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Payroll Compliance

Payroll Audits : Sample Testing is Not Enough

May 25, 2023
0 min read
Payroll Compliance

As wage underpayments remain a constant challenge in the marketplace, payroll compliance has become significantly more complex and is a recurring issue that board directors within major Australian companies can be personally held liable for.

Payroll reviews where sample testing methods are used, is simply not enough anymore when it comes to auditing compliance in a workforce as they do not provide a cohesive and big-picture analysis of the issues that lie within your payroll. With so much at stake for getting payroll wrong, understanding the limitations of sample testing when reviewing payroll can better allow businesses to make necessary changes to their audit procedures and be confident that they are getting payroll correct. 

What is a sample test ? 

A sample test is often performed during a payroll audit to analyse the businesses overall payroll systems. They are representative samples of anywhere between 3 and 10% of the workforce and are meant to provide insight into the accuracy of a businesse’s record keeping and payroll compliance. Data used in a sample test is often from 2 or 3 pay periods taken from time and attendance and payroll systems that are in place to assess an employee's worked hours, relevant modern awards and any other employer obligations. 

Sample testing in our modern workforce is not enough anymore to assess payroll records and provide businesses with the confidence required to ensure they are getting employee pay right. Limitations to this generalised method of risk management have become more prevalent as underpayments continue to occur despite companies passing a sample test. 

Limitations of sample testing 

In the past, sample testing was a more acceptable risk management approach because entire workforce reviews took too long to perform or were too costly for businesses to afford. Despite this, the use of sample testing when conducting payroll compliance audits or reviews introduced many oversight risks that unfortunately, have contributed to the position many businesses find themselves in today when it comes to payroll.

One of the major limitations of sample testing is the inability to detect small errors and discrepancies that require large sample sizes to adequately assess compliance. Sample testing in this sense, will only tend to focus on large inconsistencies that indicate high levels of errors as opposed to single occasions of these inconsistencies. Affording the expertise to audit these checks can also be very costly for organisations who might rather use these finances elsewhere in the business.

To reduce the amount of time taken to audit the payroll, sample checks will often only select three to 10 percent of the entire workforce which means 90 percent of the workforce could still be at risk of underpayment. Only analysing a small sample of two or three pay periods in the year greatly increases the risk for payroll errors to occur at another time of the year and be missed by the sample test. For example, if the sample period is in winter, but the company is busier in the summer months, employees will work more overtime. Payroll errors due to incorrect configuration of overtime clauses would easily be missed in the sample test as they are only triggered in busier months. 

Risks of sample testing 

With the government planning its next slate of industrial relations reforms, new consultation papers released by the Department of Employment and Workplace Relations (DEWR) to criminalise wage underpayments and record keeping misconduct is at the top of the agenda. Under this proposal, harsher penalties and potential jail time for wage underpayment offences are in place and applicable to entitlements under modern awards, enterprise agreements and The Fair Work Act, including the National Employment Standards. DEWR also notes a recovery of approximately half a billion dollars in underpayment by the Fair Work Ombudsman in the 2021-22 financial year alone, indicating that non compliance is a widespread issue and sample testing is insufficient to reduce companies’ payroll compliance risk. 

What is a better solution ?

The advent of technology introduces a cost effective and timely solution to payroll challenges that exist in the workplace today. Automated compliance reviews enables businesses to audit 100% of their workforce payroll within minutes, taking into consideration relevant modern awards, and enterprise agreements that strengthen overall governance measures around payroll. 

Because of the cost effective and timely nature of automated payroll compliance softwares, reviewing 100% of your workforce and not just a sample is achievable within minutes. This allows for total risk awareness and the ability for companies to make business changes within offset periods more regularly and not rely on annual reviews and top up payments. Getting a better insight into your workforce also negates the need for large scale remediation projects due to variations in pay that traditional sample testing methods do not detect.

Technology like PaidRight, provides confidence to various stakeholders including the board, investors and Fair Work that the business is compliant and optimising its payroll systems to best ensure that employees are being paid correctly. With so much at stake for getting payroll wrong, taking your compliance to the next level by reviewing your entire workforce is essential towards greater business success. 

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