How To Do a Payroll Audit (+ a Payroll Audit Checklist)

There’s no question that Fair Work has taken a strict approach to companies that fail to meet compliance obligations and continue to under-compensate their employees. 

They have no problem naming and shaming companies that have breached their payroll compliance regulations. Take Woolworths, for example. They were recently exposed for major underpayments of salaried managers.

And they’re not alone. There is a myriad of companies that continue to (intentionally and unintentionally) violate payroll compliance, including cafes, hairdressers and disability services providers.

The Fair Work website has a long list of media releases that are specifically aimed at naming and shaming employers who fail to meet their employer obligations and comply with payroll legislation.

So, how do you know you’re 100% compliant? 

Well, the first place to start is a payroll audit. 

The Fair Work Commission has found that wage theft (or wage underpayments) is a direct result of failing to conduct annual audits to ensure that their staff, including annualised staff, are being compensated correctly. 

Australia has one of the most complex workplace laws in the world. So, there’s no doubt that interpretation of the jargon-heavy Modern Awards has become a tricky, time-consuming task for many employers. 

Suppose you’re feeling concerned that you may not have interpreted your industry’s Modern Award correctly, or you just want to make sure you’re not in breach of your obligations. In that case, you may want to consider undertaking a payroll audit before the Fair Work Commission comes knocking on your door. 

• a review of the Modern Award or Enterprise Agreement applicable to your industry, 
• an assessment of the relevant pay rates, penalty rates and overtime rates, 
• a calculation of each employer’s current wages and superannuation contributions to verify that they conform with payroll regulations, 
• a review of your payroll tax obligations, 
• remedying any payroll discrepancies and non-compliance during the payroll audit, and 
• identifying long-term payroll solutions do avoid payroll inefficiencies and compliance issues in the future. 
  
  

If you are currently manually interpreting your Modern Award pay conditions, you may want to consider engaging the services of a third-party organisation that specialises in conducting payroll audits. 

If the Fair Work Ombudsman has already approached your organisation, and you have entered into an agreement for an Enforceable Undertaking. In that case, the agreement likely mandates regular payroll audits by a third party.

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• Maintain compliance: if you’re constantly checking your records and making sure that you are paying your employees according to the appropriate pay conditions, you won’t have anything to worry about when Fair Work knocks on your door. 

• Reconciliation: an audit allows you to identify any unknown non-compliance issues and allows you to remedy them.
• Payroll process review: beyond ensuring compliance and remedying non-compliance issues, a payroll audit helps you identify any inefficiencies in your payroll process.

Step 1: Identify and Review Applicable Pay Conditions 

Before diving into your employee records, it’ll help to have a foundational understanding of the applicable Modern Award, or Enterprise Agreement is: 

• Are you aware of which Modern Award covers and applies to your employees?
• Are you aware of the National Employment Standards (NES)?
• Do you have processes in place for employees to apply for their leave entitlements in terms of the NES? And do you maintain accurate records of employee leave entitlements?
• Do you understand your obligations in terms of these regulations?
• Have the pay conditions changed since your last audit? Typically Fair Work updates the wages, penalty rates and applicable allowances at the beginning of each financial year. 
• Do you provide your employees with payslips?

If you answered no to any of the above questions, you’d need to do some homework before proceeding to the next step. 

Interpreting the Modern Awards can get quite complex. So Pay Cat has drafted several eBooks for various Modern Awards that aim to simplify the interpretation process. 

Step 2: Compare Current Pay Rates and Time and Attendance Records 

Now that you know which Modern Award is applicable, you can compare your current pay rates in relation to the updated pay conditions and your employee’s time and attendance records: 

• Are you paying your employees according to the suggested minimum employee pay rates proposed in the Modern Award?
• Do your wage payments align with your employee time and attendance records?
• Have you considered pay point progression?
• Have you considered the applicable penalty rates and overtime rates? 
• Have you taken into account each allowance that your employees may be entitled to? If you’re unfamiliar with employee allowances, use our allowance database tool to access every allowance applicable to every Modern Award.

