual salary.

The lesson here is to make sure you receive appropriate advice on the approach.  

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Considerations we work through

When conducting a recalculation, the following considerations are examples of key considerations we take into account – though it’s not an exhaustive list. 

• Is historical data available, including timesheets, schedules and payroll?
  • We are usually working in circumstances where data is incomplete, so we collaborate with organisations and their legal advisors to develop appropriate assumptions. For example, we often find that organisations have not accurately captured overtime worked.
  • If we are looking back over a long period, the systems (and therefore the available data) may have changed, and so different approaches will need to be made for earlier time periods. 
    
    
• The scale of a recalculation can vary with respect to the number of employees included and the period for the calculation. 
  • A recalculation for a sample of employees across a couple of payroll periods will result in a shorter recalculation project timeline and may be useful to identify and confirm if underpayments have occurred and specific causes of the underpayments. 
  • A recalculation for all employees across several years will take longer to complete. However, this will provide more certainty on any underpayment amounts and will assist in Stage 4 Remediation for Employees.

• The number of employees will affect the approach.
  • If there are many employees, then it is worth investing in an automated approach.
  • Where the number of employees is more limited, the cost of automation may not be the most efficient approach.
  • We work with our clients to use the most efficient approach, which requires thinking ahead – often we start with a small group of employees that may grow. If we think the number of employees or time period will expand, it is worth setting up automation early, even though it may cost more for the initial cohort of employees.
    
    
• It is important to consider formal and informal agreements made by employees.
  • Many Awards include clauses that allow variation to the Award condition when agreed upon between an employer and most employees. For example, being able to roster shifts for up to six hours without providing a meal break (instead of five hours). 
  • It’s important to know the organisation’s agreements with employees and practices so that the recalculation mirrors these approaches. Otherwise, the recalculation may indicate there are underpayments that are not valid.

This is only a snapshot of the recalculation process. If you have identified or suspect your employees have been underpaid, contact our experienced team to discuss your options.