This step of the payroll audit is especially important for annualised salary staff.

One of the most significant concerns was that some employers did not ensure the annual salary was high enough to cover all the entitlements and their annualised salary arrangement was placing employees at a disadvantage. 

The new annualised salary changes introduce various processes that employers must follow to ensure that their annualised salary arrangement doesn’t disadvantage their employees. 

Make sure to check out our annualised salary guide on how to navigate these changes. 

Step 3: Review Your Payroll Tax and Superannuation Obligations

There is a common misconception that payroll compliance simply involves making sure that you are paying your staff enough for each pay run. 

However, payroll compliance goes beyond that and includes meeting your payroll tax obligations and performing all your superannuation contributions. 

We recommend working closely with your accountant or payroll manager to ensure that you haven’t failed to register for payroll tax. 

For more information, make sure to check out our guide to payroll taxes, where we break down everything you need to know about your tax obligations. 

Step 4: Review and Organise All Your Payroll Records

Many business owners don’t realise that they are required to keep time and attendance and pay records of employees for a minimum of seven years, including: 

• Payslips
• Employment agreements
• Rosters
• Timesheets

If your business is subject to payroll auditing, these records must be readily accessible to a Fair Work Inspector. 

So, during the audit process, make sure that you have all your records organised and easily accessible. 

Step 5: Payroll Reconciliation

If during the payroll audit, you identified discrepancies in your reporting obligations and your pay runs, it’s important to remedy them immediately to prevent further non-compliance. 

This may involve:

• running a comparison of what your current pay cycle looks like and what it should look like,
• back paying your employees, 
• updating your payroll records and payroll policies to comply with the current pay conditions and pay requirements, and 
• re-organising your records.

Take the payroll audit process, for example. Without all your information stored in a centralised system, you’ll have to leverage several resources and staff to complete the process. And even then, there is no guarantee that you’ll be 100% compliant at the end of your payroll audit. 

Implementing an automated cloud payroll system, such as Employment Hero Payroll, will not only guarantee accuracy in the application of Modern Awards and NES conditions but also create a far more streamlined method of processing payroll to improve efficiency and workforce management. 

To further streamline your payroll and rostering process, Pay Cat strongly recommends using an integrated cloud payroll and time and attendance software, which can help mitigate labour budget blowouts and manage attendance in real-time.

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Conducting a payroll audit could be your answer to identifying these possible breaches so that you can remedy them accordingly. To help you navigate your next payroll audit, we've put together this checklist. 

We often encounter businesses navigating these complex payroll conditions using manual payroll processing and a “hope” strategy that they might pass with flying colours in the event of an audit.

But that is not enough to guarantee compliance. 

By adopting automated cloud payroll software in conjunction with time and attendance software, you can mitigate any non-compliance risk factors of paper timesheets and improve the productivity of the entire business' payroll process.

Pay Cat are payroll professionals and leading experts in Australian payroll compliance. As experts in payroll solutions, we have decades of experience helping Australian businesses shift from inefficient payroll processes to a more streamlined and automated solution.

The Pay Cat team will help your business to implement Employment Hero's Payroll system.

Here’s how Employment Hero Payroll works:

1. • Time and Attendance
     Employees clock their time using NoahFace time and attendance software that syncs all data with Employment Hero Payroll's cloud software.
   • Live Timesheet Approval
     No more manual entries or paper timesheet approvals. Supervisors and managers approve time and attendance on-the-go directly on Employment Hero Payroll.
   • Automated Modern Awards Compliance
     Employment Hero Payroll’s pre-built modern Awards make it easy for payroll managers to pay staff correctly, each and every pay run.
   • Automated Payslips
     Create and customise Fair Work compliant payslips that can be easily accessed in the Employment Hero Payroll cloud.
   • Payroll Complete In Under an Hour with Employment Hero Payroll
     Never get it wrong. No back pay calculations. No inefficient manual interpretation. No data re-entry. Stress-free paydays that take less than an hour to complete!

If you’re interested in moving from a manual payroll system to Employment Hero Payroll, get in touch with us today for a free demo.